Chinese state-owned Guangdong Rising Assets Management's bid for Australian-listed copper and gold producer PanAust, which values the latter at A$1.5 billion ($1.4 billion), is the latest in a flurry of mining-related acquisitions as Chinese companies seek to secure resources.
On May 6, state-owned Baosteel group teamed up with Australian rail freight company Aurizon and made an unsolicited bid for Aquila Resource, valuing the Australian company at A$1.4 billion.
However, unlike past years, the modus operandi of Chinese bidders appears to be changing: they are now more cautious about overpaying and exercising greater discipline in their bids.
Guangdong Rising Assets, which has a 23% stake in PanAust, initially proposed paying A$2.20 for each PanAust share but later revised the offer up to A$2.30, a 45% premium to PanAust's Friday close.
Despite the premium, PanAust's board rejected the bid. In its Australia stock exchange announcement, PanAust said it has advised Guangdong Rising that the offer price remains “materially below” the level at which the board would be prepared to recommend a takeover to its shareholders.
However, it left room for Guangdong Rising to cough up more money. In its exchange filing, PanAust said it agreed to give Guangdong Rising access to due diligence information to help it "materially improve" its indicative offer price.
While Chinese companies have previously shown a propensity to overpay for overseas mining assets, they are now showing more discipline. One Australia-based mining analyst who declined to be named pithily described Guangdong Rising's offer for PanAust as an “opportunistic, low-ball bid.”
He added that prior to the bid, PanAust traded at a significant discount to its net asset value. Assuming the full value of development projects such as the Frieda River Copper Gold Project – which PanAust agreed to buy from Glencore Xstrata late last year – are ascribed, he sees a value of A$2.65 per share.
“I would be very disappointed if PanAust’s directors accepted anything less than A$2.50," the analyst said.
PanAust is a copper and gold producer in Southeast Asia and has projects in Laos and Chile. Its producing assets include the Phu Kham Copper-Gold Operation and the Ban Houayxai Gold-Silver Operation in Laos. PanAust is advised by Rothschild and Herbert Smith Freehills.
Treading carefully
There has been a flurry of deal activity in the mining sector this year as Chinese companies seek to tie down resources from copper to iron ore. According to Dealogic data, mining-related outbound mergers and acquisitions from Asia ex Japan have more than doubled to $8.6 billion so far this year compared with the same period last year. This raft of activity has come on the back of a loosening of offshore M&A restrictions.
Starting from May 8, Chinese firms planning to invest less than $1 billion in an overseas company no longer need to seek approval from authorities but only need register with the National Development and Reform Commission (NDRC), according to a statement by the NDRC earlier this year.
According to one resources M&A banker, the guidelines have not applied to most of the recent deals (which have been in excess of $1 billion) but they have nonetheless set the tone and encouraged more investment by natural resources and mining companies.
On May 6, state-owned Baosteel group teamed up with Australian rail freight company Aurizon and made an unsolicited bid for Aquila Resource. In April, a Chinese consortium led by Hong Kong-listed miner MMG agreed to buy the Las Bambas copper project in Peru from Glencore Xstrata for $5.85 billion in cash.
While Chinese firms are showing renewed appetite for acquisitions, they remain cautious about overpaying, having learnt from past missteps such as Citic Pacific's acquisition of its Australian iron ore project and Sinosteel's acquisition of Australia's Midwest in 2008.
“Chinese companies have made poor investments in greenfield projects in the past and there is a lot more focus on doing deals that are fiscally prudent,” said the resources M&A banker. “They are not going to pay a price that enables them to win and assume that commodity prices will rise, which was the strategy before,” he said.
According to sources familiar with the matter, the MMG-led consortium took months of negotiation after the bids were submitted before agreeing to buy Las Bambas, as they wrangled over pricing. Guangdong Rising Asset and Baosteel are also existing shareholders of PanAust and Aquila, respectively, which suggests that they are already intimately familiar with the assets they are buying into.
However, there is still questions over whether the deals will close, though the gap in pricing expectations between sellers and buyers is narrowing. In its ASX filing, PanAust said that there is no takeover offer from Guangdong Rising that is "capable of acceptance by the company's shareholders and there is no certainty that one shall eventuate."
