Companies opt for smaller stakes overseas
Chinese companies are changing the ways in which they acquire overseas metals and mining resources and are focusing less on outright control.
'When Chinese companies first started investing abroad they always wanted to take a controlling stake,' Keith Spence, the president of Global Mining Capital Corp told the Mines and Money conference in Beijing. 'But now [they] are realising they can have a smaller percentage of the company and negotiate an off-take agreement. At the end of the day it is the raw material they want.'
The need for metals is being driven by China's rapidly growing economy and the continued process of urbanisation. Currently, 43 per cent of the population live in urban areas which is roughly half that of OECD countries.
The demand for metals is expected to soar. The country, for example, consumes four kilograms per head of copper compared with 40kg per head in Japan.
Outbound investment has soared since 2004 with mining investments totalling US$31 billion last year.
Spence said he expected the way Chinese mining firms acquired overseas assets would continue to change as they gained more experience.
In 2007-09, 36 per cent of outbound mining investment involved equity stakes of greater than 50 per cent; 38 per cent of the deals were equity stakes of 20 to 50 per cent, and 26 per cent of the transactions were for stakes of less than 20 per cent. But in 2009 and 2010 this has changed sharply with deals for stakes of less than 20 per cent rising to 52 per cent.
At the same time, Spence said the structure of the deals was changing. Previously, most transactions were pure equity deals, but over the past year these had fallen to 74 per cent while 18 per cent of deals were financed by debt. 'Increasingly, more of these deals will be financed by debt and convertible bonds.'
Also, more private companies were making overseas investments. In 2009, state-owned enterprises accounted for 71 per cent of outbound direct investment in mining assets. However, in the last quarter of 2009, outbound investment of state-owned enterprises had fallen to 53 per cent and to 36 per cent in the first quarter of 2010, according to Zeng Shaojin, the vice-president of China Mining Association.
Australia was the most favoured country for mainland mining investments, accounting for 45 per cent, while Africa and Canada received 20 per cent and 15 per cent, respectively. But Spence said he expected to see greater interest in Canada and Africa following concerns over Australia's proposed 40 per cent resources tax.
In 2007-09, iron ore accounted for 32 per cent of Chinese investments followed by copper (27 per cent), and gold (16 per cent). But Spence said he expected more Chinese companies to invest in projects involving gold, uranium and zinc.
In 2009, the pattern of investment had changed with iron ore accounting, for only 28 per cent , coal and gold each 16 per cent, and base metals 38 per cent.
Chinese companies were also prepared to take on more risk, Spence said. Previously, they were only prepared to invest in mining ventures close to the full production stage but over the past year they were investing a lot earlier in the development phase of projects.
Minority holdings
In 2009 and 2010, deals for stakes of less than 20 per cent have risen to: 52%
