Alumina giant Chalco inks massive metals deal as China pushes ahead with supply-side reforms

PUBLISHED : Monday, 28 May, 2018, 3:16pm
UPDATED : Monday, 28 May, 2018, 11:34pm

The Aluminum Corporation of China (Chalco), the world’s second-largest alumina producer, plans to merge its copper mining unit with Yunnan Metallurgical Group, which has total assets of nearly 90 billion yuan (US$14.17 billion), in what would be the country’s biggest industry consolidation deal in the non-ferrous metals sector.

China Copper, wholly owned by Chalco, will merge with government-controlled Yunnan Metallurgical Group, which owns two listed companies on the mainland – Yunnan Chihong Zinc & Germanium and Yunnan Aluminium, according to separate statements by Chalco, Yunnan Chihong Zinc & Germanium, and Yunnan Aluminium on Monday.

This big deal signals the deepening of supply-side reform, in which industry consolidation is key to reducing excess capacity
Lin Yang, analyst, Dongxing Securities

After the deal, Chalco will see its stake in China Copper decrease to 58 per cent, while the Yunnan government will hold the rest.

“The deal is to integrate the non-ferrous mineral resources of Yunnan province and the resources of Chalco as a leader in China’s non-ferrous metal sector, and bring their advantages into full play,” the statement by Yunnan Chihong Zinc & Germanium said.

Chalco said in its statement that the agreement is only a principal one and subject to the approval of relevant authorities.

Beijing has made it a top priority to push ahead with supply-side structural reforms introduced by President Xi Jinping in 2015, and has been actively encouraging mega-mergers between state-owned enterprises (SOEs) to create “bigger and more competitive” conglomerates.

“This big deal signals the deepening of supply-side reform, in which industry consolidation is key to reducing excess capacity,” said Lin Yang, an analyst for the non-ferrous metal sector at Dongxing Securities.

He said one reason for the deal was the fact Yunnan is rich in non-ferrous mineral resources but is lagging behind in terms of SOE reform.

The Yunnan provincial government has been trying to catch up with the reforms process through asset restructuring, including spinning off quality assets from SOEs for listings and closing down the least competitive government-run enterprises.

On the other side, Lin said Chalco is the biggest player in the industry and also the largest shareholder of Yunnan Copper, so the deal came as no great surprise.

“Industry consolidation is key in supply-side reform. We should expect more deals to come among SOEs, or between SOEs and privately-owned companies.”

Chalco is involved in the exploiting, smelting, processing, and trading of non-ferrous metals.

Yunnan Metallurgical Group is based in the southwestern province of Yunnan, which is one of China’s largest production regions for non-ferrous metals, in particular copper, lead, zinc, germanium, tin, and aluminium.

Its Shanghai-listed unit Yunnan Chihong Zinc & Germanium controls the Selwyn Project, one of the world’s largest undeveloped zinc-lead deposits located in Yukon, Canada.

Meanwhile, its Shenzhen-listed unit, Yunnan Aluminium, is China’s largest listed producer of aluminium using hydropower.

In an earlier research report, Citic Securities predicted the non-ferrous metal sector would have the biggest potential for industry consolidation because it has “numerous” SOEs and the motivation to integrate resources and cut overcapacity.