Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Natural Resources

AUSTRALIAN UPDATE – Australian Regulatory Response to Chinese Investment Opportunities and Challenges

Editors’ Note:  This paper was co-authored by Jeremy Low, Partner, and Andrew Wong, Senior Associate, at Allens Arthur Robinson.  Mr. Low specialises in mergers and acquisitions, corporate restructurings and corporate governance.  Mr. Low was based in the Allens Shanghai office from 2002 to 2006.  It was contributed by Ezekiel Solomon and Guy Alexander of Allens.  Mr. Solomon, who is a member of XBMA’s Legal Roundtable, has long-ranging global M&A experience and his expertise is in high demand from Australian, United States, Korean and Japanese corporations seeking his advice on the structuring, negotiation, financing and documenting of major energy and resource development projects, joint ventures and acquisitions, as well as negotiations with governments in Australia and Asia.  Mr. Alexander is the National Co-Head of Allens’ M&A and Equity Capital Markets practice and has been a member of the Takeovers Panel (established under Australian corporations and securities law to consider disputes in relation to takeovers and other acquisitions of substantial interests in, Australian companies) since 2004.


  • Chinese state owned enterprise investment into Australia’s resources sector is helping create unprecedented high-levels of M&A activity.
  • In recent years, Australia’s Foreign Investment Review Board has taken steps to balance the benefits and risks created by this influx by successive revisions or elaborations of the foreign investment policy, amendments to the regulatory framework and the attachment of conditions to particular investment approvals.
  • Feedback from some Chinese SOEs suggest that they view these policy changes and the foreign investment review process as confusing and discriminatory.
  • The record, however, suggests that China’s SOEs have adapted to the foreign investment process and policy by changing their approach to investment and being prepared to engage with the Government earlier in the investment process.
  • China is likely to continue to be a significant source of investment in Australian energy and resources, and increasingly in other areas, especially agriculture and food.


In the past decade Australia has enjoyed unprecedented high rates of foreign investment.  This has been driven by a once-in-a-generation boom in investment in the country’s resources sector.  In large part, this boom has been due to the activities of China and Chinese state owned enterprises (SOEs) eager to secure reliable sources of iron ore, coal and other commodities.

This trend has presented both opportunities and challenges for Australia.  The influx of foreign capital confers obvious economic benefits.  However, for Australia’s Foreign Investment Review Board, the challenge is to balance these obvious benefits against national interest considerations.

Over the last three years, Australia’s foreign investment policy has evolved in response to this trend.  This evolution has not been smooth.  At times Chinese SOEs have referred to Australian investment policy as discriminatory, citing highly publicised rejections of deals and confusing policy and process.  Over the last twelve months, FIRB has made steps to make the process more transparent and Chinese SOEs have changed the way they look to invest to avoid some of the issues.

This dialogue may be about to begin again.  Recent media quote the Australian Government Treasurer Wayne Swan on his plans to impose a two-stage foreign approval process for investment in resource exploration and mining.[1]  This would require foreign-government-related entity investors to obtain approval from FIRB to acquire an exploration business and, if a viable discovery is made, to re-apply for permission to develop the resource.  If introduced, this would create greater uncertainty for SOE investment in new projects to add to the claims that the Australian investment regime already makes things difficult.

At this point, it is important to look back at the history of the recent evolution of Australia’s foreign investment policy to:

  • provide an overview of the regime and how it applies to Chinese and other SOEs;
  • examine the perception and reality behind the Government’s track record in relation to Chinese investment proposals; and
  • outline the strategies that Chinese SOEs have employed to maximise their chances of obtaining foreign investment approval./li>

A closer look provides hope that while the debate rages, there are signs that the dialogue involved in the Australian foreign investment regime policy and process is shaping the structure of investment to serve the demands of investors and regulators.

Overview of Australia’s foreign investment regime

Foreign investment in Australia is regulated by a combination of legislation (the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA)) and published government policy (the Policy).

In general terms, the FATA obliges foreign persons to notify the Australian government and obtain prior approval for the following types of proposals:

  • any proposal whereby a foreign person will acquire an interest of 15% or more in an Australian business or company that is valued, or has gross assets, above A$231 million[2]; and
  • any proposal whereby a foreign person will acquire an interest in certain types of Australian real estate.

In addition to the FATA, the Policy requires foreign governments and their related entities[3] to notify the Australian Government and obtain prior approval for any proposal whereby the foreign government or related entity will acquire:

  • an interest of 10% or more in an Australian business or company irrespective of the value or gross assets of that business or company; or
  • an interest of less than 10% in an Australian business or company irrespective of the value or gross assets of that business or company, where the foreign government or related entity will obtain special voting rights, the ability to appoint directors or contractual rights.

The aspect of the Policy regarding foreign government investment was first introduced in February 2008.

All proposals must be notified to the Foreign Investment Review Board (FIRB), which is an advisory body that examines proposed foreign investments and makes recommendations to the Australian Treasurer on whether to prohibit or approve proposals.  The Australian Treasurer is empowered to prohibit a proposed investment if it is “contrary to the national interest”.

The ‘national interest’ test

The Act does not define the concept of “national interest” nor provide any guidelines on how it is to be assessed.  However, the Policy states that FIRB reviews foreign investment proposals on a case-by-case basis with national interest considerations given to a broad range of factors.  These considerations include:

  • national security – the extent to which foreign investments affect Australia’s ability to protect its strategic and security interests;
  • competition – the effect that foreign investment will have on the diversity of ownership within Australian industries and sectors to promote healthy competition;
  • other Australian Government policies – including the impact on Australian tax revenues and environmental objectives;
  • impact on the economy and the community – including the impact on: plans to restructure the target entity, the nature of investment funding arrangements, the level of Australian participation in the target entity following the transaction and obtaining a fair return for the Australian people; and
  • character of the foreign investor – the extent to which the foreign investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision.

The ‘national interest’ test is broadly similar to Canada’s ‘net benefit’ criteria, and both are broader than the US’ focus on security considerations.[4]

Considerations specific to SOEs

In addition to the above, the Policy contains the following considerations for SOEs:

  • whether the nature of the investment is commercial and at arm’s length;
  • the extent of actual or potential foreign government control, including through lending arrangements embedded in the source of the investor’s funding;
  • the nature of any part-privatisation; and
  • mitigating factors which may assist the Government in determining that the investment proposal is “not contrary to the national interest”, including:
  • existence of external/private partners or shareholders in the investment;
  • level of non-associated ownership interests;[5]
  • governance arrangements;[6]
  • ongoing arrangements to protect Australian interests from non-commercial dealings;[7] and
  • whether the target will be listed on the Australian Securities Exchange (ASX).[8]

Observations regarding the Policy

On first read, the Policy appears to make the approval process more onerous for SOEs than for other investors.  It imposes more stringent approval thresholds (ie. approval is required irrespective of the size of the target company or business), it expands FIRB’s review power beyond that under the FATA, and applications for approval made solely under the Policy need not be dealt within in a particular time frame (whereas applications under the FATA need to be assessed by the Government within 30 days, unless extended by FIRB by an additional 90 days).

