Miners look to Asia for partners and financing

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When Fortune Minerals Ltd. began courting capital markets to fund a giant coal project in British Columbia two years ago, chief executive officer Robin Goad knew he wouldn't be sourcing the funds locally.

Canadian banks were saying Fortune should get long-term supply agreements with Asian customers before they were comfortable financing the $800-million project.

"Well, we thought, if we are going to have to get [agreements], why don't we just partner with the guys who want the stuff," said Mr. Goad, who sold a 20-per-cent stake in the Arctos coal project to South Korea's Posco a year later, marrying Fortune's need for capital to the giant steel maker's need for the metallurgical coal to produce steel.

"We didn't need a bank," he said in a recent interview.

The Posco deal marked a growing trend of Asian customers turning to Canada – where publicly listed companies control some 10,000 projects worldwide – to guarantee supplies of the commodities needed for their booming economies.

"When we started to sell our material, obviously Asia was the first place we looked," said Peter Secker, CEO of Canada Lithium Corp., which signed supply agreements with Tewoo-ERDC and Marubeni Corp., top commodity trading houses in China and Japan, respectively.

Canadian miners had more reason to turn to Asia in the past year, as debt and equity markets dried up and big producers who typically buy smaller companies to replace reserves also pulled back from the market, stung by writedowns on acquisitions that went sour as commodity prices retreated.

"There's no money in North America or coming out of Europe any more," said Robin Phinney, CEO of potash developer Karnalyte Resources Inc., which sold a 19.98-per-cent stake to India's Gujarat State Fertilizers & Chemicals Ltd. in January in exchange for cash and a 20-year supply deal.

Fortune has returned to Asian markets to sell a second stake in Arctos, preferring that route to diluting the $60-million company with an equity increase.

"You end up with a lot of these TSX- or Venture Exchange-listed companies with relatively small market caps looking to raise hundreds of millions and in some cases billions of dollars in financing for various projects," said Don Robertson, a managing director for Standard Chartered Bank.

"So if you can't access debt and you can't access equity, the question is where do you find a partner, and China continues to have an insatiable appetite for natural resources," he said, pointing to deep-pocketed state-owned enterprises (SOEs) with a mandate to acquire resources.

China leads the resource-buying spree, but increasingly, Japan, South Korea and India are in the mix, as well as SOEs from the Middle East eager to diversify oil and U.S. dollars holdings by adding gold reserves.

Banks and adviser firms are beefing up staffing after many underestimated Asian demand for deals.

Douglas Beaton, vice-president and director for global mining for Deloitte & Touche Corporate Finance Canada Inc., warns firms not to view Asia as easy money, however, saying SOEs have become increasingly sophisticated investors.

"We're seeing more companies in Asia trying to raise capital, so it's a more crowded market," said Mr. Beaton, whose firm advised Fortune on the Posco deal. "It comes down to, if you have the relationships, and you have attractive assets, that positions you to get attention."