SYDNEY (Dow Jones)--Plans by a government-controlled Chinese company to invest in a Western Australian uranium explorer may face significant hurdles before winning regulatory approval in Australia, according to lawyers and takeover experts.
Northern Uranium Ltd. (NTU.ASX) Monday said it has signed a binding letter of intent with Chinese mineral explorer Jiangsu Eastern China Non-Ferrous Metals Investment Holding Co., a unit of the East China Mineral Exploration and Development Bureau, or ECE, a mining agency owned by the Jiangsu provincial government.
Under the terms of the letter, ECE would acquire 51% of Northern Uranium for A$15.7 million.
But foreign investment by Chinese state-owned companies--particularly in sensitive commodities such as uranium and rare earths being explored by Northern Uranium--have run foul of Australia's Foreign Investment Review Board in recent years.
"FIRB doesn't have a rule book for this," says Simon Price, director at Azure Capital, a Perth-based advisory firm that has worked on Chinese resource takeovers. "They used to have fixed principles for investments by state-owned enterprises but they have replaced them with more general concepts."
"The key thing is whether the (suitor) has a standalone governance structure," said one lawyer familiar with FIRB decisions. "The closer they are to the government, the more likely they may be seen as a conduit for gathering information, rather than as an independent mining house."
The FIRB took just a month to approve privately-held Sichuan Hanlong Group Co.'s purchase of a 55% stake in Moly Mines Ltd. (MOL.AU) last November, but state owned companies face a higher bar.
"If this is directly controlled by Jiangsu province, so there's not a lot of separation, that's going to be a factor," said Price.
The level of control in Australia also makes a difference. In a speech to the Australia China Business Council last year, FIRB's executive director Patrick Colmer said the government was "much more comfortable" with foreign investments in new projects below 50%.
China Nonferrous Metal Mining Co.'s proposed A$500 million bid for a 51% stake in rare earths explorer Lynas Corp. Ltd. (LYC.AU) last year collapsed after FIRB insisted China Nonferrous lower its stake below 50% and take less than half of the board seats.
Northern Uranium, however, may have a strategy in place to get around this issue.
George Bauk, Northern's managing director, said the 34.5 million options outstanding on the company would be able to dilute ECE's stake down to 41%.
The options, expiring in March and September 2012, can be exercised for 15 cents and 20 cents respectively, compared to Northern's current price of 10 cents.
"They were looking for a placement of 51% but should the price go up above 15 cents 20 cents there's a mechanism for them to go under 50%," he said.
Under the current proposal, ECE would have three seats on Northern Uranium's nine member board and would choose two more independent directors in cooperation with the current board, Northern said.
But the biggest hurdle may well come down to the nature of the materials being mined.
Uranium's potential military use makes it the subject of close scrutiny, and Australia's exports to China are governed by a cooperation agreement restricting use to civilian power stations overseen by the International Atomic Energy Agency.
But the level of regulation may make uranium deals easier, as evidenced by state owned China Uranium Development Company Ltd.'s purchase of a 70% stake in Perth based uranium explorer Energy Metals Ltd. (EME.AU) for A$100 million last
year.
A person familiar with the deal said that uranium was expected to be "not particularly sensitive", especially as Northern already has an agreement to market all its uranium through French nuclear utility Areva S.A. (CEI.FR).
Northern's rare earths interests may be a bigger concern, said the lawyer familiar with the FIRB.
China holds around 90% of the world's resources of rare earth metals, which have growing uses in electronics, lasers and hybrid car technology.
ECE already holds 22% of Arafura Resources Ltd. (ARU.AU), which is exploring the Nolans Bore deposit north of Alice Springs, one of the world's top half-dozen rare earths resources outside China.
Fears about Beijing's hold over the global rare earths market are likely to have played a part in FIRB's decision over Lynas, which has the most developed resource of the metals outside China.