The current Policy (in place since June 2010) does represent, however, a significant improvement for SOEs compared to the previous policy.  Under the previous policy, all investments by SOEs were be subject to FIRB review, even if the proposed acquisition amounted to less than 10% of interest in an Australian company.  The current policy exempts acquisitions of less than 10% unless the SOE acquirer obtains special voting or other rights.

In addition, it needs to be recognised that most of the ‘additional’ requirements and national interest considerations are not ‘new’ in the sense that they were not previously applied to SOE investors.  The national interest considerations which FIRB may take into account are not exhaustive and were never limited to those in the previous Policy.  This was again made clear by the Australian Treasurer’s recent decision in rejecting the proposed merger between the ASX and Singapore Exchange (May 2011).

Arguably, the current Policy merely codifies some of the considerations that had already been applied to SOEs, and provides a degree of additional guidance to foreign investors.

Sentiment towards investments from China: perception vs reality

The Australian Government has consistently stated, both in its Policy and on many occasions, that it welcomes foreign investment.  This enthusiasm has been reciprocated by Chinese investors: as of July 2011, China has invested a total of A$39 billion in Australia, making it the largest national target of Chinese outbound investment ahead of the US and Brazil.[9]  While large SOEs continue to dominate China’s outward investment by volume, the SOE share has dropped from 94% in 2010 to 89% in the first half of 2011.[10]

Given these impressive investment statistics, it can be surprising to learn that some Chinese investors (mostly SOEs) view Australia’s foreign investment approval process and its administration by FIRB to be a major hurdle to the success of their investment.[11]  The following points have been raised as ‘evidence’ supporting the perceived discrimination.

  • Sensitive cases of Chinese investment – These include the widely publicised collapse of the A$24 billion Chinalco / Rio Tinto deal (2008), China Minmetals’ reduced bid for Oz Minerals (2009) and the withdrawal of China Nonferrous Metal’s offer for Lynas (2009).
  • Informal FIRB position – In 2009, a FIRB representative made unofficial comments about FIRB ‘guidelines’ restricting foreign SOEs to minority equity ownership in Australian companies.[12]  The context suggested that the statement was directed at Chinese SOEs.
  • Change in FIRB Policy – Whilst the current Policy applies equally to all SOE’s, it has been viewed as targeting China rather than state-backed foreign direct investments in general.
  • Negative press – Chinese investors and officials have viewed the Australian media as playing a negative role in influencing popular opinion and FIRB decision-making regarding Chinese investment.  For instance, recent media attention on China’s food security concerns and its growing investment in Australia’s food and agribusiness sectors preceded the current Senate inquiries into FIRB’s handling of foreign interest in agricultural industries and rural land.
  • Delays in approvals – According to policy the review process typically takes a 40 day initial review period, but it is common practice for FIRB, if their review is not completed within that time, to ask Chinese applicants to withdraw and re-submit their proposal.  Anecdotally, it is not unusual for FIRB applications for Chinese investment to take longer than the usual 30 day statutory period.  FIRB either extends the period of review for an additional 90 days as it is empowered to under FATA or requests that applicants withdraw and resubmit their applications so as to restart the statutory timeframe.

However, such ‘evidence’ of discrimination does not – to put it candidly – stack up against the evidence.  What the evidence in fact reveals is that the Australian Government has, for the most part, approved Chinese investment proposals.  In 2009-10, 1,766 approvals were granted to Chinese proposals, consistent with the 1,761 approvals in 2007-08 prior to the global financial crisis.  Where approvals were granted, FIRB has on occasions imposed conditions to ensure that the investment would comply with the ‘national interest’ test – though it is true that certain FIRB conditions (e.g. ownership caps) have had the effect of altering or blocking the proposed acquisition.[13] The table in the Schedule outlines the FIRB review outcome for major Chinese investment proposals in the last three years.

The evidence also reveals that there has been no noticeable slowdown in Chinese investments proposals since the Policy was first amended in February 2008 to refer specifically to investments from SOEs.

In many instances, the withdrawal or non-approval of Chinese SOE investment proposals have related to commercial reasons (eg. concerns about overpaying, or potentially overpaying, for a target company[14]) or reasons that are not specific to the nature of the investor (eg. two major proposals which did not receive FIRB approval in 2009 sought to acquire assets located in the Woomera Prohibited Area which is reserved for national defence purposes[15]).

Finally, it would be misguided to believe that the Australian Government is more likely to approve, or to approve on an unconditional basis, investment proposals from private enterprise than SOEs.  The Government has recently given unconditional approval to COFCO in its 100% acquisition of Tully Sugar (May 2011), and reportedly also to Bright Food’s proposed acquisition of a 75% stake in Manassen foods (August 2011).[16]  It may represent the beginning of a trend as Chinese SOEs and other investors increasingly expand their targets beyond the resources sector.

A few strategies for dealing with Australia’s foreign investment regime

FIRB decisions and experience have provided some clues as to how Chinese investors, SOEs in particular, can (if commercially feasible) structure their investment strategically important or potentially sensitive projects to maximise the chances of receiving FIRB approval.  These strategies include:

  • seek minority rather than controlling interests – aim for smaller, non-controlling stakes (eg. various share placements in ASX-listed companies of less than 20%);
  • partner up with a non-Chinese investor – seek JV arrangements between Chinese and non-Australian companies to invest in Australia (eg. the acquisition of Arrow by the PetroChina/Shell JV);
  • selling to the public/listing – as in Yanzhou Coal’s undertaking to sell down to 70% by 2012 and list the operating company on the ASX; and
  • appropriate governance arrangements to ensure transactions are conducted on arms’ length / commercial terms.

In a recent example, two of China’s largest State-owned renewable energy businesses, China Datang Renewable Power Co and Baoding Tianwei Baobian Electric Co formed a renewable energy joint venture, called AusChina Energy Group, with Australian listed company CBD Energy Limited.  Datang Renewable is a major wind farm developer and operator.  Baoding Tianwei Baobian is the main operating company of the Baoding Tianwei Group, the largest electrical supplier in China and a producer of wind turbines and other alternative energy technology.

The new AusChina Energy Group is an important opportunity that will enable both Chinese SOEs and their Australian joint-venture counterpart to work towards a development target of approximately $6 billion worth of renewable energy projects over eight years, which would represent one third of Australia’s wind energy market.  Obviously, there are a number of commercial reasons for the joint-venture, but it highlights a successful path towards foreign investment for Chinese SOEs.

