Chinese miners build muscle to compete on world stage
Even after Chinese domestic mining mergers reached $US19.6 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.
Frequently Asked Questions about this Article…
The Chinese government is promoting mergers in capital‑intensive sectors including steel, aluminium and rare earths to create 'globally competitive' national champions. The industry today is highly fragmented, so consolidation aims to produce bigger, better‑capitalised companies that can compete overseas. For investors, that means watching for larger state‑controlled players pursuing domestic and cross‑border deals.
Yes. Analysts and advisers in the article note that consolidation will give Chinese miners easier access to capital and reduce domestic competition, making firms such as China Minmetals and Aluminum (Chinalco) more robust overseas buyers. That could put them in a position to compete with global majors like BHP Billiton for attractive mining assets.
Outbound activity dipped: acquisitions of mining assets outside China fell to a five‑year low of US$2.9 billion in 2012. However, the wave of domestic consolidation and bigger Chinese players emerging is expected to potentially reverse that slump and lift overseas deal volumes.
The article highlights state‑controlled groups such as China Minmetals (Minmetals), Aluminum Corp of China (Chinalco), Shenhua Group and Citic Group as active or potential overseas buyers. Minmetals and Chinalco are singled out as candidates to become main Chinese buyers abroad.
Yes. The article cites examples: Shenhua Group studied an investment in Australia’s Whitehaven Coal, and Citic Group agreed to buy about a 13% stake in Alumina, a partner in the world’s biggest alumina business. These moves show clear interest in Australian resources.
Chinese miners are seeking access to raw materials that China imports heavily, notably iron ore and coal, and also minerals like gold and tin. Companies such as Chinalco said they may seek assets in South America, Africa and Asia, while gold producers like Zhaojin are studying takeovers in South America and elsewhere.
The article names Saracen Mineral Holdings (Perth) and Alacer Gold (based in Englewood, Colorado, with assets in Australia and Turkey) as two gold companies that could draw interest from Chinese buyers, according to a Perth‑based analyst.
Investors should monitor government merger policies, deal announcements from state‑controlled groups (like Minmetals, Chinalco, Shenhua and Citic), and takeover approaches for listed targets (for example Whitehaven and Alumina were mentioned). These moves can affect share prices of potential targets and change competitive dynamics in global mining M&A.
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