MONDAY,OCTOBER21,2019 | THEGLOBEANDMAIL O REPORTONBUSINESS| B5
China is taking the extremely
long view on copper.
State-owned Chinese firms are
making big bets on Canadian
copper companies at a time
when other investors are backing
away amid weak commodity
prices and a shaky international
geopolitical climate.
Last week, state-owned Chi-
nese miner Jiangxi Copper Co.
Ltd. announced it had amassed a
10.8-per-cent stake in Vancouver-
basedFirst Quantum Minerals
Ltd., through Pangaea Invest-
ment Management Ltd. Jiangxi
also said it may end up increas-
ing its stake to 16.6 per cent
through a share-purchase agree-
ment with an unnamed counter-
party.
Vancouver-based Ivanhoe
Mines Ltd., which is developing
the giant Kamoa-Kakula copper
resource in the Democratic Re-
public of Congo (DRC), has at-
tracted two major Chinese back-
ers over the past few years. CITIC
Metal Group Ltd., which first in-
vested in Ivanhoe just more than
a year ago, is its biggest share-
holder with a 26.4-per-cent stake,
and Zijin Mining Group, which
got involved in 2015, has a 13.9-
per-cent share. (The holdings are
contingent on a recent sharehol-
der agreement closing.) Zijin al-
so has a 39.6-per-cent stake in
the Kamoa-Kakula project.
The investment by deep-pock-
eted Chinese investors into two
of Canada’s best-known copper
companies comes in the midst of
a protracted period of weakness
for the commodity itself, and a
continuing trade war between
the United States and China that
has scared off the big Western
miners from investing in copper.
“Major diversified miners
have been unwilling to acquire
copper miners due to a high level
of risk aversion and a focus on
austerity and capital returns. But
the Chinese are making acquisi-
tions in copper and the timing is
brilliant,” Chris LaFemina, ana-
lyst with Jefferies, wrote in a note
to clients last week.
Copper futures closed at
US$2.62 a pound on Friday. Lev-
eraged to the health of the world
economy, the industrial com-modity has fallen about 10 per
cent since April. Copper peaked
in 2011 during the height of the
last great commodities boom at
around US$4.50 a pound.
Unlike publicly traded compa-
nies that are pressed to show re-
turns every single quarter, and
whose minute-to-minute finan-
cial condition often depends on
the direction of volatile and fick-
le commodity prices, state-con-
trolled Chinese entities can af-
ford to take a much longer view-
point.
“We do not believe Chinese
state-backed companies are
concerned about near-term cycli-
cal risk. Their focus is more likely
on the strategic benefit of con-
trolling large-scale copper re-
sources for decades via acquisi-tions at low prices during a weak
point in the cycle,” Mr. LaFemina
said.
Chinese financial support has
allowed Ivanhoe to move for-
ward in developing Kamoa-Kak-
ula, which the Canadian compa-
ny touts as one of the largest un-
developed copper projects in the
world, despite sluggish copper
prices.
The investment from Jiangxi
Copper in First Quantum, mean-
time, sent shares in Canada’s big-
gest copper company soaring.
First Quantum also said Jiangxi
is considering buying a stake in
its Zambian copper assets, Kan-
sanshi and Sentinel, which are
also the two largest copper
mines in Africa. RBC Dominion
Securities Inc. analyst Sam Crit-
tenden estimates that First
Quantum could generate US$1-
billion by selling a 20-per-cent
stake in the mines.
As to whether the Chinese
could take it one step further,
and buy either Ivanhoe or First
Quantum outright? Various
standstill agreements preclude a
hostile move on either company
from their existing Chinese
shareholders over the next few
years. Still, that doesn’t rule out a
friendly arrangement in the in-
terim.
Clement Kwong, managing di-
rector with Pangaea Investment,
said Jiangxi is happy with its eq-
uity stake in First Quantum for
the time being, and stressed that
it has historically been a conser-
vative investor, only making big
strategic moves after deep fore-
thought.
“Jiangxi hasn’t done anything
silly or crazy,” he said.
Jefferies’s Mr. LaFemina,
meantime, isn’t sure how it will
all turn out for First Quantum.
