Investing in Africa via Australia - Why it makes sense

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11 October 2012

With 30 per cent of the world’s mineral resources, Africa has become the new frontier of mining. Chinese-African trade has seen a three-fold increase in five years to a record $166 billion. Australia and China are, in many ways, natural partners in this phenomenon. Australian mining companies and Chinese investors have a great deal to offer one another.

Australian listed mining companies with African assets have a proven track record of management expertise in Africa together with strong corporate governance and a positive reputation for sensitivity to local conditions and represent an ideal platform for Chinese companies wishing to invest in Africa. It is little wonder that Chinese companies are eying mid-tier Australian mining companies with African operations as a method of accessing valuable assets in Africa. 

The past two years have seen Minmetals Resources buy Anvil Limited, Guandong Nuclear Power Group’s mandatory takeover of Extract Resources, Hanlong’s proposed acquisition of Sundance and, most recently, China's Cathay Fortune Corporation's tilt at Botswana-focused copper miner, Discovery Metals.

Making the most of the market

The consensus view of market commentators is that Australian mining stocks have been oversold and current trading prices do not reflect strong fundamentals, including book values and price earnings ratios.  Many analysts have suggested that Australian stocks represent excellent value at current market prices.  Of course a catalyst for the return to value may be on the horizon, as the Reserve Bank of Australia reduces interest rates.

Importantly, Chinese investors are able to more readily identify and consider the true value of underlying African assets owned by Australian listed companies. The corporate governance and continuous disclosure obligations, and Joint Ore Reserve Committee standards for reserve reporting, for Australian listed companies means that Chinese investors can undertake due diligence and understand the performance of the company and importantly the underlying African assets with a great degree of certainty.

This value for money coupled with a mature and stable legal framework, provides certainty to Chinese investors seeking to acquire an Australian company with African assets. 

Strategic fit

There are currently 200 Australian companies involved in 650 projects in 37 African countries.  One in 20 Australian companies listed on the Australian Securities Exchange has an investment in Africa, and Africa hosts the largest number of Australian mining projects in any region outside Australia, at around 40% of all overseas mining projects. 

This unparalleled Australian activity in Africa means Australian companies have management expertise in developing assets in Africa on which Chinese investors can rely.  This knowledge of assets is coupled with the development of deep relationships with key stakeholders and Governments in African jurisdictions which Chinese investors can readily access.

Most Australian businesses with assets in Africa are mid to small cap companies in need of capital to move from exploration to development.   Consistent with China’s Going Out Policy Chinese investors provide patient capital for this transition and an appreciation of the need for development of much needed infrastructure vital to support mine development. 

Leveraging the social licence

Earlier this year Secretary of State Hillary Clinton said “African countries should consider partnerships with more responsible countries as against countries that exploit resources”.  Many, including Chinese state news agency Xinhua, considered this a thinly veiled reference to China.

During the unprecedented current mining boom, Australian mining companies have developed a positive reputation for being sensitive to local conditions, fair dealing and good corporate responsibility.  They have extensive experience in addressing issues arising from the proximity of mining sites to environmentally sensitive and traditional indigenous lands, and in working with a myriad of stakeholders, commercial, political and legal issues.

This has resulted in the development of sophisticated approaches to working with complex and competing interests which, in turn, have allowed them to effectively manage reputational risk and to secure a social licence to operate in Australia and, increasingly, in Africa.

At the world’s second largest investment conference, Africa Down Under, Australian Foreign Affairs Minister, Senator Bob Carr, recently highlighted examples of the development of Australia’s social licence in Africa. In the Democratic Republic of Congo, Australian based Mawson West has given a 10% equity interest in its two main projects to a non-profit community development organisation.  In Niger, Burkina Faso and Liberia, the Australian Government is partnering with Middle Island Resources to provide benefits for local communities, including an agricultural and irrigation project in rural Burkina Faso that directly benefits 14,000 people.

Chinese companies investing in Australian mining companies with African operations can utilise and leverage the expertise of these Australian companies in developing and maintaining a social licence to operate and seek to dispel the myth about China’s motives for investment in Africa.

Growing with Africa

In 2008 the African Union declared its “commitment to prudent, transparent and efficient development and management of Africa’s resources”.

Australian miners and Chinese investors can both help achieve this.




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


Contacts

Andrew Lumsden

Partner. Sydney
+61 2 9210 6385

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Lizzie Knight

Partner. Sydney
+61 2 9210 6437

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