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A matter of time before China moves on Canadian resource firms

China has emerged as the single dominant player in commodity deals as this economic downturn gains speed.

The activity raises the question of when and where the world's most populous nation will move on Canadian resource companies.

Consider where state-owned Chinese enterprises have put their capital to work in recent weeks. Chinalco, the state-owned aluminum company, is working on a $19.5-billion (U.S.) stake in Rio Tinto assets. Minmetals, last seen kicking tires at Falconbridge Ltd., offered $1.7-billion for OZ Minerals, the world's No. 2 zinc producer.

China agreed to lend Russian energy companies $25-billion at 5 per cent in exchange for 20 years of guaranteed supply of Siberian oil. And yesterday brought news that China Investment Corp. is negotiating a possible stake in Australian iron ore Fortescue Metals.

This is all part of a stated Chinese policy aimed at locking in supplies of resources, and expanding its reach. In a note to clients yesterday, UBS Securities called China's moves on resource companies the "biggest developing theme" in global investing.

To date, China's state-owned entities have only made token investments in the oil sands, and held a few tentative talks with Canadian base metal companies. With many domestic companies selling assets and interested in raising capital - Teck Cominco Ltd., Rio Tinto Alcan, any number of oil sands plays - it seems inevitable that Chinese companies will take a run at Canadian icons before this downturn is over.

hedge funds deliver

Canadian hedge funds did what they are supposed to do in January, delivering solid positive performance despite dreary results from market benchmarks.

The average domestic hedge fund was up 3.09 per cent last month on an asset-weighted basis, according to the Scotia Capital Canadian Hedge Fund Performance Index.

The survey of 39 funds was up 1.94 per cent on an equal-weighted basis, which shows that the biggest funds posted the best results.

While the hedge funds had an up month, the S&P/TSX index was down 3.26 per cent and the S&P 500 dropped a gut-wrenching 8.57 per cent in January. Scotia Capital's bond index was down 0.95 per cent.

"Canadian hedge funds delivered strong results for January as the majority of managers across all strategies posted positive results for the month," said Scotia Capital's commentary on the numbers. The investment dealer also noted that gold stocks, a favourite of many Canadian portfolio managers, delivered a sparkling performance.

Last year, the Scotia Capital hedge fund index was down 15.9 per cent on an asset-weighted basis and 22.6 per cent on an equal-weighted basis. The weak results came as a shock to investors who bought these funds on the promise of absolute returns - gains in good markets and bad. Substantial losses forced a number of domestic fund managers to close their doors.

To qualify for the Scotia Capital index, a hedge fund needs at least 12 months of performance numbers, and a minimum of $15-million in assets.

gm wins friends

While nobody in the auto industry has a good thing to say about Chrysler these days, analysts see General Motors taking a supplier-friendly attitude as it attempts to restructure.

GM held an investor conference yesterday as part of the sales pitch behind its plea for additional taxpayer support, and union concessions. Part of the conference call focused on supplier relations, building on the fact that Chrysler is promising to squeeze additional savings out of parts manufacturers, many of which are public companies.

"Unlike Chrysler, GM did not make any assertions in either its submission or during the conference call to the effect that it expected to extract further concessions from its suppliers," said a report from BMO Nesbitt Burns analyst Peter Sklar. "Moreover, GM intends to accelerate the movement of new and current programs to healthier suppliers."

In the analyst's view, this combination of increased orders and consistent prices is good news for GM's preferred Canadian suppliers, publicly traded Magna Entertainment Corp., Linamar Corp. and Martinrea International Inc.

awillis@globeandmail.com

See Andrew Willis's Streetwise Blog at ReportonBusiness.com

© 2007 The Globe and Mail. All rights reserved.

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