“While we do not believe a full
takeover is likely, time will tell
what the end game is.”Chinamakeslong-termplansoncopper
Despiteasoftmarket
andweakcommodity
prices,Chinesefirms
areamassingstakes
inCanadian-owned
miningcompanies
NIALLMCGEEMININGREPORTER
FirstQuantumMinerals
saysJiangxiCopper,
whichlastweek
announcedithad
acquireda10.8-per-cent
stakeintheVancouver-
basedminer,isalso
consideringbuyinga
stakeinitsZambian
copperassets,including
theKansanshisite,
seenabove.O
penText Corp.chief exec-
utive Mark Barrenechea
likes to call his company a
durable, steady performer, a disci-
plined acquisitor and one of the
most profitable software provid-
ers in the world.
It’s not enough for the Water-
loo, Ont.-based provider of data-
management software to enter-
prises such as General Motors Co.,
Citigroup Inc. and the Canadian
government to have a 38.3-per-
cent operating profit. He wants it
to hit 40. “We’ve set out intention-
ally to be the most productive
software company,” he said in an
interview.
So why has OpenText, which
reports first-quarter earnings
next week, lagged other players in
its sector? Its 66-per-cent stock
price gain over the past five years
is less than half that of the S&P/
TSX Capped Information Tech-
nology Index. Investors have tak-
en more of a shine to software
companies with robust revenue
growth such as Shopify Inc. or Ki-
naxis. OpenText’s revenue, by
contrast, has increased by 12 per
cent on average since 2014 and
that has come almost entirely
from buying other slow-growth
rivals.
But OpenText’s stock returns
and valuation multiples have also
lagged deal-driven Canadian
peers Constellation Software Inc.,
Descartes Systems Group Inc. and
Enghouse Systems Ltd. that gen-
erate better internal sales growth.
Investors appear to be tiring of
OpenText’s inability to increase
sales from existing customers, or
organic growth. When it said in
August that organic revenue for
the fourth quarter ended June 30
was negligible and would be in the
low single-digits this year, its
stock fell 9 per cent and hasn’t re-
covered.
Does OpenText, one of Cana-
da’s largest publicly traded tech
companies, need a new strategy
to rekindle investor interest?
“Given that valuation multiples in
the software sector seem to be
much more closely correlated to
revenue growth than margins, we
question whether 40 per cent is
the right” profit target, BMO Cap-
ital Markets analyst Thanos Mos-
chopoulos said in a recent note.
“We’d be happier with margins in
the [low- to mid-] 30s if it would
mean a meaningful acceleration
in organic growth.”
PI Financial’s Gus Papageor-
giou, meanwhile, calls Open-Text’s M&A track record “a mixed
bag.” Its returns on equity (ROE)
and capital have declined as as-
sets have grown faster than its
earnings and it relied on raising
external capital to fund deals, he
said, noting Constellation’s ROE is
56 per cent – seven times more
than OpenText – because it has
used internally generated cash to
fund deals.
Mr. Barrenechea defends his
strategy, saying the company
doesn’t want to sacrifice profits to
chase revenue: “I like the balance
we have.” He adds OpenText has
also been less acquisitive lately
because private equity buyers
drove up deal prices. “I look at
some of [those] deals ... and the
valuations are ridiculous,” he
said. “We’re sticking to our value
play.”
But the CEO has tweaked the
formula to address investor con-
cerns. He has promised to double
OpenText’s sales force’s coverage
of the world’s top 10,000 compa-
nies to 80 per cent over the next
three years to create more reve-
nue opportunities and to focus on
getting OpenText’s 74,000 cus-
tomers to adopt more of its offer-
ings and move them to its cloud-
based service. He has committed
to spend $2-billion on research
and development over the nextfive years into areas such as artifi-
cial intelligence and blockchain.
He’s pledged to spend more on
revenue-growth initiatives – but
only when operating profits ex-
ceed 40 per cent. The company
has also formed a new deal team
to do smaller acquisitions (valued
at US$75-million or less), which
should deliver a steadier pace of
value-adding deals, analysts say.
Mr. Barrenechea said Open Text,
with $1.4-billion in capital for pur-
chases, should become more ac-
tive as valuations have eased off.
“We’re in more conversations to-
day [about possible deals] than
we were a year ago” for targets of
all sizes, he said. “This year, I’m ex-
pecting to get deals done and de-
ploy capital.”
And just maybe, Open Text’s
profit push will look smarter if the
global economy tips into reces-
sion and investors favour conser-
vative stocks. Several high-
growth, unprofitable U.S. tech
companies have already faced
negative response from public
market investors this year. “I be-
lieve that predictable and steady
wins the race,” Mr. Barrenechea
said. “A downturn puts us into an
amazing position to gain share
and to buy companies,” he added.
