China's miners to step up overseas push

More deals are expected this year amid robust demand for commodities after weakening metal prices dampen the mood for M&A activity in 2013

PUBLISHED : Friday, 04 April, 2014, 11:29am
UPDATED : Saturday, 05 April, 2014, 1:54am

Chinese mining companies will be on the prowl this year to acquire more firms or forge joint ventures in regions ranging from Africa to Latin America to Southeast Asia as they try to feed the country's voracious appetite for the iron ore and precious and industrial metals vital for an economy that has slowed but is still expanding at a healthy clip.

Industry data shows China accounted for nearly 14 per cent of all mining merger and acquisition activity by value last year, but the number of transactions slid to 21 from 34 and their value declined to US$5 billion from US$6 billion in 2012, according to a research report by PwC.

Last year was one of the worst years for global mining mergers and acquisitions in nearly a decade, with the deal value at its lowest since 2004, the PwC report said.

The sour mood in the sector was exacerbated by soft metal prices that in turn reduced profits at mining companies, it said.

This caused those firms to focus on reducing debt and controlling costs instead of acquiring mines, PwC said.

China's share of global mining deals might be bigger this year, said Ken Su, the China mining and metals leader at PwC.

"China has become relatively more important globally. While 2013 was one of the worst years for mining mergers and acquisitions, China outpaced nations such as Canada, Australia and the United States," Su said. "We might see some bigger deals announced in 2014."

China is the top producer of steel and the leading importer of iron ore in the world. More than 95 per cent of the iron ore it imports is processed into steel, which is widely used for everything from shipbuilding to construction.

The country is also the world's leading consumer of copper, a key industrial metal widely used by power companies. It is the world's biggest producer of gold and also the top importer and consumer of the precious metal.

PwC global mining leader John Gravelle cited the Las Bambas copper-mining project in Peru as an example of Chinese mining firms reaching out for major investments overseas.

On March 19, MMG, a Hong Kong-listed subsidiary of China Minmetals, a state-owned enterprise, confirmed it was in discussions with two other mainland firms, Guoxin International Investment and Citic Metal, to acquire a stake in Las Bambas from Glencore Xstrata, the Swiss resource giant.

Gravelle estimated the Chinese consortium would pay US$4 billion to US$6 billion for a stake in the project, roughly equal in value to all Chinese mining mergers and acquisitions last year.

"This is a mega deal for sure. If this happens, it will stand out compared with the past two years," said Su.

But the average deal size of Chinese investments in overseas mines would be smaller because more private Chinese companies, which lack the financial muscle of state-owned enterprises, were investing in mines abroad, he said.

Last year, the China-Africa Development Fund invested in more than 20 mining projects in the continent, covering iron ore, copper, gold and other metals and minerals, said an executive with the fund, which is a subsidiary of state-owned China Development Bank.

Chinese firms are looking not only at Africa and Latin America. Closer to home, they forged deals with Indonesia during President Xi Jinping's visit to the country in October.

In mining, these included a US$5.1 billion deal to build a ferronickel plant with an annual capacity of 300,000 tonnes in Sulawesi, a US$1 billion joint venture to build an aluminium-processing plant and a deal between Hangzhou Jinjiang and Borneo Alumindo Prima for a US$1.7 billion bauxite and aluminium-processing plant.

China's demand for mining resources would grow 3 to 6 per cent this year, Gravelle estimated.

The China Metallurgical Industry Planning and Research Institute predicted the country's iron ore imports would rise 6.3 per cent to 850 million tonnes this year, about half of which would come from Australia.

Western Australia's iron ore exports to China jumped 23.5 per cent to 425 million tonnes last year, accounting for 76 per cent of its exports of the raw material, the state's government said.

This year, the value of Chinese overseas mining investments would probably increase, but the nature of the mining assets being acquired would shift towards gold and copper, said Carrie Chen, a senior vice-president of mergers and acquisitions at Citic Securities.

Su said investment would gravitate towards gold mines. "When we talk to Chinese companies in general, they have a positive outlook on gold prices. They think the price is going to go up," he said. "Gold is seen as a safe investment. There is a flight to quality as there are challenges in the global economy."