Buying Binge

ENLARGE PHOTO+

BUYER: Minmetals
SELLER: Oz Minerals
The deal effectively cleared the Australian company's entire existing debt

Oz Minerals / Reuters

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A few years ago, the Chinese called it their "Going Out" strategy. State-owned companies in key industries were being encouraged by the government to plant the flag of Chinese capitalism around the world by purchasing stakes in foreign companies. China was booming, flush with cash and full of optimism — naive optimism, it turned out. In 2005, China National Offshore Oil Corp., China's oil and gas giant, tried to buy Unocal, the American oil company, and learned just how xenophobic Washington could be: the deal was called off after strident objections from congressional leaders. Two years later, Beijing's fledgling sovereign wealth fund China Investment Corp. poured $3 billion into Blackstone in return for a 10% stake in the New York City – based private-equity firm, just before the bottom fell out of U.S. debt and equity markets. That deal was followed by a $5 billion purchase of a 9.9% stake in Morgan Stanley, then in the early throes of the credit crisis. Morgan Stanley's share price has since fallen by more than half.

These were expensive lessons, but make no mistake: Beijing has not decided staying home is better than "Going Out." State companies are still sitting on mountains of cash, and although China's economy is slowing, officials see the global recession as a prime opportunity to cheaply acquire holdings of strategically important natural resources such as iron ore, copper, oil and gas — commodities China's leadership knows it will need much more of in the long run. In the past month, Chinese companies have bought assets abroad at an unprecedented pace. Aluminum Corp. of China (Chinalco), a major holding company focused on resources, has announced plans to invest $19.5 billion in Rio Tinto, one of the world's largest mining companies. If completed the deal would be the biggest foreign purchase any Chinese company has ever made. China Minmetals, another state-owned firm, said it would pay $1.7 billion in cash for Australia-based Oz Minerals, the world's second largest zinc miner. On Feb. 23, Hunan Valin Iron & Steel Group of China purchased a $771 million stake in Australian iron-ore exporter Fortescue Metals Group.

It's not just minerals Beijing is now frantic to buy. On March 3, China National Petroleum Corp. agreed to buy Calgary based Verenex Energy, which has a 50% stake in a huge Libyan oilfield, for $390 million. The China Development Bank and China Petroleum & Oil Corp. last month invested $10 billion in Petrobras, Brazil's state-owned oil company and the prime operator in one of the most promising new offshore fields in the world. The deal gives Petrobras capital to further develop the fields. In return, China will get 100,000 to 160,000 barrels of oil a day over 20 years.

Two days before the Brazilian deal, China secured what may be the most strategically significant agreement of all: Beijing agreed to lend $15 billion to cash-strapped Rosneft, Russia's oil major, and another $10 billion to Transneft, Russia's biggest pipeline company. The loans will be paid off not in cash, but in crude — 300,000 barrels a day from the huge east Siberian oil field. That's about 4% of China's current total demand for crude, secured on very favorable terms. Over the 20-year life of the deal, Beijing will effectively be paying about $20 per barrel. Crude prices, which last summer peaked at more than $140 per barrel, now sit just above $40.

There is a lot more oil and gas where that came from, if Beijing can bring itself to depend on Moscow as a supplier. That isn't as easy as proximity might suggest. The two countries have never trusted each other. But economics now dictates that historical enmity be put aside. With the collapse of oil prices and the credit crisis, Russia needs cash. China needs fossil fuels; it needs them from a variety of suppliers far into the future — and it has the money to pay for them. Half of the country's massive national savings of $2 trillion is in corporate coffers. "These [Chinese] companies know this slump, while deep, will not last forever," says Xu Minle, a Shanghai-based analyst at BOC International. "China is now making strategic investments overseas at a comparatively lower cost."

There's no question that it's a buyer's market for raw materials, and that many resource companies are struggling to find willing partners and financiers. China's Rosneft injection will allow the Russian company to pay off $8.5 billion in debt — 60% of it owed to foreign banks — that matures this year. Beijing looks like the last, best hope of miners and drillers.

But the deals are not without controversy, particularly in Australia, where some are worried that control of vital resources is being handed over to the Chinese. Chinalco is a huge consumer of iron ore, and mining companies fear that the investment in Rio Tinto could give China more influence over the price of iron in global commodities markets. Every year, steel and aluminum producers worldwide dicker with the big raw-material producers over new contracts. During the boom years, when Chinese companies' appetite for virtually every metal was voracious, they got stuck with stiff price increases. But the deal could give Chinalco, which already owns 9.3% of Rio, additional stakes in the mining company's choicest deposits of copper, iron ore and bauxite. The secretary general of China's Iron and Steel Association, Shan Shanghua, has already hinted that Chinese buyers could have some additional clout at the bargaining table.

This rankles some of Rio's shareholders. One institutional investor told TIME that it's "up to Rio to convince us that this does not transfer key pricing power over a key commodity to a big customer. They need to make that case, or I'm not inclined to vote for the deal" when it comes up for approval in May or June. The investment also must be cleared by the Australian Foreign Investment Review Board.

At a March 2 news briefing in Sydney, Chinalco President Xiong Weiping tried to allay fears. "The transaction will in no way lead to any control of the natural resources of Australia," he said, adding that Rio's corporate strategies and management practices would also remain unchanged. For now at least, blatant anti-Chinese sentiment in Australia appears to be bottled up, and the investment is expected to go through.

Considering how far mineral prices have fallen, some analysts believe Chinalco might actually be paying a premium for Rio Tinto assets. But BOC International's Xu says "the price is much, much lower for the assets — particularly iron ore and copper — than it would have been just six months ago. This seems like a pretty good deal." As long as commodity prices are depressed, Chinese companies — having learned the pitfalls of "Going Out" — are likely to be ravenous buyers.