A beachhead for China

We might not have seen the last of the $1.4 billion of assets China Minmetals extracted from the wreckage of OZ Minerals after all, with senior Minmetals executives flagging the possibility that they might eventually be re-listed. Minmetals has shown itself to be a very quick learner.

The possibility that the suite of assets that Minmetals acquired last week – when OZ Minerals' shareholders approved the sale – might eventually be listed was raised at the launch of Minerals and Metals Group (MMG) by the president of Minmetals' non-ferrous business, Wang Lixin and subsequently confirmed by former OZ Minerals chief executive, and new MMG chief executive, Andrew Michelmore.

China's State-owned Assets Supervision and Administration Commission, which supervises the country's key state-owned enterprises, apparently is quite keen on the concept of acquiring assets offshore and subsequently listing them on the local exchanges and offering the locals up to 25 per cent of the equity.

There are two apparent strands to the thinking. One is the ability to recycle capital and, assuming the assets China's SOEs acquire during the financial crisis do improve in value as the global economy and commodity prices recover, crystallise some gains. The other, unstated, is to help make Chinese investment in resources less controversial and sensitive.

Minmetals president Zhou Zhongshu and his colleagues went to some lengths at the launch to downplay any tensions between China and Australia as a result of the local opposition to Chinalco's aborted alliance with Rio Tinto or the raft of conditions – including the excision of OZ Minerals' best asset, Prominent Hill – imposed on its own deal (China's protests don't add up, June 12).

They also said all the right things about their commitment to transparency and communities and their optimism about the prospects of the deal helping to create a deeper and closer trade relationship between the two countries. The colours it chose for MMG's corporate logo – red and gold – were deliberately symbolic of the intersection of nations the new company creates.

MMG represents, not just a beachhead in the Australian resources sector, but a 100 per cent-owned one. It is also the largest such investment a Chinese entity has made in this country. Minmetals knows that every action its new subsidiary takes will be monitored in Canberra and elsewhere and that if it demonstrates that it is a model citizen, it will open up more opportunities for itself and other Chinese companies.

Not that it has that much choice, given the conditions that were attached to Wayne Swan's approval. MMG had to be locally-headquartered, employ mainly a local management team (it has taken on most of OZ Minerals' executives), appoint at least two Australian directors, price all its output transparently using an Australian-based sales team, maintain or increase employment and production, re-open mines, produce an annual report that conforms to the Corporations Act and even set up a local website.

Michelmore said MMG would be committed to transparency and that the company was even considering whether it should issue quarterly reports so that its progress could be tracked by the public and the rest of the sector. That would go well beyond the commitments sought by the federal government.

Minmetals accepted all the conditions imposed by Swan without complaint and now talks about the "fantastic" base it has acquired and how important it was to it that it was able to acquire the OZ Minerals executive team and employees.

It presumably also has access to lots of cheap capital – China is very keen to develop a deep presence in the sector to secure supply of the commodities it needs to sustain its growth and, in effect, to create a hedge against the price effects its own demand will create (KGB Interrogation: China focus, June 12). As the Chinalco tilt at Rio demonstrated, it is prepared to put a lot of its vast store of cheap capital into that effort.

What Minmetals, and indeed the other Chinese SOEs, need is access to resources and, just as importantly, skilled and experienced people. It knows that it now has the asset and intellectual property bases from which it can build a far bigger presence in the global resources sector. MMG isn't Rio (the relatively modest scale of the OZ Minerals portfolio in fact helped make the deal less controversial), but it is a decent base to build on.

By being diplomatic and prepared to deal generously with OZ Minerals, rather than exploiting its leverage and OZ Minerals' vulnerability – even increasing the offer at the eleventh hour when there was no pressing need to do so – Minmetals has done everything it could to demonstrate that it has no hidden agenda and that it will bring a long-term view and the financial support to build MMG into a locally-based but international resource house of substance.

If it lives up to its promises, a lot of the concerns and cynicism about China's state-owned enterprises might be defused.

It was quite apparent from the deft way the Minmetals team handled questions about the trade relations and their own dealings with Canberra that it understands the significance of what it has achieved already and the potential that creates, not just to realise its own ambitions but aid the larger China quest for resource security.