However, Bauk said that Northern's interests in those commodities were not advanced. "There's some really encouraging rockchip samples but we're in such an early stage there, a lot of work has to come into that."
Northern Uranium Ltd. (NTU.ASX) Monday said it has signed a binding letter of intent with Chinese mineral explorer Jiangsu Eastern China Non-Ferrous Metals Investment Holding Co., a unit of the East China Mineral Exploration and Development Bureau, or ECE, a mining agency owned by the Jiangsu provincial government.
Under the terms of the letter, ECE would acquire 51% of Northern Uranium for A$15.7 million.
But foreign investment by Chinese state-owned companies--particularly in sensitive commodities such as uranium and rare earths being explored by Northern Uranium--have run foul of Australia's Foreign Investment Review Board in recent years.
"FIRB doesn't have a rule book for this," says Simon Price, director at Azure Capital, a Perth-based advisory firm that has worked on Chinese resource takeovers. "They used to have fixed principles for investments by state-owned enterprises but they have replaced them with more general concepts."
"The key thing is whether the (suitor) has a standalone governance structure," said one lawyer familiar with FIRB decisions. "The closer they are to the government, the more likely they may be seen as a conduit for gathering information, rather than as an independent mining house."
The FIRB took just a month to approve privately-held Sichuan Hanlong Group Co.'s purchase of a 55% stake in Moly Mines Ltd. (MOL.AU) last November, but state owned companies face a higher bar.
"If this is directly controlled by Jiangsu province, so there's not a lot of separation, that's going to be a factor," said Price.
The level of control in Australia also makes a difference. In a speech to the Australia China Business Council last year, FIRB's executive director Patrick Colmer said the government was "much more comfortable" with foreign investments in new projects below 50%.
China Nonferrous Metal Mining Co.'s proposed A$500 million bid for a 51% stake in rare earths explorer Lynas Corp. Ltd. (LYC.AU) last year collapsed after FIRB insisted China Nonferrous lower its stake below 50% and take less than half of the board seats.
Northern Uranium, however, may have a strategy in place to get around this issue.
George Bauk, Northern's managing director, said the 34.5 million options outstanding on the company would be able to dilute ECE's stake down to 41%.
The options, expiring in March and September 2012, can be exercised for 15 cents and 20 cents respectively, compared to Northern's current price of 10 cents.
"They were looking for a placement of 51% but should the price go up above 15 cents 20 cents there's a mechanism for them to go under 50%," he said.
Under the current proposal, ECE would have three seats on Northern Uranium's nine member board and would choose two more independent directors in cooperation with the current board, Northern said.
But the biggest hurdle may well come down to the nature of the materials being mined.
Uranium's potential military use makes it the subject of close scrutiny, and Australia's exports to China are governed by a cooperation agreement restricting use to civilian power stations overseen by the International Atomic Energy Agency.
But the level of regulation may make uranium deals easier, as evidenced by state owned China Uranium Development Company Ltd.'s purchase of a 70% stake in Perth based uranium explorer Energy Metals Ltd. (EME.AU) for A$100 million last
year.
A person familiar with the deal said that uranium was expected to be "not particularly sensitive", especially as Northern already has an agreement to market all its uranium through French nuclear utility Areva S.A. (CEI.FR).
Northern's rare earths interests may be a bigger concern, said the lawyer familiar with the FIRB.
China holds around 90% of the world's resources of rare earth metals, which have growing uses in electronics, lasers and hybrid car technology.
ECE already holds 22% of Arafura Resources Ltd. (ARU.AU), which is exploring the Nolans Bore deposit north of Alice Springs, one of the world's top half-dozen rare earths resources outside China.
Fears about Beijing's hold over the global rare earths market are likely to have played a part in FIRB's decision over Lynas, which has the most developed resource of the metals outside China.
However, Bauk said that Northern's interests in those commodities were not advanced. "There's some really encouraging rockchip samples but we're in such an early stage there, a lot of work has to come into that."
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