First published in Mining Journal on 8 March 2013
Australia is China's number one destination for outbound investment. Between late 2006 and June 2012, China invested approximately US$45.1 billion in Australia, with 79 percent of this amount being invested in Australia's mining sector.
When comparing this figure to Chinese investment over the same period in other resource-rich jurisdictions such as the United States (US$42 billion), Brazil (US$25.7 billion), Nigeria (US$18.8 billion) and Canada (US$17.2 billion), it is clear that Chinese investors favour investment in the Australian market. The attractiveness of Australia, and Australia's mining sector in particular, to Chinese investors is a result of several factors including similar time zones between Australia and Beijing, relatively short distances between China and Australia's resource-rich north-west and north-east, and Australia's settled legal and political climate. Given that the vast majority of Chinese investment in Australia is through state-owned enterprises, these figures also show that China's SOEs (and the Chinese government agencies who approve foreign investment proposals by SOEs) are comfortable investing in Australia's mining projects.
Properly understanding the regulatory regime applicable to an Australian mining project is crucial to understanding the ability, limitations, costs and timing of the project's production and therefore the value of the project.
"Those who do not use local guides are unable to obtain
the advantages of the ground"
Sunzi's Art of War.
Chinese investment in Australian mining - legal considerations
Australia's foreign investment laws
The first regulatory consideration for most Chinese investors seeking to invest in Australian mining is the application of Australia's foreign investment laws, in particular the Foreign Acquisitions and Takeover Act 1975 (Cth) (FATA) and Australia's Foreign Investment Policy Framework (Policy).
The FATA provides a legislative framework for the Australian Government to screen certain foreign investment into Australia and the Policy explains the Australian Government's approach to administering the FATA.
Foreign persons must notify the Australian Government under the FATA (or, in certain circumstances for foreign government investors, the Policy) if they wish to make certain investments in Australia. Relevantly for Chinese investors seeking to invest in the Australian mining sector, circumstances where notification and approval are required include:
- "direct investments" by a foreign government investor, for example the Chinese government or its related entities (including SOEs), irrespective of the value of the investment. A "direct investment" is defined loosely in the Policy as an investment of 10 percent or more in an Australian business that is made without any longer term strategic intent for control;
- the acquisition of a substantial interest (that is, an interest of 15 percent or above) in an Australian company (other than an Australian urban land corporation) whose assets are valued in excess of A$248 million (indexed annually);
- the acquisition of any interest in an Australian urban land corporation regardless of value (unless the corporation is listed on the Australian Securities Exchange (ASX), in which case the investor may acquire up to 15 percent of the corporation without approval);
- the acquisition of an interest in an operational mine if it is valued at A$54 million (indexed annually) or above; and
- the acquisition of a prospecting, exploration, mining or production tenement or other exclusive right to use land which has a term (including extensions) of more than five years, regardless of value.
Once notification is received in respect of a proposed investment, the Australian Treasurer considers whether or not the proposal is contrary to the national interest. If the proposal is contrary to the national interest, the Treasurer has the power to reject the investment. Where there is an obligation to notify the Australian Government of an investment, failure to notify can result in the investor being prosecuted or a divestment order being made.
Given the vast majority of Chinese investment in Australian mining has been through SOEs, it has very often been the case that Australian Government approval is required to be sought by Chinese investors prior to investing in Australian mining companies or assets. An advantage of the large number of applications which have been made to the Australian Government over the past five years in relation to Chinese investment has been that the Australian Government, perhaps more so than any other Government in the Western world, is now relatively comfortable with Chinese investors and Chinese SOEs in particular. It is unusual for an investment application to be rejected (although conditions may be attached to the approval).
If there is likely to be any sensitivity about a foreign investment proposal, thought should be given to structuring the transaction in a manner that will reduce the sensitivities (for example, what happens to the offtake can be just as important as the level of foreign control over the project) and the Foreign Investment Review Board (the Australian Government agency that processes foreign investment applications) welcomes approaches to discuss complicated transactions.