As well as an opportunity to maximise the chances of FIRB approval, this strategy could have commercial advantage for SOE investment.  With the price of acquiring Australian resources businesses at an all-time high, it is likely, going forward, that SOEs will look beyond the acquisition of operating Australian miners towards investment in exploration and development.  Joint-venture arrangements often have commercial advantages for exploration companies looking for capital and investors looking to take a more speculative investment.  It remains to be seen how the Treasurer’s recent statements about potential FIRB policy changes will impact on this investment strategy in the future.

Schedule – Regulatory Outcome of Chinese Investment Proposals





(A$ b)


Conditions / Reasons for refusal
May  2011



Tully Sugar




Apr  2010

PetroChina / Shell


Arrow Energy

Coal seam gas



Nov 2009

Hanlong Mining (private)

Moly Mines

Molybdenum, Iron ore



Oct 2009

China Baosteel


Aquila Resources

Coal, Iron ore, Manganese



Limited to 19.99% holding.
Oct 2009

Yanzhou Coal


Felix Resources




Sell down to <70% by 2012; operate using an Australian incorporated, headquartered and managed company; list operating company on ASX by 2013; off take arrangements on arms’ length basis.
Sept 2009

Wuhan Iron & Steel


Western Plains Resources

Iron ore


No (Dept of Defence)

National security concerns associated with the Hawk Nest magnetite site located within the Woomera Prohibited Area.
Sept 2009

China Nonferrous


Rare earths



Limited to 49.9% holding.
May 2009



Gindalbie Metals

Iron ore



Limited to 36.28% holding; support the development of Oakajee Port and Rail Project; not alter the 50/50 ownership of pellet plant without Government approval.
Apr 2009

China Minmetals


Oz Minerals



Yes (2nd proposal)

Sensitive assets excluded; arms’ length off take pricing; operations headquartered and managed in Australia; compliance with Australian industrial relations laws.
Mar 2009

Hunan Valin Steel



Iron ore



Compliance with Fortescue Directors’ Code of Conduct and the information segregation arrangements agreed between Fortescue and Hunan Valin.
Feb 2009

China Minmetals


Oz Minerals



No (1st proposal)

National security concerns associated with Prominent Hill, which is located within the Woomera Prohibited Area.
Sept 2008



Murchison Metals

Iron ore



Limited to 49.9% ownership to maintain diversity of ownership in the Mid-West region.
Aug 2008



Rio Tinto

Iron ore



Limited to 14.99% ownership and not to seek to appoint a director to Rio Tinto without fresh approval.
Jan 2008



Midwest Corp

Iron ore





[1]  China warns of boycott, John Garnaut, Sydney Morning Herald, 12 September 2011.

[2] This threshold is subject to indexation each year.  A threshold of A$1,005 million applies in respect of US investors, except in certain industries (including media, telecommunications, transport, military and uranium) where the standard A$231 million threshold applies.

[3] Entities in which foreign governments have control or have more than 15% interest are considered to be “related” to the foreign government.

[4] See The Foreign Direct Investment Process in Canada and Other Countries, Parliament of Canada, 19 September 2007.

[5] For example, the approval of the Shell/PetroChina bid for Arrow Energy (April 2010) without conditions.

[6] For example, the approval of Yanzhou Coal’s investment in Felix Resources (October 2009) on conditions that: 1) Yanzhou operate its Australian mines through an Australian company, headquartered and managed in Australia, with its CEO and CFO principally residing in Australia; and 2) the Australian operating company have at least two directors principally residing in Australia, one of whom must be independent.

[7] For example, the approval of Hunan Valin’s investment in Fortescue Metals subject to Hunan Valin undertaking that its nominee directors will comply with: 1) Fortescue’s Directors’ Code of Conduct, and 2) the information segregation arrangements agreed between Fortescue and Hunan Valin.

[8] For example, the approval of Yanzhou Coal’s investment in Felix Resources (October 2009) on conditions that 1) the Australian operating company list on the ASX by the end of 2012, and 2) by that time Yanzhou will have reduced its ownership level to 70%.

[9] Heritage Foundation, ‘Chinese Outward Investment: More Opportunity Than Danger’ 13 July 2011.

[10] Heritage Foundation, ‘Chinese Outward Investment: More Opportunity Than Danger’ 13 July 2011.

[11] See John Larum, ‘Chinese Perspectives on Investing in Australia’, Lowy Institute for International Policy, June 2011.

[12] Speech delivered by then-FIRB director Patrick Colmer to an Australia-China investment forum on 24 September 2009.

[13] FIRB’s cap on majority holdings caused Chinese acquirers to terminate their takeover proposals – China Nonferrous Metal’s plans for Lynas (2009) and Sinosteel’s initial proposal for Murchison (2008).

[14] Minmetals’ bid for Equinox Minerals (April 2011) and Yanzhou Coal’s bid for Whitehaven Coal (May 2011).

[15] Wuhan Iron & Steel’s bid for Western Plains Resources (2009) and China Minmetal’s first proposal for Oz Minerals (2009).  Woomera Prohibited Area is the weapons testing range operated by the Royal Australian Air Force.

[16] Reported by China Daily on 29 August 2011.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

MINING AND METALS UPDATE – Global M&A and Capital Raising Trends in the Mining and Metals Sectors

Editors’ Note:  This paper was prepared by Ernst & Young’ Global Mining & Metals Center, a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector.  Franny Yao (Yao Fang), who contributed this paper, is a Partner & Leader at Ernst & Young in Beijing, responsible for Key Accounts and Government Relations in China.  She is a founding director of XBMA and has broad expertise in cross-border M&A, representing major Chinese companies in their global expansion and other strategic drives. 


  • Low gearing, strong earnings and good capital availability supported an ideal environment for mergers & acquisitions (M&A) in the first half of 2011. However, jittery markets and dropping confidence caused activity to slow in the third quarter.
  • While deal values in the first nine months of 2011 are up 67% on the same period in 2010, macro economic issues and resource nationalism are making M&A decisions difficult. This is reflected in the fact that volume of deals is actually down on 2010.
  • Synergistic, strategic and ‘one chance’ deals are being undertaken, and more speculative deals are being deferred. But with a number of large deals in the pipeline, and companies with access to cash in an environment where targets appear to be undervalued, we could see the year finish strongly.

Uncertainty is Having an Impact on Execution

The current level of political and economic volatility is making it harder to evaluate and execute M&A:

  • There is a scarcity of new large scale, quality assets particularly in traditional resource geographies
  • This is driving greater interest in frontier markets
  • Resource nationalism is spreading globally making valuations more complex and deal execution more uncertain
  • Meeting vendor price expectations whilst also delivering shareholder value is increasingly challenging, given increased risks for projects
  • Volatile markets are making it more difficult for companies to price risk

Regional Overview

Asia Pacific Regains its Position as Most Active Acquirer

North America has extended its lead as the preferred destination for mining and metals M&A targets, while Asia Pacific regained its title as the most acquisitive region. Australia and China dominated by activity.

