In 2007, Aluminum Corp. of China Ltd. (NYSE ADR: ACH) – better known as Chinalco – snapped up Peru Copper Corp.
Don't let the names of the two copper companies fool you – both targets were Canadian mining ventures. And all three of the suitors hailed from China.
Commodity-rich Canada has become China's personal shopping mall.
And the wheeling and dealing continues.
A Bright Spot at a Dour Conference Illuminates Future
When it comes to global mining conferences, none has the cachet of the Prospectors and Developers Association of Canada (PDAC) convention in Toronto. In short, it is the world mining conference – which is why I make sure to attend each year.
When this year's conference was held in March, the world's financial markets were hitting multi-year lows and the future was uncertain. But there was a bright spot: The attendance of the Chinese delegation, which signaled that country's continued interest in Canadian mining assets.
So it was no surprise to me when, in July, the state-run China Investment Corp. (CIC) bought a $1.5 billion stake in Canada's Teck Resources Ltd. (NYSE: TCK). CIC is one of the new breed of so-called "sovereign wealth funds" (SWF), essentially government controlled investment funds that all told control trillions in foreign reserves. CIC manages about $200 billion of China's estimated $2.3 trillion in foreign-exchange holdings.
For Teck, the 17.2% stake taken by CIC provided a badly needed cash infusion, since the Vancouver-based producer of copper, zinc, gold, metallurgical coal, and a host of specialty metals and excess energy was saddled with debt.
Since then, China has picked up the pace.
That puts nearly 3 billion barrels of crude oil under PetroChina's ownership, while operational control of the projects remains with Athabasca.
With reserves surpassed only by those of Saudi Arabia, Canada's oil sands are seen as a world-class asset – as well as one that's highly strategic.
Controversy Hamstrings Dealmaking
But despite its great stash of cash, China's not having an easy go at getting the investments it really wants. Why? Because China's large acquisitions are raising eyebrows and spooking national governments. And that's to be expected.
Large, developed resources such as oil are an economic necessity – which gives them the strategic importance I cited a moment ago. Add in the fact that oil is a limited – diminishing – resource, and it's no surprise that buyout attempts on large properties by foreign players will create a lot of political heat.
If you want an example, think back to 2005, when the Chinese National Offshore Oil Corp. (NYSE ADR: CNOOC), or CNOOC (NSYE ADR: CEO) failed in its attempt to take over Unocal Corp., a U.S.-based refiner/retailer of gasoline. Unocal later merged into Chevron Corp. (NYSE: CVX).
Several subsequent China-led takeovers of properties in North America were thwarted for apparent political reasons.
CNPC International Ltd., a subsidiary of state-owned China National Petroleum Corp. tried, and ultimately failed, to purchase Calgary-based Verenex Energy Inc. (PINK: VRNXF). Verenex has been developing a Libyan project said to contain some 2.15 billion barrels of oil equivalent. The state-run China National is that country's largest integrated oil-and-gas producer.
Libya, looking to guard its asset by imposing state ownership, had initially indicated it would match China's offer. But the Northern African nation then strong-armed Verenex into a weaker deal by claiming the property had been acquired through an improper bidding process. And that little dust-up cost shareholders $150 million in equity, out of a potential $500 million deal.
It's that type of behaviour that makes Canadian assets so attractive.
New Tactics, New Targets
Back in the December to March time frame – when oil was down in the $35-$40 range – the financially viability of oil-sands projects came into question.
But now that oil is backup in the $70-a-barrel range – the price level required for profitable oil-sands production – Western Canada's oil-sands industry is back on the front burner.
Essentially, China has become a key supplier of badly needed capital, with a focused interest in a multitude of Canadian mining-and-commodities projects. But most observers assume China is only after the big fish – advanced-stage projects, with near-term production. Yet getting those deals done is becoming tougher by the day.
That's why the majority of pundits are simply dead wrong. If you can spot the trend, you'll see why it's a costly mistake to focus exclusively on larger, high profile projects. China itself has now realized how much attention its bigger deal making attracts.
So China's advanced guard has cast a much wider net: It's now studying smaller mining and commodities projects that have at least passed certain regulatory hurdles and (ideally) have proven reserves.
I recently attended the investor presentation of a smaller resource firm, and listened as the company president provided some personal insight, confirming the underlying trend I see emerging.
This "junior-mining firm" owns two development-stage projects – both located in Canada:
- A gold-cobalt-bismuth-copper deposit.
- And an anthracite coal deposit, both located in Canada.
Now the earliest of these to move to production is the gold-cobalt-bismuth-copper deposit, and that won't be any sooner than mid-2012.
But get this. What the leaders of this junior miner hadn't yet learned was that China Mining Resources Group Ltd., had recently purchased 7 million shares of their firm out on the open market. This junior mining company is still 2 ½ years away from any production. What this clearly shows us is that China – intent on securing resources – is shrewdly employing a new tactic in its quest to buy up producing properties: It is staying off the radar screen by ponying up money to pay for smaller, less-advanced projects. Those are the types of properties that won't cause a huge political backlash, either.
That makes sense, and gives investors another clue about what to look for, since they can be certain that this Canadian commodities grab will continue.
[Editor's Note: If you're new to the commodities-investing arena, and are uncertain about the landscape – or even if you're an "old hand" at natural-resource stocks, but want some insights into the new profit plays and new players – consider hiring a guide: Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks, is also the editor of the Global Resource Alerttrading service, which ferrets out companies poised to profit from the so-called "Secular Bull Market" in commodities.
A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities we'll see in our lifetimes. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, please click here.]
News and Related Story Links:
- Prospectors and Developers Association of Canada:
Official Web Site.
- The National Post: .
- Money Morning Special Report:
As Junior Miners Cash in on Soaring Inflation and Growing Global Demand, So Can You.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.