Mergers set to create mining giants
Industry consolidation in China to give companies muscle for overseas acquisitions
A record wave of consolidation in China's mining industry is creating bigger companies that will have the muscle to compete with the likes of BHP Billiton for overseas acquisitions.
Even after Chinese mining mergers reached US$19.6 billion last year, double the tally for 2011, the government wants to see more.
Easier access to capital and less Chinese competition for assets might make companies including China Minmetals Corp and Aluminium Corp of China more robust overseas buyers, said Deloitte & Touche.
That will help reverse a slump in acquisitions of mining assets outside of China, which fell to a five-year low of US$2.9 billion last year, data shows. As the world's biggest importer of iron ore and coal, China relies on foreign sources of the raw materials.
"With stronger and bigger Chinese players emerging, we could see a significant pickup in the volume of overseas acquisitions," said Richard Tory, the Hong Kong-based head of natural resources for the Asia-Pacific region at Morgan Stanley.
China's mining industry, while one of the world's largest producers of minerals, is now peppered with thousands of smaller companies.
Minmetals, its largest miner by revenue, had assets of US$36.6 billion at the end of 2011 - dwarfed by BHP's US$122.1 billion.
"China's mining sector is too fragmented right now," said Eugene Qian, the head of global banking for China at Citigroup, which advised CNOOC on its US$15.1 billion acquisition of Nexen, the biggest outbound takeover by a Chinese company. "It needs a lot of consolidation to create majors."
In January, the government said it would promote mergers in nine industries including steel, aluminium and rare earths to create "globally competitive" enterprises.
The announcement reinforced what has already begun. Excluding deals between parent firms and their subsidiaries, the largest domestic acquisition last year was Hunan Jiangnan Red Arrow's US$623 million takeover of Zhongnan Diamond.
"Creating national champions makes sense because mining is very capital-intensive, said Jeremy South, who oversees global mining advisory at Deloitte & Touche. "It also makes no sense for Chinese companies to be competing with each other for overseas deals."
Shenhua Group bought China State Grid's electric-generation unit for US$8.2 billion last year. The Chinese state-owned miner is now studying an investment in Australia's Whitehaven Coal, two people with knowledge of the matter said.
Whitehaven, part owned by Nathan Tinkler, has a market value of A$2.64 billion (HK$20.8 billion). The stock is trading at its lowest level since May 2009.
An official at Shenhua's press department in Beijing declined to comment.
Whitehaven chairman Mark Vaile said on February 21 the company had not had any recent dialogue with Shenhua.
Citic Group, China's largest state-owned investment company, last month agreed to pay about A$452 million for a 13 per cent stake in Australia's Alumina, partner in the world's biggest alumina business.
Other Chinese miners are also searching for deals. Chinalco Mining Corp International may seek assets in South America, Africa and Asia, chief executive Peng Huaisheng said on January 17. Parent Aluminium Corp of China was the most active overseas acquirer among Chinese miners in the past decade with US$14 billion of deals, data shows.