Acquiring Noranda, China trades dollar surplus for hard assets
China Steps Up Overseas Hunt for Raw Materials
By Bill Rigby and Steve James
Reuters
Friday, September 24, 2004
reuters.com
NEW YORK -- China Minmetals Corp.'s move to buy
Noranda Inc., the Canadian copper and zinc miner,
is the next step in China's great march to becoming
an industrial powerhouse, experts said on Friday.
With an apparently insatiable hunger for raw materials
to fuel its economic growth, China has massively
increased investments in overseas mining projects for
metals in the past two years, and more is likely to
follow.
That trend broke new ground on Friday when both
companies said state-owned China Minmetals plans
to buy Noranda -- the world's No. 3 zinc and No. 9
copper producer -- in a mostly cash deal worth
more than $4.7 billion (C$6 billion).
"Because of its large level of consumption, it makes
sense for them to acquire assets outside of China
so they can guarantee supplies," said Francisco
Alzuru, a portfolio manager specializing in emerging
markets, at Hansberger Global Investors.
"It means they are in this for the long term and can
also take a share of those profits," he said, as
prices of raw materials stick around long-time highs,
mostly driven by demand from China's red-hot
economy.
"China is one the largest accumulators or reserves
in the world. Instead of coming and buying more
(U.S.) Treasury bills and lowering the yields, they
might as well buy hard assets."
Chip Hanlon, domestic strategist with Euro Pacific
Capital, a $300 million fund with some 10 percent
invested in mining stocks, said it appeared to be a
logical move for the Chinese.
"They have a huge appetite for raw materials. If they
feel they have to secure sources of raw goods, we
will probably see more, and the same thing in the
procurement of oil."
Jay Taylor, who publishes an investment newsletter
specializing in mining -- Gold and Technology Stocks
-- said the deal was an obvious way for China to not
only own a source of metals but also develop its own
untapped resources.
"China does not have the mining know-how and they
want to bring in the expertise to find their own
resources," he said. "It makes a lot of sense as
China has to import so much raw material."
Taylor said China has the capital to do such deals.
"They don't really want Noranda looking for metals
elsewhere but in China. So why not go out and buy
a mining company?"
He said China has untapped mineral resources and
the dependence on buying raw materials from
elsewhere to fuel its economic growth was putting
strains on shipping and transportation.
"No doubt there are plenty of metals in China and it
makes sense to dig them yourself instead of letting
someone like Robert Friedland find them and take
them home."
Friedland's Ivanhoe Mines is currently developing
vast copper and gold deposits in Mongolia and says
it is on track to begin output in early 2007.
Among recent Chinese forays into international
mining operations, Jiangxi Copper signed a letter of
intent with Ivanhoe in June to study possibilities of
taking a stake in the Canadian mining promoter's
Oyu Tolgoi project in Mongolia.
Brazil's Companhia Vale do Rio Doce, the world's
largest iron ore miner, earlier this year signed deals
worth $5 billion to supply iron ore, alumina, and steel
to China's resource-hungry factories. In return,
state-controlled Chinese firms will help pay to build
a steel plant and an alumina refinery in Brazil.
A senior executive at U.S. copper miner Phelps
Dodge Corp. said recently that although China was
at least 10 years away from mining its own mineral
deposits, it was likely to eventually become a world
mining power.
"But the amount of infrastructure that's required to
bring a new mine into production in a region like that
is large," said President and Chief Operating Officer
Timothy Snider.
"Fully developing a minerals industry in China to the
level that can support that kind of economy is probably
decades away," he told Reuters.
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