Gold and fertilizer consolidation by Russian-based companies saw CIS step into third place as a target destination and acquiring region.

Country Overview

US Takes the Lead

The US has taken the lead ahead of both Australia and Canada as the most active acquirer, supported by intense domestic coal consolidation.

The US has also taken the lead as the preferred destination, although not all deals were for mining targets, e.g., BHP Billiton’s acquisition of Petrohawk Energy Corp ($11.8b) and Chesapeake Energy Corp’s Fayetteville Shale assets ($4.6b)1.

Inflated asset prices in Australia relative to other countries have led acquirers with greater risk appetites to look elsewhere. This has resulted in Australia dropping to fifth rank destination.


Coal Dominates M&A Activity

Coal continued to dominate the M&A landscape by a wide margin, accounting for over $30b of deal value. There are strong strategic drivers for coal :

  • Majors buying assets to boost production capacity to meet increasing demand from China and India
  • Power utilities, steel companies and governments integrating into raw materials
  • Economies of scale to manage risk and regulatory compliance

There have been a large number of gold deals but at a relatively low average deal value.


M&A and Capital

Raising Outlook

The first six months saw the ‘first wave’ of M&A: bolt-on, ‘one chance’ and strategically important deals. But Q3 saw even these deals put on ice as economic turbulence found its way into commodity prices.

Companies are well positioned to undertake M&A, and targets appear undervalued, but the global economic backdrop is making M&A decisions more difficult than ever. If these factors stabilize, we may see a resurgence of M&A activity.

Volatility on equity markets will make life difficult for juniors once again, with the need to increase capital raising options and consider preservation of strategies.

Risk aversion may see a tightening of bank credit, an increase in the cost of borrowing, and a flight to ‘safe’ investments in the bond markets, leaving mid-tier and sub-investment grade companies potentially exposed.

Capital management is more important than ever in a rapidly changing and volatile funding environment.

To see the full report, click here.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

SOUTH AFRICAN UPDATE – Investing in South Africa’s Mining Industry

Editors’ Note:  This paper was contributed by Michael Katz, chairman and senior partner of Edward Nathan Sonnenbergs and a member of XBMA’s Legal Roundtable.  It was authored by Otsile Matlou, head of Edward Nathan Sonnenbergs’ Mining and Resources Department and an expert in the field.


  • The calls by the Youth League of the African National Congress for the nationalisation of mines has been much talked about but on balance is very unlikely to occur.
  • Most of the recovery and growth in global steel production is attributable to China’s phenomenal growth with non-Chinese production not yet recovering to pre-crisis levels.
  • The Minister of Mineral Resources has assured potential Chinese investors that South Africa offers a competitive mining sector open to foreign investors.

1. Introduction

The principal legislation governing the mining industry in South Africa is the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) which came into force on 1 May 2004 and replaced the Minerals Act, 1991. The MPRDA is not a “Mining Code” because it does not codify mining law in South Africa.  As such, and although the MPRDA is the starting point, the common law remains applicable.  In addition, other pieces of legislation are also pivotal.


2.1.         The MPRDA changed the system of mineral regulation in South Africa from that of private ownership of mineral rights and licensing to one which is administratively driven and has replaced mineral rights with limited real rights in the form of prospecting and mining rights (for minerals) and exploration and production rights (for petroleum).  The objects of the MPRDA include the empowerment of historically disadvantaged South Africans and security of tenure.

2.2.         Transfer of prospecting and mining rights as well as the change in controlling interest of companies (that hold rights) requires consent of the Minister of Mineral Resources.   Similarly, encumbrances of each right require Ministerial consent (save where the encumbrance is registered in favour of a bank or registered financial institution).

3. Law Applicable to Empowerment

3.1.         On 11 October 2002, and as a result of a tripartite process (involving government, labour and the mining industry) the Broad Based Socio Economic Empowerment Charter for the Mining Industry (“the Original Mining Charter”) was signed by the representatives of the participants of the tripartite process.  The Original Mining Charter was gazetted as the Charter contemplated in section 100 of the MPRDA on 13 August 2004.  The Original Mining Charter became the instrument by which Government was to achieve its target of substantially and meaningfully introducing historically disadvantages South Africans into the mining industry.  The Original Mining Charter imposed a 26% empowerment requirement on mining companies.  After 5 years of its existence, it was reviewed and by way of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry dated 20 September 2010 (“The Amended Mining Charter”) it was amended.

4. Mining Titles Registration

The primary legislation governing registration of mining titles is the Mining Titles Registration Act, 1967 (MTRA).  Under this law, the Mineral and Petroleum Titles Registration Office (MPTRO) is established as a Mining Titles deeds registry.  Mining Titles must be registered in the MPTRO. The role of the MPTRO is to register prospecting and mining rights that have been granted to holders.

5. Mine Health and Safety Act 29 of 1996

This Act provides for the protection of the health and safety of employees and other persons at mines and, for that purpose to promote a culture of health and safety; to provide for the enforcement of health and safety measures; to provide for appropriate systems of employee, employer and State participation in health and safety matters; to establish representative tripartite institutions to review legislation, promote health and enhance properly targeted research; to provide for effective monitoring systems and inspections, investigations and inquiries to improve health and safety; to promote training and human resources development; to regulate employers’ and employees’ duties to identify hazards and eliminate, control and minimise the risk to health and safety; to entrench the right to refuse to work in dangerous conditions; and to give effect to the public international law obligations of the Republic relating to mining health and safety; and to provide for matters connected therewith.

6. Precious Metals Act 37 of 2005

This Act provides for the acquisition, possession, smelting, refining, beneficiation, use and disposal of precious metals; and to provide for matters connected therewith.  It is the legislation that is dedicated to the precious metals industry.

7. The Diamonds Act 56 of 1986

This Act provides for the establishment of the South African Diamond and Precious Metals Regulator and for the establishment of the State Diamond Trader; for control over the possession, the purchase and sale, the processing, the local beneficiation and the export of diamonds; and for matters connected therewith.

8. Size of the industry

8.1.         The mining sector accounts for over seven per cent of the country’s gross domestic product (GDP), it provides employment to close to 500 000 workers and has mineral resources estimated at US$2.5-trillion, the largest in the world.

