China eyes nimble private equity for overseas M&A

HONG KONG Wed Jun 3, 2009 4:02am EDT

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HONG KONG (Reuters) - Frustrated by political interference in Australia as it tries to buy natural resources there, China is changing tack and will use homegrown private equity firms as a more subtle weapon to seek out overseas deals.

Resources-focused private equity firms are raising billions of dollars and, in terms of dealmaking, will be far more nimble than China's massive state conglomerates, said two sources familiar with the matter.

The funds will also be able to cut smaller deals under the radar and avoid the type of scrutiny that has slowed Chinalco's $19.5 billion tie-up with Rio Tinto (RIO.L)(RIO.AX).

A group of around 300 mine entrepreneurs recently raised 500 million yuan ($73.25 million) for the China Mining United Fund, its chairman Zheng Zhi told Reuters, and the fund aims to raise up to 10 billion yuan to target Western Europe, Africa and Australia for resources such as gold, copper and iron ore.

It is already investigating about 30 projects, Zheng said.

Despite the fund's small size compared to state-owned giants such as Chinalco, Minmetals, and Hunan Valin Iron & Steel, its cozy relationship with Beijing and alignment with official economic policy, is clear.

"We private entrepreneurs think it's important to secure valuable overseas resources, partly for the sake of our country," Zheng said. "We're getting a lot of support from the government for overseas asset acquisitions."

HUNGER GROWING

China's hunger for overseas resources shows little sign of fatigue, and is not dampened by the political sensitivities of big deals such as the Chinalco-Rio tie-up, or Minmetals' $850 million deal with OZ Minerals (OZL.AX) regional dealmakers say.

Firms such as Felix Resources FLX.AX, Teck Resources (TCKb.TO), Freeport McMoran Copper & Gold Inc (FCX.N), Equinox Minerals EQN.TO and Cliffs Natural Resources (CLF.N) have been named in recent months by bankers and analysts as potential deal targets for Chinese firms.

"They won't be Rio sized deals," a Hong Kong-based investment banker with a bulge bracket firm told Reuters.

"I think when people get $19 billion in their heads, they think, aw c'mon, but when you step back there's a number of deals happening that are relatively significant," the source added.

Case in point: In early May, Chinese state-owned China Nonferrous Metal Mining Group (CNMC) agreed to take a majority stake in Australian rare earths miner Lynas Corp Ltd (LYC.AX) for roughly $186 million.

MORE FUNDS

Several other resource-focused private equity firms are cropping up across China, in addition to the China Mining United Fund.

China's Shanxi province, home to roughly one third of the country's coal deposits, teamed up with local coal miners and asset managers to set up the 10 billion yuan Shanxi Energy Industry Investment Fund, which began investing earlier this year, the two China-based sources told Reuters.

All sources declined to be named because they were not authorized to speak publicly about the matter.

Beijing is also reviewing a proposal to set up China's first Aviation Industry Investment Fund, which aims to raise 5 billion yuan in its first stage, local media reported.

One of the fund's investment focuses will be energy assets, for example, aviation fuel and related support services, at home and abroad to support the development of China's aviation industry.

In April, state media reported China Guangdong Nuclear Power Group launched a 10 billion yuan fund, the China Nuclear Power and New Energy Industry Investment Fund -- the first such specialist fund backed by the Chinese government.

A recent nuclear deal fell under the media radar due to its small size.

In March, Western Prospector Group Ltd WNP.V, a Mongolia-focused uranium miner, said it agreed to be bought by a unit of CNNC International Ltd (2302.HK) for about $25 million.

CNNC Overseas Uranium Holding Ltd, a unit of uranium developer and nuclear fuel company China National Nuclear Cooperation, holds 74 percent in CNNC International.

"Don't underestimate these small companies," said one of the China-based sources, referring to Chinese fund-backed deals. "One day, if you combine them all, they can also become a market leader in a specific sector."

($1=6.826 Yuan)

(Additional reporting by Samuel Shen in SHANGHAI, Editing by Ian Geoghegan)

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