Minmetals' global goals for MMG

It hasn't taken long for China Minmetals to develop sufficient confidence in the management and the assets it acquired from the then-reeling Oz Minerals almost 18 months ago to effectively bulk up and list MMG, its Australian-based vehicle.

CMN has announced plans for MMG to be acquired by its smaller but Hong Kong-listed subsidiary, Minmetals Resources (MMR), for $US1.85 billion in a combination of cash, shares and convertible securities. CMN bought MMG for $US1.4 billion in June last year.

In effect CMN is backing MMG into MMR, where its current shareholding is 64 per cent. MMR's primary activity is alumina trading, although it also has some downstream businesses.

Initially CMN would own about 75 per cent of the merged group, which would have a market capitalisation approaching $US3 billion, and the public about 25 per cent.

The expanded MMR, however, also plans to raise up to $US1.6 billion of new capital to restructure its balance sheet (repaying a $US694 million loan from CMN to help fund the deal) and provide nearly $US1 billion of funding for MMG's projects, including potentially the $US790 million development of its Dugald River zinc project in Queensland. CMN could be diluted to about 51 per cent if MMR is able to raise the maximum amount envisaged.

While it would have appeared logical to reverse the transaction, back the smaller MMR into MMG and list the business in a market more familiar with the former Oz Minerals assets, the fact that MMR is already listed and MMG is 100 per cent owned probably makes for a more straightforward transaction. CMN may also be more comfortable with the Hong Kong market, where Russia's giant aluminium group Rusal chose to list earlier this year.

When it acquired the assets from Oz Minerals – and the management team headed by former WMC resource chief executive Andrew Michelmore – CMN made no secret of its ambitions of leveraging the experience of the group to develop a significant operating presence in the non-ferrous commodities sector. It also flagged the possibility of an eventual listing.

CMN executives have made it clear subsequently that they are more than happy with what they acquired and, most particularly, the access to experienced management the deal with Oz Minerals enabled. Michelmore will be CEO of the new MMR and his chief financial officer, David Lamont, will have that role within MMR. MMG non-executive director Peter Cassidy will join the MMR board.

Apart from bulking up its exposure to an international portfolio of resource projects and providing access to external capital, the merger of its two satellites will also create a blend of trading and operating businesses. Michelmore has said previously that one of the advantages of being part of the CMN group was the access to intelligence about the Chinese market it provided.

Given the raft of undertakings CMN gave to the Australian Government to obtain approval to acquire the Oz Minerals portfolio (sans the Prominent Hill project retained by Oz Minerals after the government rejected CMN's original application) the deal will be subject to Australian government approvals. With the operational headquarters remaining in Australia and the assets being transferred into a listed vehicle in a well-established and well-regulated market, however, that shouldn't be an issue.

The creation of MMG was the largest investment a Chinese state-owned entity has made in Australia and CMN saw it as an opportunity to build credibility and trust in the West, get access to the intellectual property of Michelmore and his team and create the foundations for a larger international portfolio.

The improved market conditions (reflected in the $US400 million-plus uplift in MMG's value since it was originally formed) and the increased confidence in MMG's capabilities are reflected in the relatively speedy shift into the higher gear implied by today's announcement to pursue the broader China Minmetals group's stated ambition of transforming itself from a trading-focused group into a leading diversified international upstream base metals producer.