Chinese Fund On Junior Acquisition Spree

VANCOUVER — A new source of Chinese financing is proving to have a healthy appetite for juniors in its first six months of being. Allana Resources (AAA-V, ALLRF-O) has become the third public company targeted by a recently established Chinese investment fund called the China Mining United Fund (CMU), the first such fund approved by the Chinese government.

CMU is buying 8 million Allana shares at 25¢ a share for a total of $2 million and has also agreed, pending a definitive agreement and the outcome of a planned feasibility study, to take 20% of Allana’s potential production at its Ethiopian potash project and to pay for 35% of the project’s anticipated US$280 million in capital costs.

The Allana deal brings to $5.8 million the amount CMU has doled out since it was formed in May, when it announced it had raised about US$73 million in capital from Chinese investors. CMU’s goal?

“The fund will primarily invest in outstanding domestic or offshore mining-related projects and taking control of public mining companies with great potential,” says the CMU website. “The fund will also engage in activities such as resource integration, joint projects, pre-IPO investments, credit guarantee and short-term loans with its partners.”

While the CMU promises to use a diverse financing toolkit, its forays into the North American market have so far followed a fairly simple formula. In all three financings it has spearheaded, the fund has taken minority stakes in juniors with market caps of under $40 million.

The CMU’s first investment was a $3-million private placement in Klondex Mines (KDX-T, KLNDF-O), which has long owned and operated the Fire Creek gold project in Nevada, in return for about 1.7 million shares at $1.75 a share.

Next, partnering with China Nonferrous Metals Exploration, the CMU financed Murgor Resources (MGR-V, MGRRF-O), a junior with copper, zinc, silver and gold assets on option in Manitoba and Saskatchewan, with $810,000 in return for 8.1 million shares at 10¢ a share, giving it around 15% of the company’s outstanding shares.

An emerging pattern in the CMU’s investments is a desire to be involved with the companies it is buying. In each of three financings of public companies to date it has participated in, the CMU has been given a board seat. Klondex is the first and only so far to have received a nomination from CMU, while Murgor and Allana are still awaiting word of who will be coming to their tables.

Nor does the CMU’s hunger for investments seem to be limited to a single flavour. Its financings have so far been in companies with disparate assets: From gold (Klondex and Murgor), to copper, zinc, lead and silver (Murgor), and then all the way to potash (Allana).

The assets of each company are also at similar stages of development. In each case, there are resources in the ground on flagship projects. Klondex has pegged its Fire Creek project at 5 million indicated tonnes grading 10.11 grams gold per tonne; Murgor puts its Wim deposit at 2.8 million indicated tonnes grading 1.94% copper, 0.3% zinc, 1.88 grams gold and 7.53 grams silver per tonne, and its Hudvam deposit at 854,100 tonnes grading 1.22% copper, 1.78% zinc, 3.82 grams gold and 13.84 grams silver; and finally, Allana’s Dallol potash project in Ethiopia weighs in at 105 million inferred tonnes grading 20.8% potassium chloride.

While so far the CMU’s influence has come in the form of cash and board membership, it has tentatively gone a step further in the case of its latest investment in Allana. It is the first to involve, at least publicly, promises of an offtake agreement and help with financing construction of a proposed mine. Just how committed is the fund to those promises?

“It’s very firm,” says Allana president and CEO Farhad Abasov. “We’re going to sign a definitive agreement.” Abasov could not, however, pin down a schedule for when that agreement will be signed, explaining that, with other parties interested in being involved in its potash project — “big players,” Abasov says — the company is biding its time so as to get the best deal possible.

“We’re trying to play our hand right,” he says. In ongoing negotiations, not only with the CMU, Abasov says Allana will consider joint ventures and full-on takeovers. “Both are still on the table,” he says.

Though the partnerships with CMU are still fresh, so far the relationships the fund has forged appear void of controversy. Murgor president and CEO Andre Tessier says his experience with CMU has been “nothing but positive.”

While CMU has yet to send a nominee to Murgor’s board, Tessier says there have been numerous meetings, both in Canada and China, and that the two companies are essentially on the same page. “They’ve basically established goals for our company and we’ve discussed where we want to go.”

Tessier, who says the presence of CMU and other Chinese funds like it signal “the new way of doing things” in the market, suggests that CMU, instead of buying a company outright, would rather collaborate. “They want to learn the Canadian way of doing things,” Tessier says.

That desire, Tessier agrees, to be minority partners rather than dominating shareholders, may be born out of a recognition by the Chinese that in foreign markets its presence is not always perceived positively: The case in point being, of course, the recently failed Chinese attempt to secure an increased stake in Rio Tinto (RPP-N, RIO-L).

By this way of thinking, CMU may be seen as using a less controversial tactic by securing minority stakes in small commodities-based companies.

Whatever the reason for the new Chinese funding model, its implication to juniors in North America is becoming clear. There is a new kid on the block, with pockets full of cash, who may give traditional investment groups a run for their money.

Not only do both Tessier and Abasov report CMU has signalled its willingness to be involved in future financings (Tessier calls the fund “keen” while Abasov describes it as “eager”), but it also appears willing to pay more than going rates. It is noteworthy that in all three financings, with Klondex, Murgor and Allana, CMU only bought straight-up shares without any warrants attached. Furthermore, CMU did so at share price premiums at a time, Tessier notes, when other North American firms would have likely demanded a rebate.

Though Tessier renders CMU’s apparent generosity down to its long-term thinking, suggesting that the acquisitions are driven more by the desire to secure commodities assets than pure financial considerations, it seems equally plausible that the premium CMU has been willing to pay may be related to its relative inexperience in arranging these types of financings.

Whatever the case may be, the effect on the market is more or less the same. As Tessier puts it: “Larger North American companies (who finance juniors) will need to become aware that there is a hungry bear on the prowl.”

The CMU has said it has plans to raise as much as US$1 billion and in August, it announced it had created, in partnership with merchant bank Forbes and Manhattan, a US$100- million fund to invest in the mining sector.