This is the first in a series of seven articles prepared by HFW (Holman Fenwick Willan) which answer frequently asked questions concerning Chinese investment in Australia’s mining sector.
THE rapid growth of China has given rise to a strong increase in global demand for mineral resources. According to the Composition of Trade Australia for 2011-2012 published by the Department of Foreign Affairs and Trade1, Australia’s top three mineral resource exports are iron ore, coal and gold. China is Australia’s largest export market for iron ore, second largest for gold and fourth largest for coal2. With such a strong trade relationship between China and Australia, mining companies from both countries are keen to elevate their relationships to longer term partnerships.
In this series of seven articles we will examine:
- Australia’s foreign investment notification regime, with particular empahsis on investments in the mining sector.
- The typical business structures for Chinese companies investing in Australia’s mining sector.
- The legislative regime applicable to the mining sector.
- The implication of the Personal Property Securities Act 2009 (Cth) on the mining sector.
- Land access rights needed by mining companies.
- Environmental bonds.
- Government taxes and royalties relating to minerals.
In this first article, we will look at Australia’s foreign investment notification regime in so far as it applies to investments in the mining sector. Foreign investment is welcome in Australia. In 2011-12, a total of 11,420 applications for foreign investment were considered with 10,703 approved, 13 rejected, 534 withdrawn and 170 exempt3. Approved foreign investments from China amounted to AUD16.2 billion, 65% of which were in mineral exploration and development4. Australia’s Foreign Acquisitons and Takeovers Act 1975 (Cth) requires a foreign investor to notify Australia’s Foreign Investment Review Board (FIRB) of its proposed investment. Notification to FIRB of certain proposed investments is mandatory. Notification to FIRB of other proposed invstments is often voluntarily made as the consequences of completing an investment that is subsequently determined to be contrary to Australia’s national interest are significant (and can include an unwinding of the investment transaction).
FIRB will review the proposed investment and make a recommendation to the Commonwealth Treasurer. Based on that recommendation, the Treasurer will decide either that the Commonwealth Government has no objection to the proposed investment (with or without conditions) or that the Commonwealth Government prohibits the proposed investments on the grounds that it is “contrary to Australia’s national interest”.
The types of proposed investment transactions typically notified to FIRB are:
- (Foreign government investors) any direct investment, starting up a new business or acquisition of an interest in land, including any interest in a prospecting, exploration, mining or production tenement by foreign government investors, regardless of the value of the investment. A foreign government investor includes a body politic of a foreign country, entities in which governments, their agencies or related entities have an aggregate interest (direct or indirect) of 15% or more from a single foreign country or an aggregate interest of 40% or more from more than one foreign country, or entities that are otherwise controlled or could be controlled by foreign governments, their agencies or related entities, and any associates. An investment of an interest of 10% or more is considered to be a direct investment. An investment that involves interest below 10% may also be considered a direct investment if the acquiring foreign investment investor is building a strategic stake in the target, or can use that investment to influence or control the target;
- (Australian business or corporations) acquisition by a private foreign entity (and its associates) of an interest of 15% or more (or an acquisition by 2 or more private foreign entities (and their associates) of an aggregate interest of 40% or more) in an Australian business or corporation that is valued above Aus$248 million or in an offshore company whose Australian subsidiaries or gross assets are valued above Aus$248 million;
- (Australian urban land) acquisition of an interest in Australian urban land, including:
- acquisition of an interest in a share in an Australian urban land corporation; or
- acquisition of an interest in a prospecting, exploration, mining or production tenement where it provides the right to occupy Australian urban land and the term of the tenement is likely to exceed five years; or
- acquisition of an interest in an arrangement involving the sharing of profits from the use of Australian urban land. Australian urban land refers to all land other than land that is used wholly and exclusively for carrying on a business of primary production;
- (Operational mine) acquisition of an operational mine where the mining assets are valued at or above Aus$54 million (or Aus$5 million for property subject to heritage listing). In each case the threshold amounts are as at 2013 and will be indexed annually.
The Treasurer reviews each foreign investment proposal against a national interest test. ‘National interest’ is not defined in the legislation. Each proposal is decided on a case-by-case basis. Guidance is drawn from the Australian Government’s Foreign Investment Policy, and relevant considerations include existing governmental policy and legislation, national security, competitive effects, impact on Australian government policies, impact on the general economy and the community, and the character of the investor. Previous decisions by the Treasurer indicated that acquisition of a controlling shareholding, assets in a sensitive area (eg, near areas used by Australia’s defence forces), assets at lower than market value, or a target that will be delisted from the Australian Stock Exchange after the transaction, will be subject to close scrutiny from the Treasurer.
For more information, please contact: James Donoghue, Partner, on +61 8 9422 4705 or email james. [email protected]; Connie Chen, Special Counsel, on +61 2 9320 4616 or email connie. [email protected]
- Composition of Trade Australia for 2012-2012, page 50.
- Composition of Trade Australia for 2012-2012, pages 53, 54 and 57.
- Foreign Investment Review Board Annual report 2011-12, page 10.
- Foreign Investment Review Board Annual report 2011-12, page 30.
Disclaimer: Whilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not be considered as legal advice.