China's miners 'must learn' from bungled foreign acquisitions
Industry observers say Chinese companies must learn from their bungled foreign acquisitions
China's mining firms have a mixed record on overseas acquisitions, but they can learn valuable lessons from missteps made in the past few years and adjust their strategies, say mining-sector executives.
"Chinese firms are still climbing the learning curve, many failures have dotted the path in the past few years," said Wang Side, vice-president of Chinalco Resources - a unit of Aluminium Corp of China, the No 2 producer of the metal.
According to Dealogic, Chinese firms made US$4.25 billion in overseas mining acquisitions in the year's first nine months, from US$8.8 billion in the year-earlier period, when the volume was boosted by a US$7 billion acquisition by state-backed MMG in Peru. The deal volume in the first nine months of 2014 was US$4.4 billion, and US$3.3 billion in the same period of 2013.
Wang told an annual mining conference that he considered the three main reasons for Chinese outbound-investment failures to be poor timing, poor selection of investment targets and poor deal pricing.
More than 80 per cent of the mining firms had made overseas acquisitions between 2008 and 2012, with most of the companies losing some 80 per cent of their market value since the boom years, he added.
"There has [also] been a lack of proper social corporate responsibility and management of local community expectations, [although much improvement has been made in the last few years]," said a report by industry consultancy CRU on overseas investments. "Cultural issues and unfamiliarity with local regulations in the host country, as well as a lack of proper technical and financial due diligence have caused problems."
The global commodities boom ended three years ago as China's metals demand slowed, along with a switch of focus from investment to consumption-led economic growth.
China is the world's largest consumer of copper, aluminium and iron ore.
Some Chinese entities have invested in ore that is difficult and costly to process, such as a Citic project that suffered from major cost blow-outs and delays in Western Australia state.
It mines magnetite iron ore, which requires the construction of hugely expensive facilities for processing and transport.
"The error Citic made is an over-reliance on geologists' judgment when making investment decisions. The involvement of mine-design, construction, ore-trading, finance and legal experts is also imperative," Wang said.
"So while its project is the world's largest magnetite project, it is very tough to turn it into cash flows."