Resources Acquisition Fever

Recent Developments Japan and China

Anne Hung, Paul Davis, April 2009

Worldwide trends of M&A in 2008

Global*: M&A US$ 2.5tr worth of deals (drop of 31% compared to 2007) M&A deal number volumes under 12,200 deals (drop of 20% compared to 2007) Asia-pacific region M&A deal value ranked 1st for the first time on record in 2008 Q4

By country:
Country U.S.** U.K.** Japan** China***
*Source: Mergermarket **Source: Wall Street Journal. According to Mergermarket, total outbound M&A amount of Japan was over US$ 60 billion, that of China was over US$ 40 billion. ***Source: Zero2IPO Research Center

Total outbound M&A amount US$188.7 billion US$101.8 billion US$77.8 billion approximately US$30.8 billion

Compared to 2007 - 26% - 67% > +300% N/A

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Japan/China outbound resource M&A 2008

Japan By volume, 12.9% M&A deals are energy, mining and utilities By value, 15.6 % M&A deals are energy, mining and utilities China By volume, 40% M&A deals are energy, mining and utilities By value, 63% M&A deals are energy, mining and utilities

*Source: Mergermarket

Active resource acquisition players Japan and China

2009 Q1 resource related investment

China
Total acquisition amount of 2009 Q1 Compared to 2008 US$* 16.8 billion +10% (compared to last quarter of 2008)

Japan
US$ 3.48 billion (total outbound M&A) ** -39.0%**

Japan Recent Deals - 1

Oil & Gas
Date
February 2009

Deal
Arabian Oil Co., acquired a 10% stake in the Yme oil field off the Norwegian coast from Talisman Energy Norge AS. Inpex Corp.'s plan to construct a floating facility for liquefied natural gas production Nippon Oil Corp. spent about 74 billion yen to increase its stake in a large liquefied natural gas project in Papua New Guinea

Type of Country resource

Oil Norway

Amount
Approximately 10 billion JPY

February 2009 End of 2008

LNG facility LNG

Indonesia

roughly 11.2 billion US$ 74 billion JPY

Papua New Guinea

Japan Recent Deals - 2

Trading companies
Date
February 2009 January 2009

Deal
Mitsubishi Corporation agrees to acquire 33.4% of Strand Minerals (Indonesia) Pte Ltd from ERAMET, for the Weda Bay Nickel Project in Indonesia Mitsubishi Corp. has signed an agreement with Canada's Kitimat LNG Inc. to invest in Kitimat's liquefied natural gas production terminal project in the province of British Columbia. Mitsubishi will use 30%, or 1.5 million metric tons, of the LNG production capacity of the terminal Mitsui Corporation invest about $104 A million into 49% stakes and development costs in six Australia uranium blocks from Uranium One .

Type of resource
Nickel

Country
Indonesia

Amount
US$145 million

LNG terminal

Canada

Not disclosed

October 2008

uranium

Australia

$104 A million

Japan Recent Deals - 3

Consortium
Date
February 2009

Deal
Toshiba Corp., Tokyo Electric Power Co., together with Japan Bank for International Cooperation acquire a 19.95% share in Canadian miner Uranium One Inc. (UUU.T) for about $270C million Itochu, FE Steel Corporation, Nippon Steel Corporation, Sumitomo Metal Industries, Ltd., Kobe Steel, Ltd. and Nisshin Steel Co., Ltd.), together with Korean steel producer POSCO, is expected to acquire a 40% stake in NAMISA for approximately US$ 3,120mm (Approx. JPY 312.0bn) in total

Type of resource
uranium

Country
Canada

Amount
$270C million

End of 2008

iron ore

Brazil

approximately US$ 3,120mm

Major resource deals of China-1

Loans for Oil
Date
April 2009

Deal
China National Petroleum Corp to provide $5 billion loan to KazMunai Gaz EP and Export Import Bank of China will provide another $5 billion for other projects. China National Petroleum Corp is finalising a deal to pay $499C million ($3HK.02 billion) for Canadalisted Verenex Energy. China National Petroleum to lend $25 billion to Russian oil giant Rosneft and oil pipeline company Transneft in return, for 300,000 barrels of crude a day for the next 20 years at a rate of about $20 a barrel - less than half the current price of $45. China National Petroleum to provide $4 billion in loans, respectively, in exchange for long-term commitments to supply oil by Venezuela. China Development Bank to loan to Brazilian oil company to be repaid in oil.

Country
Kazakhstan

Amount
US$10 billion

Other Characteristics
Also Jointly buy Mangistan Munai Gaz from Indonesia Central Asia Petroleum Ltd.

March 2009 February 2009

Canada

$499C million

Russia

US$25 billion

Also gets pipeline connecting to China in East Siberia.

