Imagine the year 2025, when China's the boss?
POSTED BY PAMELA YOON DRAKOS
In the 1990's Canada had Dofasco, Inco, Falconbridge, Noranda and Alcan. Today, all have been swallowed up by foreign owners. Is it possible that in 15 years time (when our children enter the workforce), they will be reporting to the "bosses in Beijing" and will need to know at least some Mandarin in order to be ahead of the pack? Read on....
Desperate Rio Tinto, ambitious Chinalco. China's on the move
by ERIC REGULY
March 9, 2009
The Globe and Mail
Monday March 9, 2009
ROME -- The Chinese were big fat zeroes in the global resources market a few years ago. Two major takeover efforts, the first in 2004 for Canada's Noranda, the second for California's Unocal a year later, disappeared into the fog of Beijing bureaucracy and Canadian and American security paranoia, never to emerge.
Today, Chinese national companies are back in action. One of them, Chinalco, seems to be lining itself up to take control of the world's second-biggest mining company, Rio Tinto. If there is anyone who knows how to exploit the recession, it is China.
The investment in Rio is more than just opportunistic. It reflects the reality that global resources power is gradually but surely shifting from Europe and the United States to China, says Australian mining consultant Michael Komesaroff. Chinalco, he says, is using Rio to graduate from "national champion to a Chinese-owed global champion." He believes a full takeover of Rio by Chinalco is inevitable.
To be sure, Chinalco's link with Rio is officially an investment, with a few doodads attached. It comes with no hint of a takeover, creeping or otherwise. The details paint a somewhat different picture.
Print Edition - Section Front
Section B Front Enlarge Image
The Globe and Mail
The story began in mid-2007, when historically conservative Rio broke with tradition and greatly overextended itself with the top-of-the-market purchase of Canada's Alcan for $38-billion (U.S.). Tom Albanese, Rio's boss, compounded the problems a few months later, when he rejected a takeover offer from rival BHP Billiton, initially valued at $147-billion, as "not even in the ball park. It's two ball parks away."
As commodities peaked, then sank, BHP eventually dropped its takeover attempt. Rio's market value today is about $35-billion - a 68.5-per-cent drop in one year, compared with BHP's 30-per-cent drop. Rio's comparatively shabby performance can be blamed on the $40-billion loan that Rio took on to buy Alcan. With debt stacked as high as aluminum stockpiles, and aluminum prices at well less than half their summer peak, Rio needed a rescue disguised as a strategic investment.
Enter Chinalco. It is the state-owned mining giant that is an odd blend of Communist Party tool and ambitious commercial juggernaut. Chinalco is the world's third-biggest primary aluminum producer and calls itself a "backbone state enterprise" with an "international polymetallic" strategy.
For Chinalco, the mining selloff in the West could not have come at a better time.
The deal struck last month by the two companies is the convergence of long-term strategy (Chinalco's) and short-term desperation (Rio's). If it is approved by Australian regulators and Rio's board, Chinalco will buy $7.2-billion in convertible bonds, redeemable after seven years, at which point the Chinese stake in Rio would rise to 18 per cent from 9 per cent.
But Chinalco's bear hug is more forceful than the direct ownership level suggests. That's because it will pay $12.3-billion to buy hefty stakes in certain Rio businesses, including a 15-per-cent interest in Rio's flagship Hamersley iron ore mine in Australia, one of the biggest operations of its kind. Yet another aspect of the deal is the formation of three alliances with Rio in copper, iron ore and aluminum. They will manage the assets in which Chinalco is investing and help market their production. Chinalco will also get two seats on the Rio board and representation on various board committees.
The alliances between Chinalco and Rio appear far more extensive than traditional joint ventures. As mining analysts have pointed out, joint ventures between a listed company and its major shareholder are exceedingly rare. These particular joint ventures are extensive and will be governed by committees that include representatives from both sides.
Add it all up and Chinalco and Rio are linked at almost every level - from the boardroom and stock market to the shovel in the ground and the marketing department. It's not a stretch to see the links between the two companies turn into a full-blown merger, though that scenario could be many years away.
What might trigger it? Conflicts among joint-venture partners are fairly routine, as one partner decides the other partner is getting an unfair advantage. One way to end the conflict is to merge the assets under a single owner - a takeover, in other words.
Not everyone likes the Chinalco-Rio deal. Some investors think Rio is giving up too much control too cheaply by selling assets at or near the bottom of the market. Others think Rio should have offered a rights issue to existing shareholders if it wanted to raise cash to pay down debt. But never mind; Mr. Albanese is determined to go ahead with the deal as it was originally structured, and spent last week trying to drum up support among the unconverted.
As Mr. Albanese was trying to sell the deal, China Inc. was on the move. In Australia, Chinese companies have targeted OZ Minerals and Fortescue Metals. In Canada last month, China National Petroleum agreed to pay $499-million (Canadian) for Venerex Energy to gain access to the Calgary company's Libyan assets. There will be more. China seems poised to use the recession as an entry ticket to the world's resources arena.
