Gold miner Zijin stands out as overseas acquisition pioneer
Hong Kong-listed company has spent 7.9 billion yuan since 2010 on 13 transactions around the world, more than double what it has invested in domestic mines
Chinese gold mining firms have said for years they have been on the overseas acquisition trail, especially as the recent crash in commodity prices has sent asset prices tumbling.
Few have managed to land any gilt-edged deals on foreign turf – but Zijin Mining Group is now standing head and shoulders above the crowd as being able to buy at just the right time.
One of three state-backed gold miners listed on the Hong Kong stock exchange, Xiamen-based Zijin has also been by far the most aggressive.
The company has spent about 7.9 billion yuan since 2010 on 13 transactions, mainly buying stakes in gold and copper projects in the Democratic Republic of Congo, Australia, Tajikistan, Papua New Guinea, Peru and Canada, more than double the 3.3 billion yuan it has invested in domestic mines.
Its biggest deal was worth 2.52 billion yuan, for a 49.5 per cent stake in Canadian mining major Ivanhoe Mines’ Kamoa copper project in the Congo in western Africa, completed last year.
In 2011, Zijin also bought outright Australia’s Norton Gold Fields, which operates the Paddington mine in Western Australia state’s Kalgoorlie region, in a deal worth 1.44 billion yuan, raising its stake to 100 per cent from 16 per cent.
And in Papua New Guinea, later last year, it bought a 50 per cent stake in the Porgera gold mine from the world’s largest gold producer, Canadian firm Barrick Gold Corp, for 1.82 billion yuan.
The deals attracted huge analyst applause because they came at a time when gold was fetching about US$1,200 an ounce, about 37 per cent less than the US$1,900 peak in 2011. When Norton Gold Fields was bought, it was trading at US$1,400.
“Zijin pounced on the opportunity to bolster its own reserves when gold prices were near the cycle’s bottom and at a time when international miners were speeding up the disposal of assets,” said China Galaxy Securities analysts.
Gold has traded in recent days at about US$1,250, down from this year’s peak of about US$1,370 on concerns that an imminent interest rate rise in the United States will raise the cost of holding the yellow metal, which does not earn interest.
But analysts still remain upbeat that prices will continue to rise.
ANZ senior commodity strategist Daniel Hynes said in a recent note that “rising inflation expectations, geopolitical issues and signs of improving physical demand” represented strong reasons for holding on to gold.
Analysts expect it to rebound to US$1,375 in the first quarter of next year once the “headwind” of any interest rate rise has passed.
Foreign acquisition efforts by other Chinese gold miners, however, have proved a lot more frustrating.
Shandong-based rival Zhaojin Mining Industry and China Gold International Resources Corp – the sole overseas listed arm of the country’s largest gold miner China National Gold Group – have both failed to secure any international targets since going public in Hong Kong despite having scoured the globe for years.
Size matters when it comes to overseas gold mine acquisitions and risks have to be taken, according to analysts.
“Zijin’s larger scale and balance sheet has helped. It also has a bigger stomach to take on larger targets,” Daniel Meng, an investment analyst at CLSA, told the South China Morning Post. “The assets that smaller acquirers can consider buying are limited since quality large projects are most likely already in the hands of other miners.”
Zijin, which also produces copper and zinc, has a market capitalisation of about HK$73 billion, compared with HK$22 billion for Zhaojin and HK$7 billion for China Gold.
Meng noted that Zhaojin, which bought in the middle of last year what is likely to become China’s largest domestic gold mine at Zhaoyuan in Shandong province, was not under as much pressure to acquire assets abroad to boost its reserves since that project was large enough to provide strong output growth and took up much of its available resources.
Zijin’s overseas successes have already started bearing fruit, helping the firm grow its production at a time when output from its mainstay Zijinshan project in Fujian province continues to decline.
Zijinshan’s contribution to total output slid to 20.4 per cent in the first half of this year from 37 per cent in 2013 while the shares from its three biggest overseas mines, led by the Papua New Guinea project, rose to 37.5 per cent from 22 per cent.
“Zijin’s foreign acquisition record is streets ahead of its Chinese peers,” said Meng. “Although some investors have felt the valuations of certain assets it bought were on the high side, at [previous-year] price-earnings ratios of 20 to 30 times, Zijin has compensated by reducing production costs at those assets more than expected.”
The Norton Gold Fields mine and another joint-venture gold mine in Papua New Guinea with Barrick were particularly good examples where huge savings were achieved, he said.
