COLUMN-Two tales of one deal show the dilemma of CIC: Wei Gu

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

By Wei Gu

HONG KONG, July 15 (Reuters) - China Investment Corp's recent $1.5 billion investment in Canadian miner Teck Resources (TCKb.TO) has not led to any backlash in China, but the public might be less happy if they read the fine print of the Teck announcement.

China's sovereign wealth fund has signed a highly restrictive agreement which seems designed to ensure that it is seen as a harmless financial investor in resource-rich Canada. Good news for Teck, perhaps, in that the deal spares the board from having to go back to its own investors for funds. But less so for CIC.

For starters, CIC gets no representation on Teck's board despite buying an economic interest of 17 per cent in the company. The shares it is buying are vote-restricted B shares. Moreover, CIC has agreed to a minimum hold period of 12 months, which is three times as long as a standard private placement. This restriction means CIC cannot sell the shares or threaten to dump Teck stock even if the price slumps.

The deal also restricts CIC's ability to sell its holdings to any mining or metals company, or to a material customer of Teck -- most of them are naturally located in China. So it can only exit by placing the stock.

What's more it is hard to argue that CIC even got a screamingly good deal. It bought the shares at a mere seven percent discount to the market price. And that despite the fact that CIC was in effect throwing a lifeline to Teck, which had run up excessive debts after purchasing Fording Coal last year.

Moreover, thanks to the lengthy negotiations that attended the deal, Teck's price has sharply recovered. When talks about a deal began during the winter, Teck's stock price was on the floor, but it has now tripled from the start of the year.

All this, it is suggested in the Canadian press, is to send the message that China is willing to pay up for stakes in resources companies without taking control. Yet it is interesting to see how the deal was played in China and Canada. In its disclosures CIC refers to the restrictions in vague terms while Teck virtually spells them out in great detail to win support from its investors.

This may be the only way in the post-Rio world for China to make big block investments in resources companies. But given the sensitivity these provoke, it is worth asking whether CIC wouldn't be better off going another route. CIC needs to become more commercial and hard-nosed.

Instead of cutting backstairs deals with management, which are often unpopular with existing shareholders and spread suspicions, why not take a leaf out of the book of some of the big Gulf sovereign funds and buy stakes in the market. Then no one can complain they are being blindsided. And CIC gets to take the amount of control it actually wants.

In the case of Teck, market purchases might have allowed CIC to build a stake at well below the C$17.21 it ended up paying. After all, Teck was trading as low as C$3.35 as recently as in March. And it could have targeted its purchases on full voting stock if it wanted a bigger say.

It is not as if doing an elaborate and expensive tango with management gets Beijing any closer to a pound of zinc or a tonne of coal. So why bother? The only point of doing a special deal is to get protection in a risky situation, or to get a platform for other commercial deals. When Warren Buffett put cash into Goldman Sachs (GS.N) last autumn, he insisted on buying preferred shares with extraordinary powers -- including the right to limit top management pay and restrict bosses from making share sales.

CIC has the heft to make a Buffett-type impact. It has $200 billion to invest, for goodness' sake. But if it insists on doing convoluted deals with suspicious bidders, it will deplete its firepower without really killing the suspicions that exist about its intentions.

It has almost become a norm for the Chinese to pay high premiums to get a look in on deals. So Sinopec (600028.SS) bought Addax Petroleum AXC.TO, a pretty risky venture operating oil concessions in Iraqi Kurdistan, at a price worth more than four times Addax's November lows and a 47 percent premium to the stock price before the oil explorer announced it was in talks.

But while that may be the reality for Chinese industrial companies, they can at least use such deals -- expensive as they are -- to lever open the door to advantageous commercial relationships. CIC shouldn't have to play this game. It should be focused on delivering the best financial returns on its funds.

Given the suspicion that surrounds China and its intentions, CIC has nothing to lose by being transparent and avoiding special deals in favour of on-market transactions. It might even have a lot to gain. -- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. For previous columns, Reuters customers can click on [GU/] -- (Editing by Martin Langfield)