14 Mar 2013
Digging Deep: Chinese investment in Australian energy and resources
by Jonathan Li
Chinese investors prefer a passive minority interest at the corporate level to a stake at the assets level or a controlling stake at the corporate level.
In recent years there has been considerable public debate about the extent of Chinese interest in, and ownership of, Australian energy and resources.
In the new Clayton Utz report, Digging Deep: Chinese investment in Australian energy and resources, we have sought to uncover the real story of China's investment into the industry over an eight-year period from 1 January 2005 to 31 December 2013.
Digging Deep provides detailed insight and analysis into:
- The nature of Chinese investors in the industry – what was the number of investments completed by state-owned enterprises as compared to private enterprises and the rate of successful completion of announced investments?
- The investment strategies used by the Chinese investors – was the purpose of entry to secure supply, gain a financial return or enter into ancillary arrangements?
- What investors invested in – were investments made into companies with projects at the exploration, development or production stage and what was the value of these investments?
- The commodities which attracted a high intensity of interest – which commodity sectors were targeted by investors and did the interest in different commodity sectors change over time?
- The transaction structures used to successfully complete investments – was the investment made into shares at the corporate level, by purchasing assets or entry into a joint venture at the assets level, or a combination of both? Did the level at which the investment was made impact on the rate of successful completion?
- The management structures used by the investor to manage their investments – was local management retained or expat Chinese nationals appointed to executive level positions?
- The application of Australia's foreign investment regulatory regime – how many investments were rejected outright and what types of conditions were imposed by the Foreign Investment Review Board?
Some of our key findings included:
- Investments were to secure supply rather than gain a financial return – 78% of completed investments were for the purposes of securing supply
- Investments were into projects at the development stage, rather than at the exploration or production stage – 67% of completed investments were into companies with projects at the development stage
- Interest in targeted commodity sectors changed over time – it's now time for gold and energy. Chinese interest in the iron ore and base metals sectors peaked in 2009 and has since dramatically decreased with the gold, oil & gas and uranium sectors experiencing a high intensity of interest between 2010 and 2012.
- The acquisition of a passive minority interest at the corporate level was preferred to a stake at the assets level or a controlling stake at the corporate level. Approximately 50% of completed corporate level investments was for the acquisition of a 10% to 20% shareholding interest
- Investors preferred to rely on Australian management, rather than expat Chinese nationals to manage the investments. In investments which resulted in a change of control at the corporate level, it was least likely that a Chinese national would be appointed to the position of Chief Operating Officer.
- Australia's foreign investment review regime is no barrier to entry. The Foreign Investment Review Board formally intervened in only 9% of all Chinese investments into the industry since 2005. Only three investments are known to have been rejected outright.
We hope that Digging Deep will serve as a useful guide to current participants and potential Chinese investors in Australia's energy and resources industry.