8.2.         The South African mining industry’s total income in 2010 was R424-billion while expenditure was R441-billion. R228.4-billion was spent on purchases and operating costs such as timber, steel, explosives, electricity, transport and uniforms. R78.4-billion was paid on salaries and wages for mine employees, R49-billion on capex, R17.1-billion in tax, R16.2-billion in dividends, R38-billion on depreciation and impairments and R13-billion on interest to the banks. Estimates by the Chamber suggest that only about R34-billion or 8% of the total expenditure is moved offshore. That means that 92% of the value of local mining expenditures are effectively captured in South Africa resulting in the creation of thousands of jobs and significant multiplier effects into the rest of the economy.

9. Main resources (minerals)

9.1.         The main minerals are gold, platinum group metals, silver, iron ore, manganese, nickel, coal, chrome and copper. In addition to these, there are mineral deposits of rare earths, andalusite, base minerals and metals.

9.2.         South Africa is home to about 80 per cent of the world’s proven platinum and manganese reserves.

9.3.         South Africa’s fluorspar (natural calcium fluoride) reserves exceed 30 million tons, it has the third largest reserves in the world and accounts for around 30 per cent of the western world’s and about 10 per cent of all known reserves; iron ore amount to 9 300 Mt, or nine per cent, the sixth largest in the world; 80 per cent of the world’s known manganese ore deposits are located in the Northern Cape and the North West province; 8,5 per cent of the world’s nickel reserves, are located in South Africa’s Bushveld Igneous Complex; with around 15 million tons of zinc reserves, contains about 3,5 per cent of global deposits of the metal; 14,3 Mt, 22,1 per cent of the world’s known zircon reserves are found in South Africa; South Africa’s Bushveld Igneous Complex contains more than 5 million tons of vanadium ore reserves, which represents about half of Western world reserves and one-third of the global total; vermiculite ore reserves at nearly 80 million tons, South Africa has the second largest reserves of the metal, representing about 40 per cent of the world total.

9.4.         African production of uranium oxide, currently accounting for more than 20 per cent of world output. South African output is mainly produced as a by-product of gold and copper mining. The Richard’s Bay titanium reserves are the fourth largest in the world, Silver is an important constituent of gold and platinum ores in South Africa and occurs too in the ores of the base metals (zinc, lead, and copper).

10. Main players

The Chamber of Mines of South Africa (Chamber) is a prominent industry employers’ organization which exists to serve its members and promote their interests in the South African mining industry. The members of the Chamber include financial corporations, contractors, associations and mining companies (i.e. Anglo American, Anglogold Ashanti, BHP Billiton, Harmony, De Beers, Gold Fields, and Lonmin etc).

11. Investment climate

11.1.       According to the Chamber, in the first half of 2011, steel production stood at an annualised 1.5 billion tons, 8.9% higher than the level recorded in 2010 and is likely to be a record production year.

11.2.       Nearly 100% of South Africa’s cement and building aggregates are made locally and 80% of the country’s steel is made locally from locally mined iron ore, chrome, manganese and coking coal using furnaces that are 95% powered by electricity from coal fired power stations (the 20% imported steel is speciality steel products not made locally). Over 30% of the country’s liquid fuels are produced within the country from locally mined coal and 95% of electricity is generated in power plants that use locally mined coal.

11.3.       Most domestic chemicals, fertilisers, waxes, polymers and plastics are fabricated using locally mined minerals and coal and 20% of the world’s platinum catalytic converters are made in South Africa. The Chamber estimates that another R200-billion in sales value and 150 000 jobs can be attributed to the local downstream beneficiation sectors. All South Africa’s gold and pgms are refined locally and more than 50% of diamonds by value are sold locally into the downstream diamond cutting and polishing industry.

12. Nationalisation

12.1.       The calls by the Youth League of the African National Congress for the nationalisation of mines were arguably the most talked about issue relating to the mining industry during the year. The ANC has directed a team to look into the merits of nationalisation, which is due to report its findings at the party’s policy conference in June 2012. Nationalisation is not government policy and the Chamber is opposed to it, which represents most of the players in the mining industry. The Chamber is committed to working towards finding the best alternatives.  On the balance of evidence, nationalisation will not happen.

13. Exciting projects

Some of the recent and exciting projects include the following:

13.1.       Gold One

Gold One’s flagship operation is the Modder East mine; the first new mine to be built in South Africa’s gold-rich East Rand region in 28 years. With a currently defined ore reserve of 1.53 million ounces at 4.0 grams per tonne and a 13-year life of mine, Modder East’s target reefs are located no deeper than 500 metres below surface. The mine’s shallow resources allow for trackless mine infrastructure where the underground orebody is accessed via a decline. Dedicated trucks transport rock out of the mine while a vertical shaft provides quick face access for personnel. Modder East’s first 240 ounce gold pour took place in July 2009. The mine’s first tonne of gold was poured in May 2010, only 10 months after its commissioning. At the end of the 2010 financial year, which marked only one year since Modder East had declared continuous and commercial production, the mine recorded a maiden profit of A$ 19.35 million before taxation. The mine’s low 2010 cash costs of US$ 484 per ounce were attributable to mechanised off-reef development and in-stope hydropower drilling. The use of hydropower also enables safer and more efficient working conditions as well as electricity savings. For 2011, Gold One anticipates increasing gold production by 80% and has forecast annual production of 120,000 ounces.

13.2.       Kalagadi Manganese

Kalagadi Resources is in the process of establishing a manganese mine, coupled with a sinter plant, near Hotazel in the Northern Cape. The main shaft has holed through the lateral developments to the ventilation shaft at a depth of 281 metres, the production level of the R11-billion project, on which only equity funding has been spent so far. The project includes Kalagadi constructing a high-carbon ferromanganese smelter in Coega’s industrial development zone near Port Elizabeth, which will create the steel-making ingredient ready for consignment to foreign and local factories

The three-million-ton-a-year mine will provide the ore for the production of 2.4-million tons a year of sinter, 700 000 t of which will be sent to the ferromanganese smelter and 1.7-million tons a year of which will be marketed. The smelter will have a capacity to produce 320 000 t/y of high-carbon ferromanganese. Commissioning is scheduled for the third quarter of 2012, with the mine, sinter plant and smelter expected to employ 2 200 people. Mashile-Nkosi is targeting a 50% female employee complement. Kalagadi has secured both rail and port capacity from Transnet Freight Rail and power supply from Eskom. Kalagadi is currently generating its own power for the project from diesel-fuelled generator sets.

13.3.       Coal of Africa

Coal of Africa is an emerging developer and producer of high-quality thermal and coking coal. Based in South Africa, it has two operating collieries and two projects in early operations and development, as well as a valuable suite of exploration projects, enabling them to grow well into the future. With good access to rail and port infrastructure, Coal of Africa can effectively service both domestic and international markets, providing a much-needed resource for economic growth and development for the country and the provinces in which we operate.

