Chinese miners build muscle to compete on world stage
A record wave of consolidation in China's mining industry is creating bigger companies that will have the muscle to compete with the likes of BHP Billiton for overseas acquisitions.
Even after Chinese domestic mining mergers reached $US19.6 billion ($A19.1 billion) last year, double the tally for 2011, the government wants to see more.
Easier access to capital and less Chinese competition for assets may make companies including China Minmetals and Aluminum of China more robust overseas buyers, Deloitte & Touche said.
That will help reverse a slump in acquisitions of mining assets outside China, which fell to a five-year low of $US2.9 billion in 2012, data compiled by Bloomberg show.
As the world's biggest importer of iron ore and coal, China relies on foreign sources of raw materials.
"With stronger and bigger Chinese players emerging, we could see a significant pick-up in the volume of overseas acquisitions," said Richard Tory, Hong Kong-based head of natural resources for the Asia-Pacific region at Morgan Stanley.
China's mining industry, while one of the world's largest producers of minerals, including gold and tin, is now peppered with thousands of smaller companies.
Minmetals, its largest miner by revenue, had assets of $US36.6 billion at the end of 2011 - dwarfed by BHP's $US122.1 billion.
"China's mining sector is too fragmented right now," said Eugene Qian, head of global banking for China at Citigroup, which advised Cnooc on its $US15.1 billion acquisition of Nexen, the biggest outbound takeover by a Chinese company. "It needs a lot of consolidation to create majors."
In January, the government said it would promote mergers in nine industries, including steel, aluminium and rare earths, to create "globally competitive" enterprises, according to a statement by the Ministry of Industry and Information Technology.
The announcement reinforced what has already begun. Excluding deals between parent companies and their subsidiaries, the largest domestic acquisition last year was Hunan Jiangnan Red Arrow's $US623 million takeover of Zhongnan Diamond.
"Creating national champions makes sense because mining is very capital-intensive, said Jeremy South, who oversees global mining advisory at Deloitte & Touche. "It also makes no sense for Chinese companies to be competing with each other for overseas deals."
Shenhua Group bought China State Grid Corp's electric-generation unit for $US8.2 billion last year. The Chinese state-owned miner is now studying an investment in Australia's Whitehaven Coal, two people with knowledge of the matter said. Whitehaven, part-owned by Nathan Tinkler, has a market value of $2.64 billion. The stock is trading at its lowest level since May 2009.
An official at Shenhua Group's press department in Beijing declined to comment. Whitehaven chairman Mark Vaile said in February that the company had not had recent dialogue with Shenhua.
Citic Group Corp, China's largest state-owned investment company, last month agreed to pay about $452 million for a 13 per cent stake in Australia's Alumina, partner in the world's biggest alumina business.
Other Chinese miners are also searching for deals. Chinalco Mining Corporation International may seek assets in South America, Africa and Asia, chief executive officer Peng Huaisheng said in Hong Kong in January. Parent Aluminum Corp of China was the most active overseas acquirer among Chinese miners in the past decade with $US14 billion of deals.
Minmetals could become one of the main Chinese buyers abroad, according to Mr South. Both Chinalco and Minmetals are state-controlled.
Zhaojin Mining Industry Co, China's fourth-biggest gold producer, is studying takeovers in South America and other regions and may announce a deal "in the near future", Chen He, assistant to the company's president, said in November.
Two gold companies that could attract Chinese interest are Saracen Mineral Holdings of Perth and Englewood, Colorado-based Alacer Gold, which has assets in Australia and Turkey, according to Troy Irvin, a Perth-based analyst at Argonaut Securities.
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