China eyes nimble private equity for overseas M&A

By Joseph Chaney and George Chen - Analysis

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.