Asia's miners line up for Outback

SYDNEY - Asian mining firms are closely watching developments related to the US$19.5 billion bid by Chinese aluminum giant Chinalco for a stake in multinational Rio Tinto, amid a developing buying blitz on Australia's cheap resources stocks.

Corporate lawyers say that Japanese, Chinese and South Korean companies are locked in negotiations for equity in a host of mid-sized miners, but the fate of the deals may hinge on whether the Chinalco-Rio deal gets regulatory approval.

"You have a weak Australian dollar, very low price/earning ratios of resource stocks and a lot of cashed-up Asian firms that are underwritten - in some cases at least - by official reserves," said one lawyer involved in acquisition talks. "[But] it counts for nought if the [Australian] regulators start talking tough."

State-owned Chinalco have met with Australia's Foreign Investment Review Board (IRB) to push its case for the purchase of sizeable stakes in some of Rio's key ore, aluminum and power assets, including the vast Hamersley Iron operation in Western Australia.

Chinalco has offered US$7.2 billion in the form of convertible bonds which, once converted to shares, would increase its stake in Rio from 9.3% to 18%. The bonds, which have a 60-year term, would attract annual interest of 9-9.5% and would be redeemable after seven years.

Rio badly needs the cash injection to clear US$38 billion of debt incurred when the multinational bought Canadian aluminum producer Alcan Inc in 2007, and board members are expected to approve the bid when they meet in May. The company is committed to repay US$8.9 billion in October and a further US$10 billion next year.

But investors argue that Rio, Australia's second-biggest resources company, could mortgage its future by hiving off key assets. The Australian government also fears that a takeover could allow the Chinese effectively to dictate terms in their tortuous annual price negotiations with the resources sector.

Big exporters like Rio and BHP-Billiton benefited from annual increases of 80-90% in shipment value during the boom years of Chinese economic expansion. But they were told last week by Baosteel's Shanghai steelworks that they could expect cuts of 30-50% this year due to waning demand.

There is plenty at stake for the slowing Australian economy: the country earned A$31 billion from iron ore exports last year and A$46 billion from coal, and government leaders are anxious that the miners keep the upper ground in negotiations.

The new president of Chinalco, Xiong Weiping, said in Sydney the Rio would set up a separate committee of independent - that is, non-Chinalco - directors to handle price talks and avoid a conflict of interest. That might be enough to mollify the IRB, especially if the review board also imposes a limit on Chinalco's future stake and withholds a board seat.

But that may not satisfy the government. The Australian treasurer (finance minister), Wayne Swan, has said he will seek parliamentary approval to amend the Foreign Acquisitions and Takeovers Act so that access to resources firms is tightened.

The biggest change is likely to be that any investment - particularly those involving instruments such as convertible notes - would be treated as equity. Swan said that Australia welcomed investment but treated resources as a special category. Intending buyers would have to prove that investments in the mining sector were in the "national interest".

Shareholders, especially institutional investors, will also have a strong say in the outcome, as many have been angered that the offering was made to Chinalco at a premium - and that they were left out. There are reports that Chinalco might substitute a rights issue of US$10 billion, but Xiong said in Sydney the firm was unwilling to alter the terms.

"We do not want to see any changes to the packaged agreement. I think the Rio Tinto board and its management team will listen very carefully to the requirements and requests from the shareholders."

Yet while opening the deal to outside investors would water down Chinalco's stake, that might be the price the firm has to pay to force the deal through. And it might be vital if Rio is to keep faith with shareholders and rescue its floundering share price.

Market analysts say a substantial number of institutional investors were caught out when they shorted Rio shares in anticipation of a rights issue to cover the debts and they have lots to lose from the deal. So do Rio's board members, who are struggling to convince analysts the deal is the best option.

There has already been one casualty: the designated chairman, Jim Leng, quit two weeks ago when his case for a rights issue found no support with other board members.

Nationalist sentiment is unlikely to have much bearing with remaining board members, as only two are Australian. One of these, former Cathay Pacific and British Airways boss Rod Eddington, has said he will not vote on the deal due to a perceived conflict of interest: he chairs the Australian operations of investment bank JP Morgan, one of Chinalco's advisers.

Rio chief executive Tom Albanese, a US national, said he stood by the deal, saying it would allow Rio to reactivate iron ore, alumina and coal projects that had been put on hold due to the company's difficult financial situation.

There is still a possibility of a rival bid from another suitor, as the Chinalco deal has not yet been voted on by investors. BHP, which considered launching a formal bid last year, is one possible investor, though it would mean Rio would have to pay a US$195 million "break fee" to Chinalco.

