The Pullout Puzzle

Eldorado Gold first entered China in 2005. Just a decade later, the company wanted out

Vancouver-based Eldorado Gold Corp., a global low-cost gold producer, currently has mines in Greece, Turkey, Romania, Serbia, Brazil — and until recently China. With more than 7,000 employees around the world, it first entered China in 2005. Just a decade later, however, Eldorado wanted out.



In 2014, the company revealed it was looking for ways to increase the market value of the three Chinese mines it had acquired in China over the years. In 2009, the company bought Australia’s Sino Gold Mining’s assets in China for US$1.84 billion. The deal included the Jinfeng gold mine in Guizhou province, the White Mountain mine in Jilin province, and the Eastern Dragon development project in Heilongjiang province.

Then, just five years later, in November 2014, Eldorado President and Chief Executive Officer Paul Wright announced that Eldorado wanted to monetize those Chinese assets so that it would have more financial flexibility and could put the proceeds towards its internal project pipelines in other countries.

Eldorado explored selling assets as well as listing its Chinese assets in Hong Kong in an initial public offering — a so-called “dual-track” process designed to propel potential buyers to act before the stock offering puts the assets in public hands. It said it was seeking about US$1.5 billion for its Chinese mines. And then it waited.

Finally, on April 26, 2016, Eldorado announced the sale of its 82-per-cent interest in its Jinfeng mine to China National Gold Group for US$300 million cash. And then, less than three weeks later, on May 16, Yintai Resources Co. Ltd., putting up the equivalent of a US$30-million reverse break fee, agreed to buy Eldorado’s stakes in White Mountain, Tanjianshan and Eastern Dragon for US$600 million.

Late in the negotiations, Blake, Cassels & Graydon LLP was brought in to help Yintai seal the deal, which closed November 22. Michael Laffin, chair of Blakes Asia region initiative, and Zaichi Hu, a Blakes Vancouver partner with extensive experience in China, tell the tale of the firm’s role in the acquisition.

LEXPERT
: Blakes has had an office in Beijing since 1988. Eldorado Resources had been the biggest foreign mining company in China when it decided to sell these last remaining assets there. How did Blake, Cassels & Graydon come to be involved with Yintai? Was there a prior relationship from your firm’s years in Beijing?
Michael Laffin (Blake, Cassels & Graydon LLP, for Eldorado):  We were retained through the recommendation of the financial advisor to Yintai.

LEXPERT
: Blakes was ranked the No. 1 Canadian firm in China by deal count in 2016. Beyond those credentials, were there other reasons you were recommended for the Yintai gig?
Zaichi Hu (Blakes, for Eldorado): The Canadian financial advisor and Blakes had worked together on other deals, so we knew each other well. Behind the rankings, we are well-known in the China market for our solid China deal experience, bilingual China practice team and presence in China through our Beijing office, so we were a natural choice for Yintai.

LEXPERT
: Once Blakes was brought in, Mike, what were you seeking skills-wise for the Blakes people you put on your team?
Laffin: Yintai needed support of Canadian counsel in negotiating the Canada law-governed transaction document, closing the transaction and communicating with Chinese counsel responsible for due diligence and Chinese regulatory issues. We assembled a team with extensive experience acting for Chinese companies on M&A transactions, and knowledge of the Chinese regulatory environment.

LEXPERT
: Zaichi, you were a former partner for six years at a big Chinese law firm in Beijing. Now you’re with Blakes in Vancouver. With your fluency in Mandarin and 20 years of experience counseling multinationals with interests in China, that had to be more than handy in an asset sale like this.
Hu: Coincidentally, the lead Chinese counsel to Yintai was my former partner at a major Chinese law firm, so that was helpful in communicating the needs of Yintai and discussing due diligence and Chinese regulatory issues.

LEXPERT
: There were a lot of firms involved in this deal from a number of countries — China, Canada, Australia, Hong Kong. Besides the obvious language barrier, what were some of the other challenges your teams had in orchestrating and negotiating this deal?
Laffin: We were retained when the deal discussions were at an advanced stage, and did not participate in due diligence. Consequently understanding the negotiations and processes that occurred prior to our involvement was critical.

LEXPERT
: That wasn’t a great time for Blakes to come in on potentially a $600-million deal. It must have caused some extra pressure for your team with negotiations already under way.
Hu: Yintai had to meet the shareholder approval and disclosure requirements applicable to public companies in China, and Eldorado had to meet Canadian listed-company requirements, and the parties had to sort out the differences.

LEXPERT
: What sort of role does the Chinese government play in these kinds of deals? What lawyers or firms had to deal with that element?
Hu: Yintai had to make several filings with the Chinese government before and after the deal agreement was signed, both at the local and central government levels. These included two filings with the National Development and Reform Commission, two filings with the Ministry of Commerce, and the final foreign exchange filing confirmation, without which the money could not be transferred out of China. The final confirmation came in only a few days before the closing deadline, and the Chinese government tightened foreign-exchange filing requirements only one week after the closing. Yintai dealt with those filings mostly by itself, with some assistance from its Chinese counsel.

LEXPERT
: How does getting shareholder approval on a deal like this differ for Chinese shareholders? Is getting Chinese shareholder approval more difficult?
Hu: Yintai set up a special purpose subsidiary to act as purchaser of the assets, and the subsidiary needed capital injection from Yintai, its principal shareholders and other investors. Yintai acted as the guarantor of the purchaser’s obligations, and the deal became a related-party transaction, so Yintai needed shareholders’ approval for both the capital injection and the guarantee, thus more time was needed for Yintai to put together the documents, give notice to shareholders and make public disclosure. Eldorado eventually decided that it did not require approval of its shareholders — its board could approve the deal, so it was an easier process for Eldorado.

LEXPERT
: As you mention, the Chinese government changed rules concerning the movement of funds from a Chinese entity to a foreign one just days after this deal was completed. Did Blakes know these rule changes were coming and, if so, how did it affect the deal negotiations?
Hu: We did not know Chinese rule changes were coming, but during the few weeks before closing, the Chinese currency was continuously moving downward against the deal currency (US$) amid market turbulences, and this was not lost on the parties.

LEXPERT
: Did working on this deal require a significant physical presence in China by anyone from the Blakes team? Did you need to go to White Mountain and Tanjianshan Mines, or the Dragon Development project?
Hu: Both of us had to travel several times to China in order to advance the deal to closing, though the closing itself was effected electronically in Vancouver. We did not need to go to the mine sites, as the due diliegence had been done [by legal counsel in China] before we stepped in, and we relied on the support of Chinese counsel to coordinate the physical delivery of closing documents in China.

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