China's insatiable hunger for natural resources has officially turned hostile.
State-controlled Jilin Jien Nickel Industry Co. Ltd. launched a surprise $148.5-million unsolicited takeover bid for Canadian Royalties Inc. yesterday, marking one of the first times the Asian economic superpower has gone after foreign resource assets without first winning a friendly agreement with management.
China has become an active acquirer of foreign resources amid the global economic crisis, investing in copper, oil and iron ore needed to fuel its fast-growing economy. But despite massive financial resources and a mandate to diversify its $2-trillion (U.S.) in foreign exchange holdings into so-called hard assets such as commodities, most of China's resource deals have been friendly.
The hostile offer comes as federal Finance Minister Jim Flaherty is in Beijing on a trade mission to encourage Chinese investment in Canadian companies.
"China has a need for resources. China has ... substantial U.S. dollar cash reserves," Mr. Flaherty told reporters yesterday. "China is looking for investments abroad. Commercial investments, subject to proper governance, are welcomed in Canada."
Mr. Flaherty wants China to invest in publicly traded Canadian companies. His comments suggest that, despite political and security concerns, Ottawa is comfortable with such an investment structure. Mr. Flaherty plans to meet today with Lou Jiwei, chairman of China's $200-billion sovereign wealth fund.
The unexpected bid for Canadian Royalties, which is developing the Nunavik nickel project in northern Quebec, marks a significant change in tactics for a Chinese state entity. "This is new. ... This could be the tip of the iceberg," one mining investment banker said.
Glenn Mullan, chairman and chief executive officer of Canadian Royalties, said the takeover offer blindsided his company. Neither Jien nor its Canadian partner, Goldbrook Ventures Inc. of Vancouver, which has a 25-per-cent stake in the company created to make the bid, contacted Canadian Royalties' management before launching the offer.
"This one has a long way to go. I think you'll see lots of interest in Canadian Royalties going forward," Mr. Mullan said in an interview.
Canadian Royalties was a market darling during nickel's heyday in 2007, when the price of the metal used to make stainless steel soared above $20 a pound.
However, the commodities crash and the credit crisis last fall resulted in a sharp reversal of fortune for the Montreal company. Financing for the $500-million Nunavik project collapsed and Canadian Royalties was forced to put the operation on care and maintenance.
Mr. Mullan said Jien and Goldbrook are taking a run at the weakened company in an attempt to pick up its valuable resources on the cheap. The Nunavik project contains approximately 20 million tonnes of ore, grading about 1 per cent nickel and 1 per cent copper. Because of its small size, the bid would not require Ottawa's approval under the Investment Canada Act.
"At the end of the day, this is all about assets, commodities - nickel specifically - and China's appetite for commodities," Mr. Mullan said.
The company has hired advisers and expects to officially respond to the bid soon.
In 2004, a bid for Canada's Noranda by state-backed China Minmetals Corp. fell apart amid pressure from Canadian politicians to scrap the takeover. In 2005, China National Offshore Oil Corp. pulled an $18.5-billion offer for Unocal Corp. following a firestorm of opposition from U.S. legislators. Australia recently blocked a $1.7-billion bid for Oz Minerals by Minmetals, citing national security concerns. The deal had to be restructured to exclude a key mine asset near an Australian military site.
In a more typical, friendly, deal struck last month, sovereign wealth fund China Investment Corp. (CIC) agreed to invest $1.74-billion to become the largest B-class shareholder in Teck Resources Ltd., Canada's biggest base metals miner.