“But I don’t wish for a reces-
sion.”OpenTextCEOdefendscompany’scautiousstrategyamidinvestorconcern
SEANSILCOFF
TECHNOLOGYREPORTER
Ibelievethat
predictableand
steadywinstherace.
Adownturnputsus
intoanamazing
positiontogain
shareandtobuy
companies.MARKBARRENECHEA
CEOOFOPENTEXTInvestment dealerCanaccord Ge-
nuity Group Inc.sees opportuni-
ty amid the chaos in Australia,
where the wealth-management
industry is being reshaped by a
government inquiry that was crit-
ical of the country’s biggest finan-
cial players.
Canaccord is paying $23-mil-
lion to acquire Patersons Securi-
ties Ltd. in a deal that is scheduled
to close on Tuesday. The Toronto-
based brokerage house, which
has $68-billion in client assets un-
der management, is buying the
Perth-based firm with 100 invest-
ment advisers and $13-billion in
its care. Canaccord already has an
investment-banking unit in Aus-
tralia with 72 employees, but the
Patersons purchase marks its first
major foray into wealth manage-
ment Down Under.
The Canadian firm is expand-
ing as Australia’s wealth-manage-
ment community, which was his-
torically dominated by four large
banks, deals with the fallout from
a wide-ranging review by former
High Court judge Kenneth Hayne,
who ran a royal commission into
misconduct in the banking, su-
perannuation and financial-ser-
vices industry. Mr. Hayne pub-
lished his report last February.
Ernst & Young summed up his
recommendations and the gov-
ernment’s response by saying:
“They herald sweeping changes
to current operating models in
the financial services market – re-
shaping the financial advice, life
insurance and superannuation
sectors.”
From Canaccord’s point of
view, Mr. Hayne’s review high-
lighted the value of independent
advisers and the conflicts of inter-
est that can come when banks
with multiple lines of business try
to serve wealth-management cli-
ents. Stuart Raftus, president of
Canaccord’s wealth-manage-
ment group, said Mr. Hayne’s re-
port increased customer aware-
ness of conflict-free advice, and is
shaking loose advisers from large
institutions.
Canaccord and Patersons
share a culture based on inde-
pendent service, and plan to
stress this with potential clients
and new employees, Mr. Raftus
said.
“We are open to other acquisi-tion opportunities in Australia,
but we expect most of our growth
will be organic, and come from
recruiting,” he said.
Employee-owned Patersons,
founded in 1903, was open to a
takeover that gave the firm in-
creased international heft. In a
news release, executive chairman
Michael Manford said joining Ca-
naccord “provides additional
breadth and depth of services for
our clients, who will benefit from
access to globally integrated
wealth management, corporate
finance and equity research capa-
bilities.”
As part of the transaction, the
Canadian firm plans to roll out a
retention program in which Pa-
tersons employees are awarded
approximately $3-million in
Canaccord shares that vest over
up to five years. In Australia, the
wealth-management business
will be called CG Patersons.
Last year, Canaccord turned a
$2-million profit on revenue of
$31-million at its existing Austra-
lian investment banking division.
Patersons posted a $3-million
profit last year, with revenue of
$57-million.
Mr. Raftus said combining thetwo operations is expected to im-
prove profitability for the entire
Australian business, as the
merged investment banks can
take a larger role in selling stock
and debt offerings from Austra-
lian companies. Canaccord’s
overall profit last year was $16.6-
million on revenue of $285-mil-
lion.
Canaccord’s roots are in junior
resource stock financings in Van-
couver, and Patersons has a simi-
lar history as a firm that raised
money for mining and oil compa-
nies in Western Australia. Mr. Raf-
tus said part of the logic behind
this takeover is the shared histo-
ry, and the similar compensation
schemes it spawned for advisers
at both firms.
Canaccord and Patersons both
pay the majority of their teams
on a fee-based system, which is
widely used at firms catering to
high-net-worth clients. However,
stock brokers at both dealers can
also sign up for a compensation
scheme that partly reflects the
transactions they do for clients,
an approach that used to be com-
mon, and can suit the needs of
customers and advisers who fo-
cus on trading stocks.CanaccordtoacquireAustralianwealth-managerPatersonsin$23-milliondeal
ANDREWWILLIS
Lastyear,Canaccord
turneda$2-million
profitonrevenueof
$31-millionatits
existingAustralian
investmentbanking
division.Patersons
posteda$3-million
profitlastyear,
withrevenue
of$57-million.