China's Sovereign Wealth Fund Makes Big Bet in Canada
Canadian mining and processing company Teck Resources on Friday announced that it will sell a 17.2% stake to China Investment Corporation (CIC) via a private placement. By taking an interest in Teck, CIC is contributing the trend of Chinese investment in foreign resource companies.
The sovereign wealth fund will buy 101.3 million class-B subordinated voting shares at a price of C$17.21 each, amounting to a total outlay of C$1.74 billion ($1.5 billion). The holding represents 17.5% of Teck's outstanding class-B shares (representing approximately 17.2% equity), which will provide CIC with a 6.7% voting interest in the company. The stake comes with no board representation.
After the deal is completed, which is expected to happen on or around July 14, Teck's class-A shareholders will have a 61.8% voting interest in Teck with Temegami Mining Company holding a 28.5% voting interest.
CIC has told Teck that it is acquiring the shares to become "a long-term passive investor", according to a written statement. It will hold the shares for at least a year and it has the right to maintain its percentage ownership through market purchases or participation in future class-B share issuances. CIC is bound by a standstill agreement that forbids it from increasing its holding for any purpose other than avoiding the dilution of its stake. If it decides to sell, CIC has agreed not to transfer its shares to any company in the international mining industry or to any of Teck's significant customers.
The main rationale behind the sale is that it allows Teck to pay off some of the debt that it took on when it acquired the assets of Fording Canadian Coal Trust last year. Teck's aim is to bring its credit metrics within the criteria to restore an investment grade rating. It has a target debt-to-Ebitda ratio of 2.5 times, which would put it into rating agency guidelines for an investment grade rating of between 2.5 times and 3.5 times. Its target debt-to-capitalisation ratio is between 25% and 30%, compared to the rating agency requirement of 30% to 40%.
A private placement was chosen because it would provide better value than a public equity issue. And it is no coincidence that the investor was Chinese. "This transaction... represents an attractive opportunity for Teck to establish a relationship with a major Chinese financial investor, with a deep understanding of China, the world's largest consumer of our principal products," said Teck president and CEO Don Lindsey.
Teck is the largest diversified mining, mineral processing and metallurgical company in Canada. The company is a major player in the production of copper, metallurgical coal and zinc. It has interests in 15 mines in Canada, the US, Chile and Peru, as well as exploration activities in four continents.
Friday's deal is the latest in a series of moves by Chinese resource companies to acquire assets abroad. Two weeks ago, Sinopec put $7.2 billion on the table to buy oil exploration company Addax Petroleum; and, also in June, Wuhan Iron and Steel Corp made a $400 million investment into Brazilian mining company MMX.
Aluminum Corporation of China (Chinalco) announced last Thursday that it had taken its full entitlement in Rio Tinto's $15 billion rights offering, just one month after Rio rebuffed the Chinese company's attempt to double its 9% interest in the company.