Half of China’s foreign investment so far this year has been in mining

As speculation mounts about the possibility of alternative bids emerging for Potash Corporation of Saskatchewan (POT-T, POT-N), many eyes are turning to China, which needs potash to meet its growing food needs.

“Food security is important for China and that makes fertilizers an important part of the equation,” says Assif Shameen, a Singapore-based business reporter who has covered China for more than two decades. “If Potash Corp. is in play, the Chinese need to be seen to be trying to do something about food security by trying to get control of the firm.”

Shameen suggests that a likely buyer could be one or more of the larger Chinese food companies but says a bid from China wouldn’t come from a single Chinese firm. “It has to be a consortium of Chinese companies with maybe China Investment Corp. as a partner in there somewhere,” he explains. China Investment Corp. is a sovereign wealth fund responsible for managing part of the country’s massive foreign exchange reserves.

John Gruetzner, vice-chairman of Intercedent, a Toronto-based international investment advisory group focused on Asia, concurs. “It should be either CIC or a mining corporation, but CIC as the sovereign wealth fund would have the most aligned objective interest,” the long-time Canadian resident of Beijing writes in an email.

“The reason why you want a sovereign wealth fund is that of all the Chinese players that might come to the table, CIC would be satisfied with selling the product worldwide at market rates and be a second line of defense against bad transfer pricing and isolation of non-Chinese buyers of the product,” he explains. “If you go back and study the Foreign Investment Review Board material in Australia on the Rio Tinto-Chinalco deal, the key concern to the government under Treasury Secretary Swan was accurate and transparent transfer pricing.”

Among the Chinese companies that are rumored to be interested in Potash Corp. individually, through a consortium involving CIC, or as a joint venture, is the Sinochem Group. Potash Corp. owns 22% of Sinofert, China’s top fertilizer producer and one of Sinochem’s subsidiaries.

Analysts at UBS Investment Research concede that Sinochem has expressed an interest in offshore potash opportunities in the past, but argue the Chinese group is unlikely to attempt a full acquisition. “While we wouldn’t rule out a bid, a full acquisition by Sinochem seems unlikely, a minority interest would be more plausible,” the analysts write in an Aug. 23 research note to clients.

Shameen argues Sinofert doesn’t have the financial clout to get involved on its own. “Take a look at their financials,” he says. “They just don’t have the money to do anything with Potash except perhaps to be a passive minority investor.”

Other possible suitors include a consortium led by Hopu Investment Management, a private equity fund, according to a recent report in The Wall Street Journal.

It’s not surprising that Chinese companies are rumored to be interested parties. Of the 58 major Chinese outbound investment deals between January and August 2010, half were mining ventures, according to statistics from The China Analyst, a publication put out by The Beijing Axis, a consulting firm.

One of the largest outbound investments was announced in June when Wuhan Iron and Steel Company, or Wisco, invested a total of US$1 billion to take an 8% stake in Riversdale, an Australia-listed mining company, and 40% stake in the Zambeze coal project in Mozambique. (The 8% stake in Riversdale cost the Chinese steel giant US$200 million, while Zambeze cost it US$800 million.)

Other notable deals in the first seven months of 2010 include China’s Shandong Iron and Steel Group deal with African Minerals (AMI-L) in July to take a minority stake in an iron ore project in Sierra Leone and in June, a unit of China Railway Engineering Corp., one of China’s biggest engineering and construction firms, said it would acquire a majority stake in Crystallex International‘s (KRY-T) Las Cristinas gold project in Venezuela.

In May Zijin Mining decided to invest US$284 million in copper assets in the Democratic Republic of Congo along with the China Africa Development Fund; and in April China Nonferrous Metal Mining’s announced it planned to invest US$600 million in copper mining in Zambia.

Meanwhile China’s largest nickel producer, the Jinchuan Group, along with the China Africa Development Fund, said it plans to invest US$227 million to take 51% of the shares of South African platinum producer Wesizwe.