14. Chinese entrance

The Minister has assured potential Chinese investors that South Africa offers a competitive mining sector. “… my government is committed to creating a favourable and globally competitive mining sector in South Africa,” she told the 2011 Mining Ministers Forum in Tianjin, China”

According to the Chamber, in 2010, global diamond retail sales rose by 2.5% to US$60-billion, global jewellery sales rose by 7% to US$150-billion and polished diamond prices improved by about 6%. The strong price recovery was driven by re-stocking and a rebound in the global diamond market, particularly with the rise in polished demand from China and India.

Most of the recovery and growth in global steel production is attributable to China’s phenomenal growth with non-Chinese production not yet recovering to pre-crisis levels. China is currently producing 46.5% of global steel, driven by its own substantial industrialisation and urbanisation requirements.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

ARGENTINE UPDATE – Trends and Developments in Argentine M&A

Editors’ Note:  Santiago Carregal is a partner at Marval, O’ Farrell & Mairal and a member of XBMA’s Legal Roundtable.  In addition to handling many of the most significant cross-border M&A transactions in Argentina, he serves as a professor of post-graduate studies in banking and finance at Universidad de Buenos Aires, Universidad Austral and Universidad Católica Argentina.  He is widely recognized for his expertise in Argentine commercial, banking and capital markets transactions.


  • Despite Argentina’s high inflation and a lack of certain structural reforms, there has been an increase in the M&A activity in the country during 2011. This increase has mainly been driven by strategic investors and to a lesser degree by venture capital and private equity funds attracted by Argentina’s GDP robust growth and the high yield on the rate of returns that Argentina is offering to foreign investors in certain key sectors of the economy such as agribusiness, renewable energy and biofuels, mining, food production, distribution and processing, software and information technology, logistics and infrastructure, telecommunications, pharmaceutical and retail business.
  • During 2011 there has been an impressive influx of Chinese investment into the hydrocarbon sector, as well as in other strategic sectors such as financial services.  The largest transactions occurring in 2011 include the acquisition by Sinopec of Occidental Petroleum and the purchase of Standard Bank by ICBC.   Other BRIC investors, such as Brazil’s Banco do Brasil, and India’s Essar Aegis, also accounted for some of the most important recent M&A transactions.
  • Concurrently with the increasing appetite for raw materials, there is a continuing trend of M&A in the highly regulated public services sector, driven by international utilities companies selling their participations generally to local groups, as increases of tariffs of public utilities services in Argentina continue to fall behind the inflationary process and devaluation of the Argentine peso.  This trend may change in the near future as the Argentine Government has recently announced the reduction and/or elimination of energy subsidies, which in turn may lead to an increase of public utility services tariffs.
  • The Cristina Fernandezde Kirchner administration, re-elected on October 23, recently imposed new requirements on oil, mining and insurance companies, ending exemptions that enabled them to convert most of their Argentine profits into foreign currencies outside the country.  Until the new regulation, oil and natural gas companies were allowed to keep up to 70% of their export proceeds offshore, mining companies could keep up to 100% of their export proceeds offshore and insurance companies were allowed to keep 50% of their investments and funds outside the country.  While the new regulation is not expected to cause any meaningful changes in the oil, mining and insurance companies’ day-to-day operations, it is not clear how these new capital controls and regulatory changes may affect the investment and M&A activity in these sectors in the years to come.
  • Additionally, in an attempt to slow accelerating capital flight from the country, on October 28, 2011 the Central Bank of Argentina issued a new requirement for non-Argentine investors to repatriate Argentine pesos collected in Argentina as a consequence of a sale or liquidation of the direct investment, capital reduction and reimbursement of capital contributions inArgentina.  Pursuant to the new regulation, a non-Argentine investor will not be allowed to have access to the FX market to purchase foreign currency with Argentine pesos collected in Argentina and transfer it abroad as a result of a subsequent sale or liquidation of an investment or capital reduction or reimbursement, unless the foreign investor evidences that the funds originally paid for such investment or disbursement for the capital contribution, as applicable, were transferred to Argentina and sold in the FX Market.  Prior to the new regulation, the non-Argentine investor was not obliged to demonstrate that the funds paid for its investment or disbursement for its capital contribution had been transferred and sold in the FX Market  (i.e. brought to Argentina and sold for Argentine pesos) in order to be allowed to repatriate (i.e. have access to the FX Market to purchase foreign currency with Argentine pesos and transfer it abroad) the funds collected in Argentina as a consequence of a subsequent sale or liquidation of such investment, or capital reduction or reimbursement.  From a practical standpoint, foreign investors will be allowed to settle the transactions outside of Argentina, although if they sell their investment for pesos in Argentina –which is very unusual- they will not be able to acquire foreign currency in the country unless they demonstrate that the funds paid originally for its investment were transferred and sold in the FX Market.


M&A trends

During late 2010 and the first semester of 2011 there has been an increase in M&A activity in Argentina, mainly driven by strategic investors and to a lesser degree by venture capital and private equity funds attracted by Argentina’s GDP growth and the high yield on the rate of returns that Argentina is offering to foreign investors in certain key sectors of the economy, such as agribusiness, renewable energy and biofuels, mining, food production, distribution and processing, software and information technology, logistics and infrastructure, telecommunications, pharmaceutical and retail business.

Most of these M&A transactions involved strategic investors from BRIC countries that have turned their attention to Argentina’s vast natural resources.  As an example, during 2011 there has been an impressive influx of Chinese investment into the hydrocarbon sector (CNNOC and Sinopen), as well as acquisitions in other strategic sectors such as financial services (ICBC). In turn, Brazilian (among others, Banco do Brasil) and Indian (Essar Aegis) investors also participated in most of the largest transactions occurring in 2011.

The presidential elections held in October 2011 and the financial crisis affecting developed countries added some uncertainty during the second semester of 2011, but inflationary issues, rather than elections, caused a slow-down in M&A activity at the year’s close.  As a result, since July there have been small to mid-sized acquisitions, while larger transactions were sprinkled about.

In general, traditional long-term investors usually acquire total control of targeted companies. Recently; however, in a few cases we have seen traditional investors structuring two-tier acquisitions by purchasing equity control for a fixed cash price while having a call option on the equity balance retained by sellers, exercisable at a price resulting from an earn-out formula. The latter acquisition structure is more commonly seen in venture capital and M&A transactions. Minority investments are rare in Argentina and usually only seen in cases of government-regulated sectors such as energy and broadcasting and in some private equity and venture capital M&A transactions where funds co-invest (as a strategic partner) together with the controlling purchaser of the target company. In the latter cases, such funds look for high-yield, medium-term rates of return in their invested capital, using not more than 10 percent of their limited partners committed capital.

In addition to the earn-out’s components in the purchase price, international listed and unlisted funds are also offering mixed purchase price packages to sellers which include part of the price being paid in cash and part paid in stock of the listed or parent unlisted controlling company of the purchaser.  In the agribusiness and real estate sectors, it is also common to find private equity and venture capital funds contracting with local independent management and operation companies to run their acquired businesses in Argentina.