Although Zijin’s net debt-equity ratio surged to a relatively high 84 per cent at the end of June this year from 11 per cent in 2010 as it finances its acquisitions primarily with cash and loans, Meng said the company’s methods were in line with those of other firms in Asia, which are taking on more debt as borrowing costs remain low.
He expects Zijin’s leverage to decline substantially once it completes a planned 4.8 billion yuan new share listing in Shanghai.
Although state-backed, with 26.3 per cent owned by the government, Zijin’s management is generally viewed as being more private-sector in style and is well regarded overseas, which could help reduce any opposition it might face politically when buying foreign assets, analysts say.
While admiring its aggressive approach to deal-making, what analysts like best are the company’s ability to get the timing of its moves just right and its ability to add value to the targets once they are bought.
“Buying mining assets is a bit like buying property – when prices go up, the amount of resources or the scale of projects you can buy diminishes, so timing is very important,” Meng said. “But buying a project is only part of the process. It also needs to be developed over a long period, during which there are a lot of technical and other risks to deal with.”
During the commodities down cycles, acquirers tend to be more cautious and avoid exploration projects in higher-risk regions such as Africa and South America. Instead, they are drawn more towards early-stage projects in countries with more mature regulatory regimes and established infrastructure such as Australia and Canada or snapping up assets that international mining majors no longer want.
The latter was certainly the case when Zijin bought the Porgera gold mine.
Although still a producing mine, its expected lifespan was only about six years and its production costs, excluding fixed costs such as asset depreciation, were relatively high at US$916 an ounce, according to a report by China International Capital Corp.
For Zijin to buy the asset, Meng said the company needed to be confident Porgera could increase its mining life by deploying techniques to turn more of its geological resources into economically extractable reserves and reduce its production costs. Otherwise, it would have to rely on higher gold prices to generate a reasonable profit.
The company’s experience in cost-cutting at the Norton Field Fields project should prove invaluable, he added.
At the Kamoa copper project, an early feasibility study estimated it could be brought to production in 2018 with an initial annual output capacity of 100,000 tonnes, which can be expanded to 300,000. This is significant for Zijin, which produced about 150,000 tonnes from its own mines last year.
“However, delays in mining development are endemic in the industry, and we would not assign any significant value to a potential mine until construction has started,” Barclays analysts cautioned in a note.
“We didn’t strike any deals when gold prices were high a few years ago, so we have avoided any pain from the price decline,” Zhaojin chairman Weng Zhanbin told the Post. “We have been in talks on quite a few potential acquisitions overseas. 2016 is a very good window for us since many miners have run into operating difficulties due to cash-flow problems.”
Weng said the company had failed to commit to any overseas deals so far mainly because asking prices were too high even though the price of the precious metal has nosedived. There were also occasions when deals were closed but the plans were derailed by unexpected circumstances.
“For example, one buyer had wanted us to buy two assets as a package to reap efficiencies. But when it was time to close the deal, the seller was only able to sell one of them due to divergent opinions among the shareholders of the asset regarding the sale,” Weng said.
On another occasion, a deal fell through due to the failure to obtain regulatory approval from the country where the asset was located.
“When the approval process takes too long, the environment and asset values can change in the meantime … In the end, the seller and the buyer may not be able to agree on a new price,” Weng said.
Zhaojin is still spreading its net wide, focusing on both developed countries with rich resources, such as Australia and Canada, and those in developing nations in Central Asia and Africa.
Weng said the firm had a 20-strong overseas acquisition team, including foreigners and Chinese, with expertise in geology, mining operations, finance, risk management, commercial negotiations and asset valuation, monitoring potential overseas acquisition targets.
But he also has a strict requirement that any target must be able to deliver a minimum 20 per cent return.
Liu Bing, chief executive of Hong Kong- and Toronto-listed China Gold, said it had also been looking around the world for assets.
“Depressed market conditions have created very good opportunities for acquisitions, but we are proceeding cautiously to avoid pitfalls. Mergers or acquisitions can only be considered successful after an acquired entity brings in additional profits for the acquirer,” he said. “We have been continuously sifting through potential overseas acquisition targets, including in Canada, which is a [politically] stable nation.”
Executive vice-president Jerry Xie Quan added that to mitigate risk, China Gold was mostly interested in smaller stakes, joint investments in projects with international mining majors or established mining-sector asset management funds, wary that integration could be the biggest problem in any purchase.
This article has been amended to fix typographical errors