In the 1990's Canada had Dofasco, Inco, Falconbridge, Noranda and Alcan. Today, all have been swallowed up by foreign owners. Is it possible that in 15 years time (when our children enter the workforce), they will be reporting to the "bosses in Beijing" and will need to know at least some Mandarin in order to be ahead of the pack? Read on....
Desperate Rio Tinto, ambitious Chinalco. China's on the move
by ERIC REGULY
March 9, 2009
The Globe and Mail
Monday March 9, 2009
ROME -- The Chinese were big fat zeroes in the global resources market a few years ago. Two major takeover efforts, the first in 2004 for Canada's Noranda, the second for California's Unocal a year later, disappeared into the fog of Beijing bureaucracy and Canadian and American security paranoia, never to emerge.
Today, Chinese national companies are back in action. One of them, Chinalco, seems to be lining itself up to take control of the world's second-biggest mining company, Rio Tinto. If there is anyone who knows how to exploit the recession, it is China.
The investment in Rio is more than just opportunistic. It reflects the reality that global resources power is gradually but surely shifting from Europe and the United States to China, says Australian mining consultant Michael Komesaroff. Chinalco, he says, is using Rio to graduate from "national champion to a Chinese-owed global champion." He believes a full takeover of Rio by Chinalco is inevitable.
To be sure, Chinalco's link with Rio is officially an investment, with a few doodads attached. It comes with no hint of a takeover, creeping or otherwise. The details paint a somewhat different picture.
Print Edition - Section Front
Section B Front Enlarge Image
The Globe and Mail
The story began in mid-2007, when historically conservative Rio broke with tradition and greatly overextended itself with the top-of-the-market purchase of Canada's Alcan for $38-billion (U.S.). Tom Albanese, Rio's boss, compounded the problems a few months later, when he rejected a takeover offer from rival BHP Billiton, initially valued at $147-billion, as "not even in the ball park. It's two ball parks away."
As commodities peaked, then sank, BHP eventually dropped its takeover attempt. Rio's market value today is about $35-billion - a 68.5-per-cent drop in one year, compared with BHP's 30-per-cent drop. Rio's comparatively shabby performance can be blamed on the $40-billion loan that Rio took on to buy Alcan. With debt stacked as high as aluminum stockpiles, and aluminum prices at well less than half their summer peak, Rio needed a rescue disguised as a strategic investment.
Enter Chinalco. It is the state-owned mining giant that is an odd blend of Communist Party tool and ambitious commercial juggernaut. Chinalco is the world's third-biggest primary aluminum producer and calls itself a "backbone state enterprise" with an "international polymetallic" strategy.
For Chinalco, the mining selloff in the West could not have come at a better time.
The deal struck last month by the two companies is the convergence of long-term strategy (Chinalco's) and short-term desperation (Rio's). If it is approved by Australian regulators and Rio's board, Chinalco will buy $7.2-billion in convertible bonds, redeemable after seven years, at which point the Chinese stake in Rio would rise to 18 per cent from 9 per cent.
But Chinalco's bear hug is more forceful than the direct ownership level suggests. That's because it will pay $12.3-billion to buy hefty stakes in certain Rio businesses, including a 15-per-cent interest in Rio's flagship Hamersley iron ore mine in Australia, one of the biggest operations of its kind. Yet another aspect of the deal is the formation of three alliances with Rio in copper, iron ore and aluminum. They will manage the assets in which Chinalco is investing and help market their production. Chinalco will also get two seats on the Rio board and representation on various board committees.
The alliances between Chinalco and Rio appear far more extensive than traditional joint ventures. As mining analysts have pointed out, joint ventures between a listed company and its major shareholder are exceedingly rare. These particular joint ventures are extensive and will be governed by committees that include representatives from both sides.
Add it all up and Chinalco and Rio are linked at almost every level - from the boardroom and stock market to the shovel in the ground and the marketing department. It's not a stretch to see the links between the two companies turn into a full-blown merger, though that scenario could be many years away.
What might trigger it? Conflicts among joint-venture partners are fairly routine, as one partner decides the other partner is getting an unfair advantage. One way to end the conflict is to merge the assets under a single owner - a takeover, in other words.
Not everyone likes the Chinalco-Rio deal. Some investors think Rio is giving up too much control too cheaply by selling assets at or near the bottom of the market. Others think Rio should have offered a rights issue to existing shareholders if it wanted to raise cash to pay down debt. But never mind; Mr. Albanese is determined to go ahead with the deal as it was originally structured, and spent last week trying to drum up support among the unconverted.
As Mr. Albanese was trying to sell the deal, China Inc. was on the move. In Australia, Chinese companies have targeted OZ Minerals and Fortescue Metals. In Canada last month, China National Petroleum agreed to pay $499-million (Canadian) for Venerex Energy to gain access to the Calgary company's Libyan assets. There will be more. China seems poised to use the recession as an entry ticket to the world's resources arena.
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