Since the 2001 economic crisis in Argentina, M&A transactions are mostly unleveraged since the cost of local debt is still high, with only some exceptions mainly relating to the acquisition by local investors of governed regulated or internationally listed utilities, such as the case of the purchase by the Petersen Group of a minority stake in oil company YPF. Multilaterals often take a portion of the equity of the target company and provide leverage to the purchaser to pay the purchase price or to carry out post-money investments to expand the business of the target company.

Transactions which are deemed to be economic concentrations must be notified and require the authorization of the Antitrust Commission.  Notification must be made prior to or within one week of the first to occur of either (i) the date that any transfer effectively occurs, or (ii) the publication of any cash tender or exchange offer.  Currently, the proceedings to obtain antitrust authorization normally take between 12 and 18 months depending on the complexity of the transaction from a competitive stand-point.

While there is a continuous trend of M&A activity in the most competitive sectors of the economy, there is also M&A activity in the highly regulated public services sector, driven by international utilities companies pulling out of the country by selling their participations to local groups, as increases of tariffs of public utilities services in Argentina, some of which have been frozen since 2002, continue to fall behind the inflationary process and devaluation of the Argentine peso.  However, President Cristina Kirchner, re-elected on October 23, recently announced that her government will review its energy subsidies, including water, natural gas, and electricity subsidies for reductions and possibly eliminations, as Argentina faces a more difficult world economic situation in the months ahead.  The announcement may lead to an increase of public services tariffs, which may cause the current M&A trend in the public utilities sector to change substantially in the future.

New Regulations affecting repatriation of foreign investments

  1. Hydrocarbons and Mining Industry

On October 26, 2011, the Argentine Government reinstated the obligation of hydrocarbon companies (producers of crude oil and its derivatives, natural gas and liquid petroleum gas) and mining companies to sell the foreign currency proceeds of their exports in the local foreign exchange market.

In Argentina, simultaneously with the freeze of bank deposits and the establishment of restrictions on cross border transfers in the 2001 crisis, one of the main measures adopted by the Argentine Government was the reinstatement of the obligation to repatriate export proceeds (which has always been one of the first sources of foreign currency and a tool used to maintain the value of the Peso against the US Dollar).

However, the hydrocarbons and Mining industry were benefited by certain exemptions to such obligation.

Since December 22, 2002, producers of crude oil, natural gas and liquid petroleum gas were no longer required to repatriate 70% of the foreign currency proceeds of their exports of freely disposable crude oil and its derivatives.

Also, since February 27, 2003, any mining company which has qualified for the foreign exchange stability regime during the period March 27, 1991 – December 12, 2001, was exempted from the obligation to repatriate the foreign currency proceeds of exports of mining goods.  Since June 17, 2004, mining companies that qualified for the stability regime after June 27, 2004 were also exempted from the obligation to repatriate to Argentina their export proceeds.

As from October 26, 2011, such benefits were lifted by the Argentine Government and therefore, hydrocarbon and mining companies are now obliged to sell in the local foreign exchange market the foreign currency proceeds of their exports.

  1. Insurance Industry

Pursuant to a resolution issued by the Argentine Superintendency of Insurance, within a 50 day-period counted as from October 27, Argentine insurance companies must transfer any investment or cash kept abroad to Argentina. After such period, insurance companies may not make any investment or keep cash abroad. For that purpose, the insurance companies must submit an affidavit of any investment kept abroad within a 10-day period.

However, investments may be kept abroad only if expressly authorized by the Federal Superintendency of Insurance provided that there is no local investment available to reasonably support the commitment of the insurance company.

  1. Repatriation of Foreign Direct Investments

As from October 28, 2011 (the “Effective Date”), in order for a non-Argentine investor to be allowed to have access to the local foreign exchange market (“FX Market”) to purchase foreign currency with Argentine pesos collected in Argentina and transfer it abroad as a result of a subsequent sale or liquidation of an investment or capital reduction or reimbursement, the non-Argentine investor must evidence that the funds originally paid for such investment or disbursement for the capital contribution, as applicable, were transferred to Argentina and sold in the FX Market (the “Transfer Requirement”).

Until the Effective Date, a non-Argentine direct investor could repatriate funds in Argentine pesos collected in Argentina as a result of the sale or liquidation of its investment or a capital reduction or reimbursement, provided only that a minimum waiting period of 365 days had elapsed since the investment had been made. As from the Effective Date, the Transfer Requirement has to be complied with too.

The Communication sets a “burden” to be met by any non-Argentine resident who may need to purchase foreign currency in the FX Market to repatriate Argentine-Peso denominated funds collected as a result of the sale or liquidation of an investment. Conversely, if the foreign investor believes that it will not need to repatriate, it is not required to comply with the Transfer Requirement, and therefore, the purchase price of such investment and any capital contribution may be kept abroad.


Over the second semester of 2010 to date, significant M&A transactions in Argentina include the following:

  • Aegis Netherlands II B.V. and Aegis Services Australia Pty. Ltd. (from the Essar and Aegis Group) acquired D.A.S.’ and Y&R Inversiones Publicitarias S.A.’s shares in Actionline de Argentina S.A. and Sur Contact Center S.A., taking its first step into the Latin American BPO and marketing communications business.
  • Banco do Brasil S.A., the major Latin-American bank controlled by the Brazilian Federal Government, acquired 51% of the stockholding of Banco Patagonia S.A., the forth major Argentine private financial entity.
  • Banco Supervielle S.A., Grupo Supervielle S.A. and Banco Regional de Cuyo S.A. acquired GE Capital Corporation’s and GE Capital International Holdings Corporation’s shares in GE Compañía Financiera S.A. (GE Money Argentina) (currently, Cordial Compañía Financiera S.A.).
  • Bridas Corporation, an independent oil and gas holding company based in Argentina, acquired Exxon Mobil International Holdings Inc.’s shares in Southern Cone International Holdings Llc. (ultimately, Esso Petrolera Argentina S.A., Esso Standard Paraguay S.R.L. and Esso Standard Oil Company -Uruguay- S.A.).
  • China Petrochemical Corporation (SINOPEC), China’s largest oil company and Asia’s largest oil refiner, acquired the Argentine oil and gas business from Occidental Petroleum Corporation, an international oil and gas exploration and production company.
  • Dufry A.G., a global travel retailer with operations in 45 countries, acquired Interbaires S.A., the leading travel retailer inArgentina that operates duty free shops in the five main airports of Argentina.
  • Frigorífico Regional Industrias Alimenticias Reconquista S.A. (from the Vicentín Group), an Argentine company dedicated to the production and processing of beef, acquired Finexcor S.R.L.’s (from the Cargill Group) meat processing unit located in Nelson, Province of Santa Fe. In addition, Compañía Bernal S.A. acquired Finexcor S.R.L.’s meat processing unit located in Bernal, Province of Buenos Aires.
  • Glaxosmithkline PLC., a global pharmaceutical, biologics, vaccines and consumer healthcare company, acquired Laboratorios Phoenix S.A.C. y F., an Argentine pharmaceutical company focused on the development, marketing and sale of branded generic products.
  • SABMiller PLC., one of the world’s largest brewers with presence in six continents, acquired through two affiliated entities, all of the shares of Cervecería Argentina Sociedad Anónima Isenbeck (from the Warsteiner Group), the third largest brewer in Argentina.
  • The China National Offshore Oil Corporation (CNOOC International LTD.), who operates as an investment holding company which, through its subsidiaries, owns and operates oil and gas reserves, acquired from Bridas Energy Holdings LTD. a 50% stake in Argentina’s Bridas Corporation, aBuenos Aires based oil and gas exploration and production company.
  • Zurich Financial Services Group, through a holding company, acquired 51% of the stockholding of Santander Río Seguros S.A., one of the largest insurance companies in Argentina.
The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

