Publicity November 2011

Australia Still Welcomes Japanese Investment into Increasingly Crowded Resources Sector

New investors in Australia’s resource assets are often in the news nowadays, but the headlines often overlook the long history of successful Japanese investment in the country and the Japanese have not been forgotten.

The warm friendship and understanding that Australia and Japan enjoy offers competitive advantages for Japanese companies, especially as current market conditions foreshadow a tightening of finance for the mega projects still ripe for investment in Australia together with a relative scarcity of high-quality Australian resource assets.

Mark Pistilli, Partner, Clifford Chance, Sydney

Despite the crowd of investors around the table, there are still ways for Japanese investors to invest or expand in the market.

The first wave of Japanese investment into Australia started some 30 years ago. Since then, both sides have developed a deeper understanding of each other’s investment criteria, decision-making, risk profiles and business cultures that can ease the path to productive strategic alliances. Australians and the newer investors are only starting to understand respective business cultures and it will take time until they are as comfortable as the understanding between Australia and Japan.

Indeed, the longstanding relationships developed between Australian and Japanese major corporates has seen them embark on serial investments in a range of resources, with established joint venture relationships expanding into new ventures together and co-operation agreements and strategic alliances aplenty between Australian resource owners and Japanese trading houses as well as Japanese financiers.

Newcomers to the market have often targeted 100% or controlling stakes in resource projects or assets, which can be more difficult from regulatory or political perspectives, as well as the commercial objectives of Australian companies seeking the investment.

Traditionally, however, the Japanese investor, while keen to be informed and involved in the investment, has not sought overall control and sees projects as good ways of learning from Australian operators.

Outside these areas, opportunities are still available for newcomers. As liquidity tightens, the large resources companies are likely to spend less on development, favouring producing projects with immediate cash flow.

Given current commodities prices, these projects are also highly priced, and may be out of reach of new investors.

This is likely to leave “junior” projects or “micro” companies searching for willing investment partners. The opportunity is there to fund a junior or micro company, prepay for offtake or company stakes in the agreement, enter into farm-in arrangements and work together to bring the project to market.

Buying a stake early in a project’s history (such as prior to a bankable feasibility study) may seem a more daunting prospect, but the smaller initial investment and easier access to such projects make them viable entry points for Japanese investors.

Jason Mendens, Partner, Clifford Chance, Sydney

The market is also seeing much streamlining of business lines and assets in the resources sector, as the established companies focus on projects that offer easier and substantial production prospects.

However, high commodities prices may make some of the smaller, more complex assets left on the market technically and economically viable. Even with less funding available and a more difficult path to production, these assets are relatively cheap to acquire, and interest in early and late-stage assets is rising.

The Australian commodities market is no longer just about oil, coal and iron ore. Interest in the agricultural sector has also increased in the last 18 months, with companies seeking to acquire farming businesses, land and water rights. European companies have also bid for rice growing and other agribusinesses over the past year.

The global search for food security is driving up prices and local concerns in this sector too but, again, smaller assets and established relationships may make it easier for Japanese companies to enter the market with greater ease.

The scale of funding required by the Australian resources sector is immense. The country’s foreign minister, Kevin Rudd, recently said that over A$300BN of development was expected in the LNG sector alone—over one third of Australia’s GDP.

With traditional Western sources of financing under pressure from current banking problems, a gap is emerging in the market for Asian banks, ECAs and funds to secure stakes in existing resource financing arrangements and projects, refinancings of such arrangements, or to fund newer, smaller projects. Combining this financing with offtake and farm-in arrangements can also offer security of energy and resources supply.

This shift in the lending market may mean stronger roles for ECAs, and increased access to project stakes as syndication expands to cover substantial project costs.

We are also seeing signs of non-traditional sources of financing coming to market—funds looking for secure returns in volatile equity markets or from cash-rich corporates leveraging their balance sheets locking in customers through financing.

While the chairs around the Australian resources table are filling quickly, space remains for long valued Japanese investors.