MMG sets 10pc floor for return on acquisitions

MMG, the overseas non-ferrous metals mining unit of state-owned China Minmetals, will consider as acquisition targets only assets and projects with at least a 10 per cent return, even though it enjoys low financing costs thanks to its parent firm's connections.

"We need to add shareholder value, which means we need something that gives us a return greater than our average cost of capital," he told the South China Morning Post.

MMG would likely not acquire any project smaller than the Kinsevere copper project in Congo, which it bought for US$1.36 billion in early 2012, he said.

Michelmore would not disclose MMG's cost of capital - the weighted average cost of debt and equity - but said its cost of debt was low, at 3.1 per cent, thanks to its parent's "putting its balance sheet behind us".

This debt guarantee from the parent means MMG can tolerate a net debt-to-equity ratio of up to 70 per cent, compared with 45 per cent at the end of last year, he said.

Michelmore would not comment on speculation that MMG had been in talks to buy into Switzerland-based commodities trading major Glencore Xstrata's Las Bambas copper mining project in Peru. Early this month, the Swiss firm's chief executive identified a consortium led by China Minmetals as the preferred bidder for the project.

The sale of one of Glencore Xstrata's major copper projects by September 30 is a condition for mainland China's Ministry of Commerce to approve Glencore's merger with Xstrata, which was subject to antitrust approval by the central government.

Beijing is concerned the merger would increase Glencore's and Xstrata's control over the supply of copper and hurt the interests of users on the mainland. The country is the world's largest consumer of the metal. It has to import copper to meet some 70 per cent of its demand.

The partly completed Las Bambas project was estimated by Glencore Xstrata in January last year to cost US$5.2 billion to build, and to start production next year. This compared with its budget set in 2010 of US$4.2 billion and a first-production date of the middle of this year.

In an interview in Beijing on March 10, China Minmetals vice-president Li Fuli told the Post there were two other parties in its bidding consortium, but he declined to name them.

Li said China Minmetals was already the largest copper resource holder among mainland firms, controlling close to 10 million tonnes, of which the biggest project is in Peru. He said it was also the biggest copper miner overseas among mainland firms.

"The reason we are interested in this [Las Bambas] project is that we want to further boost our resources and raise Chinese firms' influence on bulk commodities in the global market," he said.

Li said that since 2004, China Minmetals had been seeking overseas resources like copper, aluminium, iron ore, lead and zinc, for which the mainland has to import about 70 per cent of its demand.

"As an internationalised state firm, it is our job to secure resources to support our nation's economic development," he said.

However, MMG said the mainland accounted for only 19 per cent of its revenue last year, since it makes more economic sense to sell to Asian or Australian customers closer to its mines.

Michelmore said from Beijing's and China Minmetals' perspective, by investing in overseas mining projects, it allows the country to hedge its metal price risk.