PERUVIAN UPDATE – New Rules for Investments in Natural Resources in Peru

Editors’ Note:  This paper was written by Jose Antonio Payet and Silvia Cachay, partners at Payet Rey Cauvi, one of Peru’s leading firms with significant experience in foreign investment in Peru.  Mr. Payet is a member of XBMA’s Legal Roundtable.

Executive Summary/Highlights:

  • New laws  provide indigenous people consultation right with respect to investment in Peruvian natural resources, but not the veto investors feared; however, they could delay projects while regulations are worked out,
  • New mining “windfall profit tax” expected by the Peruvian Government to raise the total tax and mandatory profit sharing costs in the mining industry to 46.5% of operating profit for companies with no pre-existing mining tax stability agreements and to 40.20% for companies with  tax stability agreements, which the Government believes remains competitive internationally. 


In the past few weeks, the new Peruvian Government has passed two important pieces of legislation with respect to investments in natural resources in Peru: Law 29785, which regulates the right of indigenous and tribal peoples to prior consultation, and Laws 29788, 29789 and 29790, which create a “windfall profit” tax applicable to mining companies. These two matters were campaign promises of President Humala, who has been able to pass the legal reforms required to implement them with multi- partisan support and in an investor friendly manner.

Consultation to Indigenous and Tribal Populations

Law 29785, enacted on September 6, implements the right of indigenous and tribal peoples to prior consultation with respect to legislative or administrative measures which directly affect them set forth in the International Labor Organization 169 Convention (1989), which was ratified by Peru in 1993.

During the debate of the new law, the key issue was whether the approval of indigenous or tribal peoples would be necessary in order to implement government measures directly affecting those populations. This would in effect have granted the relevant populations a veto right over the development of many natural resource projects and infrastructure in Perú, including mining, oil and gas, roads, electricity generation and transport, etc.  In fact, a prior bill approved by Congress had been vetoed by the Executive in June 2011, before the change of Government, because it was not clear in stating that the Government had the final decision on whether a project should move forward.

With respect to the “veto right” issue, article 15 of the law states that “the final decision over the legislative or administrative measure corresponds to the relevant Government entity”. While this decision needs to be duly motivated and incorporate in its analysis the opinion of the relevant tribal and indigenous populations and evaluate the impact of the measure on their collective rights, the Government can still implement a measure notwithstanding opposition from the relevant tribal or aboriginal populations. Thus, article 15 also states that “The agreement between the Government and tribal or indigenous populations, as a result of the consultation process, is binding. In case no agreement is reached, Government entities shall adopt all measures which are required to guarantee the collective rights of tribal and aboriginal populations and the rights to life, integrity and full development”. This means that the Government may implement the measure, but needs to assure protection of relevant rights of the tribal or aboriginal communities.

There are several matters that still need to be defined and regulated before the law may be fully implemented. Key among them is the determination of which are the tribal or aboriginal populations that are required to be consulted and which their areas of influence. A delay in this process could directly affect many projects now in the pipeline.

Mining “Windfall Profit Tax”

On September 27, the President enacted laws 29788, 29789 and 29890, which establish a new “windfall tax” regime for the mining industry. Until the enactment of these laws, mining companies were subject to the general tax regime and in addition were subject to a special mining royalty established as a percentage of the value of sales of concentrate (1 to 3% depending of the value of annual sales). Companies with mining tax stability agreements (which are mainly multinationals with large operations) were exempt from the royalty, but many of them had entered into an agreement with the Government creating a voluntary contribution system.

The new regime is comprised of three similar taxes or contributions that are assessed over quarterly operating income (instead of annual sales as the prior royalty). Companies which are not party to mining tax stability agreements are subject to Law 28788 and to law 29789.  Law 29788 provides for a mandatory payment (called the “Mining Royalty”) which is applicable to mining companies extracting metallic or non metallic resources. The Mining Royalty base is quarterly operating profits and the rate slides from 1% for companies with operating margin of between 0% and 10% to 12% for companies with operating margin over 80%, with a minimum payment of 1% of sales.  Law 29789 establishes an additional tax (called a “Special Mining Tax”) applicable only to companies extracting metallic resources. Its base is the same as the Mining Royalty but the rate is different, sliding from 2% for an operating margin between 0 and 10% to 8.4% for an operating margin over 85%. Both the Mining Royalty and the Special Mining Tax are deductible as expenses for the purpose of calculating general income tax.

Companies with mining tax stability agreements are not subject to the Mining Royalty or to the Mining Special Tax.  Instead, law 29790 provides for a contribution (called “Gravamen”) which shall be applicable only to these companies, provided they voluntarily enter into an agreement with the Government. The Gravamen is not technically a tax, because companies need to accept the obligation to pay by entering into the agreement with the Government. However, its basis and form of calculation are similar to the Mining Royalty and to the Special Mining Tax.  In this case, the rate slides from 4% of quarterly operating profits for companies with operating margin between 0% and 10% to 13.12% of quarterly operating profits for companies with operating margin over 85%. The “Gravamen” is also a deductible expense for the purpose of determining income tax.

The new tax regime was proposed by the Executive to Congress after reaching an agreement with the mining industry. The Government expects to obtain revenues of approximately USD 1.1. billion per year with these new taxes.

According to the Government, with the new regime, the total tax and mandatory profit sharing costs in the mining industry are 46.5% of operating profit for companies with no mining tax stability agreements and to 40.20% for companies with such tax stability agreements, which remains competitive internationally. According to Reuters, the CEO of Barrick Gold, one of the main investors in Peru´s mining industry, recently said that the new tax was “something he could work with”.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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