China on Global Hunt for Resources

Global Hunt for ResourcesChina may be slowing but the resource-hungry country continues to search the world for resources to help fuel its industrial growth in the decades ahead.

In 2009 and 2010, Chinese energy firms made about $48.0 billion in acquisitions in North America, according to the International Energy Agency. The country has investments in the oil rich Canadian tar sands in Alberta, and I expect to see more Chinese capital flowing in.

On Monday, CNOOC Limited (NYSE/CEO), one of the three major state-owned oil producers in China, announced a takeover bid to buy Canada-based Nexen Inc. (NYSE/NXY) for $15.1 billion in cash, representing a $27.50 per share offer, which is a whopping 60% above the close on July 20. The big challenge will be having the deal accepted by the Canadian regulators who in the past were pressured by the country’s conservative government and axed deals from China. In 2005, CNOOC attempted to buy U.S. oil play Unocal, but the deal failed due to security issues.

And in a smaller deal, China-based Sinopec Corp. announced it would pay $1.5 billion for a 49% stake in the U.K. division of Canadian oil and gas company Talisman Energy Inc. (NYSE/TLM).

China has been making significant investments in Africa and recently funded the country an additional $20.0 billion in loans. Of course, China is steadily increasing its access to African resources. Armed with nearly US$3.0 trillion in cash reserves, the country has ample cash.

China’s mega-power economic engine is stalling, but the growth in the country continues to be well ahead of that in the rest of the G7 countries.

In contrast, Europe’s economic engine has stalled and has yet to be jumpstarted. Germany just saw its rating cut, as it deals with the issues in the eurozone.

With China continuing to grow, the demand for raw materials will remain high across many sectors, from industrial, to mining, to technology. The country is the world’s largest consumer and producer of gold. In 2011, the country produced over 300 tons of gold worldwide, according to research by precious metal consultant GFMS. Australia produced 270 tons in 2011, the second biggest producer and a big reason why China has been eyeing Australia for acquisitions. Newmont Mining Corporation (NYSE/NEM) is one of the top players in Australia (see “Newmont Mining: A Class Act in Gold”), with operations in the gold-rich Kalgoorlie open-pit mine.

While China is trying to reduce its need for foreign sources of metals, the country continues to scour the world looking at acquisitions in raw materials. Mines with large reserves are sought after. China has made numerous acquisitions, and I expect this to continue, especially as the country continues to grow and its appetite for raw materials rises.

The proposed major acquisition of Nexen will not be the last, but may only be the start of an aggressive push by China to expand its access to global resources.

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