The $200 billion China Sovereign Wealth Fund has plenty of financial ammunition, especially considering depressed values around the world. In just this past month alone, the fund has purchased more than $25 billion worth of ore and mineral producers in an effort to hedge against future upticks in commodity prices. Now they are looking towards buying the Fortescue Metals Group in Australia.
Two Different Deals
Both public and private equity have attempted to buy portions of the miner. The wealth fund is looking to invest as much as $3 billion into the company, while Chinese steelmaker Hunan Valin Iron & Steel looked to invest $1.3 billion Australian dollars into Fortescue.
A New Direction
The recent purchases of mineral companies are a new direction for the sovereign wealth fund, which has taken heavy losses on purchases of financial firms. The fund had put heavy stakes into the real estate boom in the US after buying up investments banks and making a sizable investment in the Blackrock Group just before the economy soured. Minerals are a completely different investment than that of corporations, as their prices are affected largely by supply and demand rather than corporate profits.
Fortescue Needs the Money Desperately
The mineral productions company had plans for expansion when metal prices reached record highs last year. Today, the plans lay dormant as the company is unable to raise capital or find a willing lender to help put its plans into action. This presents an excellent opportunity for foreign investment, which will purchase the company at a near 80% discount from its high. The company is saddled with debt and views this as an opportunity not only to expand, but also remove some of its heavier debt obligations.
Australian Regulators Have the Final Say
China has been very active in Australia after buying other mining firms, and this activity may put some pressure on this deal. Action in Australia suggests that China may be looking to invest in areas that are closest to the country. China will be able to buy up to 9.9% of Fortescue without regulatory clearance, but any greater share will need Australian approval.