08 Mar 2013

Clayton Utz digs deep to uncover key trends in Chinese investment in Australian energy and resources

Melbourne, 8 March 2013: Investments by Chinese interests in Australian energy and resources have increased more than tenfold since 2005, with the typical Chinese investor being a state owned enterprise, investments targeted at projects at the development stage rather than at the exploration or production stage, acquisitions mainly of a passive minority interest at the corporate level, and investors relying on Australian management to manage their investments.

These are some of the key findings of a new Clayton Utz report, Digging Deep: Chinese investment in Australian energy and resources, which examines the $101 billion in investments into the industry by Chinese investors over an eight-year period from 1 January 2005 to 31 December 2012.

The report examines the sectors Chinese investors targeted, the value and number of investments, the stage of the projects and the level at which they invested in (corporate level, assets level or both), the rate of successful completion associated with the various entry strategies, whether management and board control were sought, and the application of the Foreign Investment Review Board (FIRB) regime.

An initiative of Clayton Utz Melbourne Corporate partner Jonathan Li, who has acted for companies on more than $10 billion of these investments in the past five years, Digging Deep is the result of in-depth analysis by Mr Li and his team, particularly lawyer Yasmin Hogan, to uncover some of the lesser known facts and trends in respect of Chinese investment in Australian energy and resources.

"We wanted to get a clearer picture not just of investment activity but of the entry strategies of Chinese investors as well as target commodities and approach to management," said Mr Li.

"We found, for example, that the preferred investment method was the acquisition of strategic stakes in companies, with 65 per cent of the total number of investments during the period for an acquisition of shares at the corporate level. Only in 23 per cent of investments was the preferred investment an acquisition of an interest in a project or an asset. We also found that investors relied heavily on local Australian management expertise rather than bringing in their own management in the vast majority of cases."

The findings also reveal that Chinese interests in iron ore have waned since peaking in 2009. The three sectors that experienced intense interest in the three years to the end of 2012 were oil and gas, uranium and gold.

"The gold rush of the 1850s continues to the present day, with 97 per cent of investments by value in the gold sector made during the eight-year period announced in the two years to the end of 2012," said Mr Li. "The energy sectors of oil and gas and uranium similarly experienced intense interest from Chinese investors, with each sector recording 94 per cent of all investments made in its sector in the three-year period to the end of 2012."

Chinese investment activity also peaked during the global financial crisis, due both to financial pressure on Australian energy and resources companies as well as stimulatory measures by the Chinese government. "During the GFC, the value and number of investments by Chinese investors reached peak levels, with $19.7 billion of announced investments in 2008 of which 96 per cent successfully completed. This is from a total of $100.7 billion announced investments since 2005, of which $50.4 billion have completed."

Mr Li said an analysis of investment activity also countered a common perception in Australia that China was "buying the farm". "FIRB has formally intervened in respect of 9 per cent of Chinese investments in energy and resources since 2005, and only three were rejected outright," he said. "However, the total value of completed investments since 2005 represents approximately 10 per cent of the total market capitalisation of the top 100 companies in each of the metals and mining and energy and utilities sectors on the ASX as at 31 December 2012," he said. "Considering that many of Australia's most valuable resources projects are owned by companies not listed on the ASX, the value of completed Chinese investments would likely amount to considerably less than 10 per cent of the total value of Australia's energy and resources projects. This can hardly be said to be "selling the farm", especially considering that China is Australia's largest customer in respect of raw materials."

Commenting on the impact on investment activity of the increasing urbanisation of China, Mr Li said: "For as long as the macro themes of urbanisation and GDP per capital growth in China continue, China will remain a country dependent on importing raw materials to fuel its economic growth. This has already resulted in large increases in investments in Australia energy and resources over the past eight years. Australia may increasingly be facing competition for the Chinese yuan from other resource rich countries but Australia still offers four key attractions: high quality resources, quality management, the rule of law and a strategic location. For so long as these macro themes continue in China, Chinese interest in Australian energy and resources will no doubt continue."

Digging Deep: Chinese investment in Australian energy and resources information sheet (PDF 834.8KB)

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.