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Managing Editor of Bulls N Bears, Matt Birney.

Govt rejection of Chinese money puts small caps under pressure

The Australian Government Foreign Investment Review Board’s rejections of Chinese investments into ASX-listed mining and exploration companies is confounding and building a looming dark cloud over a sector that often lives or dies on the back of Chinese investment – an investment that it regularly needs to eventually get its product to market. 

It is hard to know whether it is just a knee jerk reaction to the Coronavirus and the anti-Chinese hysteria that is sweeping the community because of it - or a long term sustained FIRB policy that will place immense pressure on small to mid-capped ASX listed companies. 

FIRB’s extraordinary actions have the potential to wash a tsunami over the entire ASX-listed small cap landscape and the effects that are now starting to emerge are perhaps best captured in the case of West Australian rare earths trial mining company, Northern Minerals

On August 15, 2019 Northern Minerals announced it had entered into a subscription agreement with Chinese Government backed group, “Baogang Group Investment”, to raise $20m under a private placement at 6.2c per share. 

The investment was a critical part of the ASX-listed company’s plan to get its rare earths trial mine, the Browns Range project in the north west of WA, up to its nameplate capacity so it could prove the case for a much larger full scale project to be built. 

However, despite the time for a decision having lapsed months ago, it would seem the FIRB trained a fresh gaze on the deal and decided to act only recently by rejecting Baogang’s investment application last month. 

The delay in decision making and the ultimately negative decision, forced Northern Minerals back to the table in the last couple of weeks to seek to raise $22m at the currently traded price of 2.2c per share, representing a massive deterioration in the relative shareholdings of the existing Northern Minerals shareholders.                                                                                     

The reasons for the prohibitive measure taken by the FIRB in the case of Northern Minerals and others are unpublished and unclear. However at face value it would seem that the Government considers Northern Minerals’ significant rare earths deposit in WA to be a critical deposit and one that must be “protected” from what it sees as the ravages of Chinese investors. 

In this Chinese initiated Coronavrus environment, FIRB is clearly playing to the band and thinks it is striking a core with the masses by preventing Chinese investment in this way. 

But what of Northern Minerals ? And what of its “critical” mineral deposit ? 

How does it get developed without investment from players in the largest rare earths market in the world – China. 

How will these type of projects survive without Chinese investment into the future. 

Very often the Chinese are the only ones who will put serious money into these projects because they are one of the few with the processing knowledge and a market that is able to soak up the product by way of off-take agreements that can be used to back initial equity investments. 

If the Government really wants to protect these critical industries then it needs to come up with an alternative funding solution if it chooses to prohibit Chinese investment rather than just applying aggressive financial choke holds to companies like Northern Minerals

Interestingly, just prior to the recent FIRB applied chokehold, Northern Minerals had only just regathered its feet after receiving a snap kick to the groin from another Federal Government institution, the ATO. 

Last year the ATO’s advisors effectively disallowed Northern’s claim for a multi-million dollar research and development grant for Browns Range, only to then reverse that decision many months later after the company was forced to pay back millions of dollars that it otherwise might have been entitled to. 

The about-face came after a long and drawn out effort by Northern Minerals to convince the ATO’s technical advisers that its Browns Range rare earths pilot plant did in fact constitute research and development. 

Whilst the ATO has not yet made a final ruling on Northern’s research and development claim, it seems likely that most of it will now be allowed albeit the financial burden caused to Northern in the meantime forced it to beg and borrow capital to stay alive. 

Now that a victory of sorts in that battle looks likely, another 800 pound Government backed Gorilla in FIRB has emerged from the shadows to apply another taxpayer funded chokehold to the ASX-listed company.

Another ASX-listed company, AVZ Minerals also recently had a $3.5m FIRB hole blown in its agreement with Chinese company Yibin Tianyi Lithium Industry Co., Ltd who were seeking to invest $14.1m into AVZ.

After tangling with the Government and FIRB for a while, Yibin Tianyi concluded that the only way they would get to invest in AVZ was to drop the subscription amount to $10.6m, leaving AVZ with a $3.5m hole to plug up as it advances its giant lithium project in the DRC towards production.

FIRB has now even temporarily dropped previous dollar thresholds at which they would take a look at and adjudicate on a deal down to zero. 

This means it will now have to look at almost every proposed foreign investment and the kicker ? – it has changed the rules to give itself up to 6 months to make decisions ! 

Not only have the new rules introduced an impossible level of uncertainty into the marketplace, but their impact will likely be felt most by small cap listed companies. The protracted saga of Northern Minerals dealing with the varying whims of the Federal Government perfectly illustrates the impact of vacillating and unreliable Government intervention in capital markets. 

 Thomas Jefferson probably put it best when he famously once said; “he who governs least, governs best.” 

FIRB’s decisions appear to be based on the view that it is protecting the profits from the mining of certain minerals going to foreign entities  - or that it wants to restrict the minerals themselves from being sold to foreign entities. 

This thinking is flawed however as there will be no profits and no minerals to be sold if there is no mine and there will be no mine if investors with deep enough pockets can not be tapped to build it – regardless of their country of origin. 

The plight of ordinary Australians looking for secure jobs in new mines is also lost on FIRB as it sings to the anti-Chinese choir right now.  

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