Investment preferences – ASX-listed companies
Looking at Chinese investment in Australian mining since late 2006, there is a clear preference for dealings with ASX-listed entities. These investments include full takeovers (such as the acquisition by Linyi Mining Group Co., Ltd of ASX-listed coal explorer Rocklands Richfield Limited), acquisition of controlling stakes (such as Ansteel Group Corporation's 35.8 percent holding in ASX-listed miner Gindalbie Metals Limited), or minority investments (such as Jilin Jien Nickel Co., Limited's minority stakes in several ASX-listed mining exploration companies).
Targeting ASX-listed miners or explorers has the advantage of allowing Chinese investors to leverage off publicly available information on such companies (including JORC standards), reducing investment risk compared to the acquisition of a private company or a greenfield investment.
A key consideration which Chinese investors must keep in mind when planning to invest in ASX-listed companies is the application of Australia's takeovers laws.
Under Australia's Corporations Act 2001 (Cth) (Corporations Act), in simplified terms, a person must not acquire an interest in more than 20 percent of an ASX listed company (20 percent rule), unless certain exemptions apply such as a takeover bid, scheme of arrangement, or as commonly used for placements, shareholder approval. It is important to note that unlike other jurisdictions, the 20 percent rule prohibits acquisitions above that threshold unless made pursuant to one of the specific limited exceptions. Australia does not have a mandatory bid rule (which allows a bidder to cross the relevant shareholding threshold provided they then proceed to make a takeover bid)
"Victory is obtained by those who make many
calculations before proceeding. Defeat is suffered because few
calculations are made beforehand. With many calculations, one can
win; with few, one cannot. How much less chance of victory has one
who makes none at all!"
Sunzi's Art of War
Many overseas investments in the Australian mining sector are successful but a number have faced difficulty after the initial acquisition phase when seeking to realise the potential of the asset. Often this will be because less attention or fewer resources are directed to post-acquisition considerations. Two key factors to consider from a legal perspective are the obligations which arise under Australia's environment and planning laws and logistics (in particular, access and development rights to key infrastructure such as rail and ports).
Environment and planning laws in Australia are relatively complex – on top of this, there is the potential for severe penalties if such laws are not complied with. There are many State, Territorial and Federal environmental and planning laws which will impact on mining projects and it can sometimes take many years to obtain all the required permits. Generally environmental approvals (and, in certain States, planning approvals) will be required before development of a mining project can commence. There may also be other environmental licences, such as for the construction of certain types of industrial plants, which need to be obtained before mining operations are able to be carried out. These laws and regulations will apply regardless of the owner of the project, including Chinese investors who may be less familiar with such legal requirements in Australia and will need to be aware of the impact of environment and planning laws on mining activities in Australia.
The success of mining projects is also usually dependent upon the ability to access or develop infrastructure. For example, roads, power, water, processing and tailings facilities, ports, and rail are requirements for most mining projects. Given the size of Australia, the location of its mineral deposits and the congestion of its ports in existing mining regions and the need for development of rail and port infrastructure in emerging mining regions, access to essential infrastructure is a key consideration for Chinese investors.
Given the complementary nature of the Australian and Chinese economies, it is to be expected that Chinese investment into Australian mining will continue for the foreseeable future. This article has outlined some of the key legal considerations which must be considered and addressed by Chinese investors looking to acquire mining interests in Australia.
In order to maximise a Chinese investor's chance of success it is extremely important to understand the Australian regulatory regime which will be relevant to the investment both before, during and after it is made. Going forward it is expected that Chinese investors will begin to diversify their investments in Australia, particularly into the agricultural and technology sectors. However, given the rapid urbanisation of China – a trend which is set to continue for many decades – it is likely that Australia's mining industry will continue to be the main driver of Chinese investment for many years to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.