Jurisdiction - Australia
Reports and Analysis
Australia – Chinese Investments.

29 December, 2012

 
Chinese foreign investment into Australia is not immune from the impacts that global economic uncertainty and the high Australian dollar are having on general M&A activity in Australia. If there is one sector, however, that appears to be showing signs of bucking that trend, it is the gold sector
 
Going for gold!
 
It is widely recognised that Chinese investment into Australia was one of the key reasons why Australia was the only OECD country to avoid a technical recession during the global financial crisis. A recent report by accounting firm KPMG (KPMG: Demystifying Chinese Investment: China outbound direct investment in Australia. August 2012.) supports that view, showing that between July 2006 and June 2012, Chinese enterprises completed 116 investments in Australian businesses (excluding real estate transactions), investing approximately US$45.1 billion.
 
China has not been immune, however, from the impacts that global economic uncertainty and the high Australian dollar are having on general M&A activity in Australia. In the 12 months to June 2012, Chinese investment in Australia actually fell by 51%. (The Asialink Index is calculated by PricewaterhouseCoopers (PwC) and the Melbourne Institute).  Declining iron ore and coal prices and rising production costs have seen investment in those sectors reduce dramatically. But it is not all doom and gloom for the resources sector as one area where Chinese investment has noticeably increased in recent times is the Australian gold sector.
 
For China, gold remains somewhat of an investment anomaly. Estimates put China’s physical gold reserves at just 1.7% of the country’s financial reserves. Contrast that figure with its estimated US dollar holdings which are thought to equate to about 54% of China’s total financial reserves. China therefore needs to significantly increase its gold holdings as a hedge against its foreign currency exposure. In addition, its vast population is expected to consume more gold as its aspiring (and growing) middle class becomes more affluent.
 
It is not surprising then that China recently inherited the mantle as the world’s largest consumer of gold. What is less well known is that China is also the world’s largest producer of gold. China’s production levels are not sufficient, however, to sustain its increasing demand. That demand, together with a gold price now above US$1700/ounce, has led to far greater Chinese interest in gold equities. One country benefiting from that interest is Australia, the world’s second largest producer of gold.
 
Recent equity transactions in Australia involving Chinese bidders include:
 
  • China SFECO’s purchase of the Zara gold project in Eritrea from ASX-listed Chalice Gold Ltd;
  • Shandong Mining’s acquisition of a 51% interest in ASX-listed gold company Focus Minerals Ltd;
  • Zhongrun Resources’ acquisition of a 42% interest in ASX-listed Noble Mineral Resources;
  • Zhaojin Mining’s acquisition of a 8.95% interest in ASX-listed Norseman Gold; and
  • Zijin Mining’s takeover bid for ASX-listed Norton Gold Fields.
 
So whilst investment in the iron ore and coal sector may have cooled, gold appears to be maintaining its lustre. Whether the level of Chinese investment into the gold sector will match that seen in the iron ore and coal sectors in the past six years remains to be seen.
 
 

 

 

 

 

 

For further information, please contact:

 
Justin Little, Partner, Herbert Smith Freehills

justin.little@hsf.com

 

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