February 2009 February 2009

Venezuela

US$4 billion

Japanese companies also worked but only in feasibility stage.

Brazil

US$10 billion
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Major resource deals of China-1

Loans for Oil 4 of them are loan for oil all made within the last 3 months very big amount very long term loan (e.g. 20 yrs) not just oil but other benefits next loan for oil Ecuador (?)

Major resource deals of China-2

Mining companies
Date
February 2009

Deal
Chinalco signed a $19.5 billion deal with Australia's Rio Tinto that will eventually double its stake in the world's second-largest mining company to 18%. China Minmetals has offered $1.7 billion for Oz Minerals (take-over).

Country
Australia

Amount
US$19.5 billion

Government Approval
Pending

February 2009

Australia

US$1.7 billion

Rejected on National Security Ground (restricted to exclude Prominent Hill) Conditional (awaiting Chinese Government approval)

February 2009

Chinas Hunan Valin Iron and Steel Group is set to buy more than 16% (after dilution) of Fortescue Metals Group for $1.2 billion.

Australia

US$1.2 billion

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Major resource deals of China-2

Mining companies

All three have government approval issues Other smaller Australian acquisitions: - Ara fura Resources, Centrex Metal, Mt Gibson, Gindabie, Perilya Currently negotiating China Investment Corporation considering Fortescures Pilbara iron ore mine

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Chances or not?
- from viewpoint of Japanese companies

Seeing good chance of acquiring resource

9falling price 9strong Yen

Reassessing current assets Looking carefully and avoiding unprofitable investments

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Chances or not?
- from viewpoint of Chinese companies Big loss in outbound investments up to now Great chance of resource acquisitions Announces in Feb 2009 to offer preferential lending rates for overseas oil investments and may tap the countrys $1.95 trillion foreign-exchange reserves to help companies buy fields abroad Announces this week it will tap into Australias uranium supply to underpin its nuclear energy plan
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Chances or not?
- from viewpoint of Chinese government New regulation issued by Chinas Ministry of Commerce (effective May 1, 2009)
9Control relaxed MOFCOM only control oversea investment over $100 US million (85% oversea investment will be handled by local government) 9Procedures simplified A go-ahead issues within three days

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Typical China resource acquisition characteristics

Strong government background Significant growth of investment in Australia
9 1277 million US$ in 2007 9 3700 million US$ in 2008 9 15466 million US$ in 2009 Q1

Confronted with public resistance/ government approval

9 9 57% Australian people think should resist Chinese investment in mining companies (poll in April) Other countries also tightened scrutiny CIS, Algeria & US

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Recent Japan resource acquisition characteristics

Joint investment

Mainly equity investment

Slowing down

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What are the ways of investing?

Major points to watch out for Ways to invest The investment process Your objective
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What is your objective?

Secure source of supply To secure other business - e.g. EPC contract To enjoy other parts of value chain (e.g. production, transport) To protect your interest (white knight) Other strategic diversify, enter new business Straight profit What are the investment models? Which to use when
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Models
Title 1. 2. 3. 4. 5. 6. 7. 8. 9. Asset acquisition (uninco) Share acquisition (inco) Public company level Strategic alliances Virtual JVs Option Farm-in Debt (convertible or not) LTSC only ? X /X X Exposure XX X X ? X X

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What level?
Public Holding Co J Co
ijv

Asset Co J Co
ujv

Other business Project/Asset

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Inco
Assets License Plant & Equipment Contracts T Employees INCO J Co Asset Co

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Uninco
Asset Co License Plant & Equipment Contracts T Employees J Co

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THIRD PARTY RELATIONSHIPS

Shareholders Shareholders INCO Pty. Ltd. Third Party

Venturer 1

Third Party

UNINCO

Venturer 2

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Model
Unincorporated joint venture (Ujv)

Plus
no hidden liabilities tax benefits direct ownership

Minus
only for large projects expensive for existing project intensive documentation

Incorporated Joint Venture (Ijv)

easier to acquire company law protects minority limited liability (?)

exposed to Asset Cos previous liabilities less flexible on tax directors liabilities

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Model 3: Acquisition at Public Company Level

J Co
listed

Public Holding Co

J Co

ijv

Asset Co J Co
ujv

Other business Project/Asset

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Model 3: Acquisition at Public Co Level

(TOB?) When to use? To gain interest in all business May be cheaper If target does not cooperate? (raid) To protect your existing interest (white knight) Buy-out minority May be faster But Foreign investment/anti-trust restrictions Stock exchange rules

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Model 4: Strategic Alliance

Contractual Only Relationships Objective: longer-term, broader relationship e.g. look for further mutual opportunities e.g. cooperative exploration of both parties resources (unitization) Use synergies to mutual advantage

