Chinese companies urged to take measured approach to Canada mining investment

Updated 2017-03-09 14:56:35

Perhaps Chinese mining companies in Canada should consider taking minority stakes in Canadian companies instead of acquiring them. That was the takeaway at a mining forum on Monday in Toronto.

"Acquisition of interests in a Canadian public mining company is often a key step to acquiring mining interests throughout the world," said Fred Pletcher, chairman of National Mining Group, Borden Ladner Gervais LLP.

Pletcher spoke to delegates of Chinese mining industry at the 2017 Chinese Mining Investment Forum. The forum coincided with the first day of the Prospectors & Developers Association of Canada (PDAC) convention, the premier international event for the mineral industry in Toronto, where optimism was voiced that the industry would rebound after a couple years' slump.

The forum hosted by the Canada China Chamber of Commerce (CCCC) and the China Mining Association (CMA) focused on the Belt and Road strategy and Chinese mining investment opportunities.

Keith Spence, president of Global Mining Capital Corp and chairman of PDAC International, suggested that Chinese investors in Canada could learn from Japan's 1970s approach in which he said it was "not necessary" to take majority ownership of the Canadian companies.

The Japanese model that was developed to invest in Canadian resources companies started was involved not only in taking controlling interests, but smaller stakes, ranging from 15 percent to 30 percent.

"But still having contracted a lot of Canadian companies to sell off-take commodities to the Japanese companies, many Japanese investors have been remained 20-plus years with successful operations," Spence said.

Here is how describes off-take commodities: "An off-take agreement is an agreement between a producer of a resource and a buyer of a resource to purchase or sell portions of the producer's future production."

"Canada is rich in mineral resources, has an open and transparent policy and a prosperous mining capital market," said Cao Jie, managing director of CMA.

"There are complementary advantages in mining resources and the stock market between Canada and China," said Li Aihua, president of CCCC.

China has vast market potential due to its great demand for mining resources, while Canada has one of the largest stock markets in the world, which plays a leading role in international prospecting and exploration of mining resources.

However, many deals by Chinese companies in mining and energy projects are losing money, running into unexpected costs or generating significantly less output than expected.

"China's mining companies need mining projects with high grades," said Luan Zhengming, a committee member of the CMA.

Spence offered three suggestions to Chinese investors: Focus on projects with lower risk; the financing structure should reflect the risk appetite; and manage and mitigate the soft risks.

"You certainly have to give up something which means you don't control it and you have to trust your partners," said Pletcher, of National Mining Group. "We started to see more Chinese investors approach it this way, like with Western Potash. He said CNOOC's (China National Offshore Oil Corporation) initial investment was restructured with minority interests and off-take.

Canada's strong financial markets also help ease investment in the country.

Pletcher said Canada is the leading global centre for mining finance. The Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V) were home to 1,207 public mining companies as of 2017.

"Canada's government welcomes Chinese investors; what we value as much as the investment is the partnership that Chinese companies bring to Canada," said Canadian Senator David Wells, who represents Newfoundland and Labrador provinces.

"The field of energy minerals is the focus of China's investment in Canada, with the gradual rebounding of the mining industry," said Xia Xiang, minister-counsellor for economic & commercial affairs at the Chinese embassy in Canada.

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