FIRB update – have the goal posts shifted?

Has Australia’s foreign investment policy, particularly in relation to Chinese state-owned enterprises (SOEs), changed? That is the question many investors are now asking following recent comments by FIRB executive director Patrick Colmer and a number of recent decisions by FIRB.

In a speech to a China-Australia investment conference in Sydney on 24 September 2009, Mr Colmer noted that ‘[the government] is much more comfortable when we see investments that are below 50 per cent for greenfield and below 15 per cent for major producers’.

Not surprisingly, Mr Colmer did not seek to defi ne what the government regards as a greenfi eld project, nor what is meant by the expression ‘major producers’. As foreign investment continues to pour into the Australian resources sector, investors are becoming increasingly nervous that the comments, and the decisions by FIRB that followed, represent a policy shift in Australia’s attitude to foreign investment.

We have set out below a brief summary of the recent decisions by FIRB and an analysis as to what, if any, policy changes may have occurred in recent months relating to foreign investment in the Australian resources sector.

The Western Plain decision

On 23 September 2009, the Department of Defence blocked a proposed magnetite joint venture between Chinese SOE, Wuhan Iron & Steel (Group) Co (WISCO), and Western Plain Resources (WPG) in relation to WPG’s Hawks Nest project. This transaction involved WISCO subscribing for shares in WPG equating to 15 per cent of the company and contributing $45 million to the cost of undertaking a feasibility study to develop WPG’s magnetite deposits in Hawks Nest to earn a 50 per cent joint venture interest in the project.

The deal was subject to FIRB approval and Department of Defence approval due to Hawks Nest’s location. Whilst FIRB has not had to rule on the matter, the Department of Defence blocked the deal on national security grounds citing the proximity of its Hawks Nest project to the Woomera prohibited area.

The Lynas decision

On 24 September 2009, China Nonferrous Metal Mining (CNMC) terminated its proposal to acquire a 51.6 per cent stake in Australian rare earths minerals company, Lynas Corporation, after FIRB sought to impose undertakings on CNMC limiting its ownership in Lynas to less than 50 per cent, and reducing the number of director positions to be held by CNMC to less than half of the Lynas Board.

One possible explanation of why FIRB took a tough stance in the Lynas proposal is because of concerns about China—which currently accounts for approximately 93 per cent of production of rare earth minerals—looking to control the global market for these strategically important minerals in order to conserve its own declining reserves.

The Meridian decision

On 13 October 2009, FIRB approved state-backed China Northwest Mining & Geology Group’s proposal to acquire a 45 per cent stake in Queensland resources company, Meridian Minerals Ltd, but not before requiring Meridian to give up some outstanding applications for tenements located within the Woomera prohibited area.

The Felix decision

On 23 October 2009, FIRB approved the $3.5 billion bid by Yanzhou Coal Mining Company Limited (Yanzhou) for all of the shares in Australian coal miner Felix Resources Ltd. The decision had been eagerly awaited by the industry, following two requests by FIRB for Yanzhou to withdraw and resubmit its application.

In approving the Felix proposal, FIRB imposed strict legally enforceable undertakings on Yanzhou aimed at addressing national interest concerns. Imposing undertakings on Chinese SOEs has become the rule, rather than the exception under the Rudd Government, as evidenced by the conditional approvals earlier this year of Minmetals’ acquisition of substantially all of OZ Minerals’ assets (excluding Prominent Hill); Hunan Valin’s acquisition of a 17.55 per cent stake in Fortescue Metals Group and Ansteel’s acquisition of up to 36.28 per cent of Gindalbie Metals.

Not surprisingly, some of the undertakings imposed on Yanzhou were similar to the undertakings attached to the Minmetals & OZ Minerals approvals, including that:

• Yanzhou operate its Australian mines through an Australian company, Yancoal Australia (Yancoal), headquartered and managed in Australia, with Yancoal’s CEO and CFO principally residing in Australia
• Yancoal and its subsidiaries have at least two directors principally residing in Australia, one of whom must be independent of Yanzhou, and
• Yanzhou market and sell coal produced from its Australian mines on armslength terms with reference to prevailing international benchmarks and in line with market practices.

FIRB also imposed conditions requiring Yanzhou to:

• list Yancoal on the ASX by the end of 2012, and, by that time, reduce its ownership of Yancoal to less than 70 per cent, and
• following Yancoal’s listing, ensure that its economic ownership of Yancoal’s underlying mining assets (including Austar which is currently owned by Yanzhou) is less than 50 per cent.

Given Felix currently has joint ventures over some of its assets, Yanzhou’s economic interest in these assets may already dilute to below 50 per cent following Yancoal’s listing. However, should Yanzhou wish to retain a 70 per cent stake in Yancoal, it will need to sell down its interest in other assets which it will own outright, including the Yarrabee mine in Queensland.

The Energy Metals decision

Finally, on 28 October 2009 FIRB approved China Uranium Development Company’s $100 million bid for 70 per cent of emerging Australian uranium company, Energy Metals Ltd.

Senate Inquiry – foreign investment by SOEs

It is also worth noting that the Senate Standing Committee on Economics released an inquiry report on 17 September 2009 which assessed Australia’s policy with respect to foreign investment by SOEs.

The majority of the Committee was of the view that the current regulatory framework for assessing foreign investment proposals by SOEs is suffi cient and that the system of FIRB analysing proposals on a case-by-case basis according to the ‘national interest’ should remain.

However, the Committee was critical of some areas of the regulatory framework and recommended that:

• FIRB develop a more effective communication strategy and provide additional information about how foreign investment decisions are made
• FIRB release its annual report in a more timely fashion, and
• the relevant legislation be tightened to deal with complex acquisitions so that acquisitions less than the 15 per cent threshold should not be able to mask takeovers of smaller strategic assets which currently do not trigger approval.

So what does this all mean?

There are several immediate observations to be made from the spate of recent FIRB decisions, namely that:

• all of the recent decisions discussed above highlight FIRB’s underlying policy of considering transactions on a case-by-case basis and according to ‘national interest’ considerations. This is particularly so in the case of both the Western Plain and Lynas matters. In the Western Plains matter, national security issues again appear to have been paramount. In the Lynas matter, the company’s strategic importance as one of the few non-Chinese rare earth producers appears to have contributed to the stringent conditions sought by FIRB
• despite the absence of formal guidelines, the reference by Mr Colmer to ‘major producers’ is likely to only include top-tier mining companies of the likes of BHP Billiton, Rio Tinto and certain single commodity producers such as Australian gold producer Newcrest Mining Limited
• for mining companies which are not considered ‘major producers’ but are in production or near production, a threshold limit of somewhere between 50 per cent and 70 per cent appears to be preferred. This view is consistent with the approvals given for the Energy Metals acquisition, the conditions attaching to the Felix approval which will, over time, reduce Yanzhou’s underlying interest in the mining assets to 50 per cent and FIRB’s stance in preventing CNMC acquiring more than a 50 per cent stake in Lynas, and
• it will remain diffi cult for ‘full’ takeovers by Chinese SOEs of Australian resource–producing companies to be approved, reflecting the much tougher stance thathas been taken by FIRB since allowing Sinosteel’s takeover of Midwest to proceed in January 2008.

What is also clear is that, as the majority of the Senate Standing Committee recommended, it may now be necessary for FIRB to provide investors with more insight into its decision–making process, as the perceived lack of uncertainty surrounding FIRB’s policy with respect to Chinese SOEs may in the long term threaten Australia’s competitiveness as a place to invest.

This article was written by Justin Little, Partner, Perth and Paul Tempone, Solicitor, Melbourne.

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