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Strategic Alliance
J Co other coal field A Foreign Co other shipping coal field A coal field A railway

Detailed agreements value/pricing, accounting, tax treatment

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Model 5: Virtual JV
E.g. J Co agrees to fund Asset Co
Agreement

J Co

Asset Co
100%

Project/Asset
Objective: keeping arms length Issues: lack of ownership accounting/tax
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Model 6: Option (project at early stage)

option price payable upfront purchase price payable if option exercised issues: why would Asset Co agree? foreign investment tax

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Model 7: Farm-in (partly paid shares)

Money paid in as required for work (= Interest is earned) Issues: - money goes into the ground - interim control
interest

Y1 Y2

Y3

Y4

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Model 8: Debt
Either: pure loan (project finance?) + Ltsc or loan convertible to equity (=upside) When is it used? risk money (pf) keeping arms length, avoiding exposure (later) where no need for ownership (later)

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Key Issues in the Models

What level of exposure? Do you need ownership? Issues where a buyer invests Foreign Investment/Anti-trust

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Key Issue 1: What level of exposure will you accept?

For your company: if project collapses if third party claims if counter party claims For your nominee directors Corporate director responsibilities

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Key Issue 2: How important is it to get an ownership interest?

Does it help against the host state? Commercial benefits? - portfolio strategy - avoid sales contract issues? Does it improve the buyers position against seller? - access to information - pre-warning of price increase - access to market information - pre-warning on reserves/quality issues Tax/Accounting

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Key Issues 3: Where buyer invests

Are the equity holding and product sales interdependent? Can the buyer terminate ltsc? Can he sell his interest? Does the buyer have greater duties under the ltsc, because he is a JV participant? e.g. to act in good faith, fiduciary duties To what extent should the buyer be involved in marketing and sales? National interest concerns
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Key Issues 4: Foreign Investment

Policy objectives (capture benefits for the country) (tax, price controls) Concerns re Chinese: control of project transfer pricing strategic dealing with resource SOEs governments take long-term views exacerbated by vertical integration sales/marketing (Chinalco case)

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Achieving J Cos objective/Issues

J Co Avoid close relationship Easy to exit Secure interest Money for f/s Offtake right Minority protection Solution No equity Debt/option Debt, Withdrawal right Foreign concern Need certainty - trigger points Needs the money

Right to convert/ Need to raise other $, Security over assets/shares right to sell etc. Stepped payment (farm-in) Agreement Withdrawal/put/sale veto Need upfront equity? Conditional on equity? Need flexibility Minority cannot obstruct Defence
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Speed

TOB

The Acquisition Process

Depends on: Sellers ideas and the Buyers objections Negotiated sales (the traditional model) Buyer has time to do d/d, get head office approvals and negotiate step by step Trade sales/auctions etc. For Seller: faster sale, better price? How to overcome the time constraints TOB

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CASE 1 Investment at List Co level (17%)

Listed Holding Co
100% 54% 100% Derivatives business 40% Mines Philippines

Mine Kazakhstan Listed Mine Australia

Mine Canada
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CASE 1
1. 2. 3. 4. but 5. 6. simple documentation effective blockage of potential takeover (white knight) good value protection of listing rules/disclosure rules multi-jurisdictional due diligence possible multi-government approvals e.g. Australia FIRB Kazakhstans government pre-emptive right loss-making mines in Philippines are included standstill requirement no veto rights, no direct control need to nominate directors conflict of interest for offtake (connected party transaction) difficult to invest directly downstream after acquisition [e.g. Chinalco]

7. 8. 9. 10. 11. 12.

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CASE 2 Loan for Offtake

Listed Holding Co J Co
Loan Agreement

other lenders

other lenders

Project Co Australia Mine

other joint ventures

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CASE 2
May be able to get around government approval requirement but not if it has feature to convert to equity (note FIRBs latest announcement convertible note) Best fit if only objective is to get offtake right Also possible to obtain other option rights No Connected Party Transaction issue so offtake discount not scrutinized as much but Competing security rights over assets with other lenders and other joint venturers could rank third/fourth in this case (need to consider others possible securities)
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 Control of mine only through loan agreement until option is exercised Expose to possible change in control danger of Project Co (may be paid out prematurely perhaps OK if offtake not affected) Offtake right is only good as long as mine is producing Needs provision to tie offtake right with/asset sale restriction (i.e. offtake right needs to run with the assets)

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Thank you !
Anne Hung () Tel: +81 3 5157 2710 Fax: +81 3 5157 2906 Anne.Hung@bakernet.com Paul A. Davis A Tel: +81 3 5157 2711 Fax: +81 3 5157 2906 Paul.Davis@bakernet.com

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