Other Asian miners also cannot be ruled out. China Minmetals wrapped up a A$2.6 billion (US$1.7 billion) takeover of OZ Minerals earlier his month, and Chinese steel producer Anshan Iron & Steel Group will pay A$162 million for a bigger stake in Gindalbie Metals.

Legal firm Corrs Chambers Westgarth, which specializes in mergers and acquisitions, confirmed it had had inquiries from Korean, Japanese and Chinese investors looking to acquire gold, coal, uranium and iron ore projects in Australia.

The investors include Japan's Sumitomo, Mitsui and Mitsubishi UFJ. They are believed to be looking at medium-sized producers such as Aquila Resources, Felix Resources and Gloucester Coal.

Alan Boyd, now based in Sydney, has reported on Asia for more than two decades.

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Gold mining sector heats up ~ Sydney Morning Herald

Bullion's stunning rise offers golden promise.....

(This blogger recomended Newcrest and Lihir last October ~ those trades are still open)

So far, it looks like it will be a rather subdued year at Diggers, particularly for the West Australian nickel miners. Their latest financial results show that Mincor Resources, Panoramic Resources, Independence Group and Western Areas have put in the best performance possible in conditions so tough that Consolidated Minerals and Norilsk Nickel have shut up shop.

But if the gold price continues to hover near a record $1500 an ounce in Australian terms - and with costs like fuel, labour and equipment falling - the gold bugs will be out in force.

After his company hosted a mining conference in Florida last week attended by several Australian-listed companies, a BMO Capital Markets analyst, Tony Robson, observed: "There are two markets. It is almost like there is gold and everything else."

Robson said he expected that would continue to be the case for the next six months, and possibly for 12 months. So while there may be some great bargains in base metals, investors looking for near-term outperformance are likely to give gold a very close look.

Barrick busy

For investors that trust industry leaders, it is worth noting that Canada's Barrick Gold - the world's largest goldminer - last week said it wanted to expand through acquisitions and was able to easily access credit and equity markets to fund deals.

Outside of China, there aren't many miners in other sectors that could make a similar statement. And even inside China there is an interest in investing in the Australian gold sector, in light of recent signals to that effect from Zijin Mining.

Outside of pure acquisitions, Barrick has also demonstrated it is seeking to keep its mills near Kalgoorlie running at full capacity by striking toll treatment deals with Crescent Gold and Cortona Resources.

In Cortona's case, Barrick will quickly mine out the 80,000 ounce North Monger deposit as early as this year, while covering all the costs. In return, the Australian junior will receive millions of worry free dollars (the higher the gold price, the higher the margin) to help develop its Dargues Reef project near Canberra, where it has so far proven up 286,000 ounces of resources at 6.2 grams per tonne.

Gold spin-offs

Just as miners were keen to spin off uranium properties into new floats a few years back, some base metals miners are now preparing to do the same with their gold projects in order to realise more value for shareholders.

Base metals miner Kagara owns cash positive copper and zinc operations, even at current prices, but it also has $150 million of debt due to be repaid by October. Its market value, once in the $1 billion range, has plunged to just $91 million - less than the amount it has spent on its oft-overlooked gold projects.

Kagara is seeking to capitalise on those gold projects by spinning off its undeveloped Red Dome and Mungana projects in Queensland as Mungana Goldmines. The new company will help Kagara reduce its debt load and will provide investors with a chance to invest in a new goldminer with 1.6 million ounces of resources.

The Drum understands Newcrest Mining has previously expressed interest in the porphyry deposits, which bear some similarities to its Ridgeway operation in NSW's Cadia Valley and are amenable to sub-level caving. Newcrest recently raised $750 million - mostly to speed up internal projects - but it could again express interest in the Mungana portfolio.

Chasing capital

The word "opportunistic" is starting to grate on the ears of many gold company directors as they seek to raise cash from investors, who have so far proven very willing. After all, in light of the dismal global economic situation, wouldn't a company lucky enough to have that ability want to raise as much as possible to fund growth when there is a window of opportunity?

The margins can be lucrative at the moment. Intrepid Mines is making a $1000 an ounce margin from its Paulsens high-grade mine in WA due to the high gold price. It expects to produce 20,000 ounces this quarter.

Focus Minerals last week raised $28 million to refurbish its Three Mile Hill mill and to increase the pace at which it is able to bring nearby deposits into production. It wants to produce 100,000 ounces a year and has already proven up 111,000 ounces of reserves and 1.8 million ounces of resources from its Coolgardie project. It expects the mill could be in operation from early next year.

Meanwhile, Allied Gold raised $31 million to help fast-track expansions in Papua New Guinea and to help retire debt early.

No doubt, many other gold companies will follow suit with capital raisings in coming weeks.

jfreed@smh.com.au