As a general rule, the most successful man in life is the man who has
the best information
“When
I entered the business world, three-fourths of the world was closed –
China, Russia, Vietnam, India, most of Africa… In 2010, the entire
world is wide open, the developing world is growing twice as fast as the
developed world and there’s still arguably
several billion people out there that will modernize and progress.”
Caterpillar’s CEO Doug Oberhelman
“The
mining industry is printing money: Citigroup expects it to have aggregate net
cash of $70 billion by the end of 2012.” Wall Street
Journal
The Competition
“Continued
growth in consumption resources is being driven by growth in China and the
rest of Asia. Chinese companies are increasingly acquiring assets, as are
Indian companies, prompting other global miners into a race to secure mineral
assets of their own.” George Fang, Standard Bank’s
Head of Mining and Metals China
The global mining industry is facing stiff new
competition in getting deals done. The new competitor’s for the
world’s resources have a mandate to secure long term resource deals for
domestic use and have the financing capabilities any major mining company, or
for that matter any government, would be envious of.
China was never a major investor in foreign mining
deals - that has recently changed with China now a very active and
increasingly aggressive investor.
China’s state owned enterprises (SOE) and
sovereign wealth funds (SWF) were armed with hundreds of billions of US
dollars from the country’s foreign reserves and sent out to scour the
globe for resources - they went on the hunt to fuel China’s exploding
economy. China wants to diversify out of the massive US dollar component of
its Foreign Reserves so the SOE/SWFs have no problem dealing in straight cash
and operating in what some might consider high risk areas. The Chinese also
have a longer term horizon for their ultimate payoff because they are mostly
after off-take supply agreements from early stage development projects.
According to a recent PricewaterhouseCooper
(PwC) report on M&A activity in the mining sector in 2010, six percent of
the world's mining deals involved Chinese acquirers. Around 62% of China's
deals were focused on projects within China and another 16% were in adjoining
Asian countries. For the decade ending in 2010, PwC counted a total of 400
Chinese deals worth US$48 billion – at the start of the referenced
decade China was a negligible player in M&A.
PwC also said they expect Chinese companies to be
more active in M&A in 2011. PwC thinks part of that increased activity
will be consolidation of the country's fragmented domestic mining sector, but
a large part will also come from outside China where they control only one
percent of overall production.
Despite a few high publicity rebuffs the Chinese
have completed a few deals in North America:
- CIC
invested $1.5-billion for a 17.2-per-cent stake of Vancouver-based Teck Resources Ltd
- The
Aluminum Corp. of China picked up Peru Copper Inc., a Canadian miner
with assets in South America, for $779-million
- China’s
CRCC-Tongguan Investment Co. bought
Vancouver’s Corriente Resources Inc. for
$549-million
According to Paul Murphy, head of Asia Pacific
Mining & Metals at Ernst & Young, Chinese investors have shifted
their focus from Australia (In 2009, China became Australia's largest export
market, surpassing Japan) and Canada to higher risk destinations which
include Brazil (In 2009, China displaced the United States as Brazil’s
top trade partner), Ecuador and Africa.
Rising from $2 billion in 1999 China's trade with
Africa is set to top $110 billion by the end of 2011.
Here are some of the African deals Chinese firms
have become involved in:
- China's
CNOOC Ltd and Ghana National Petroleum Corp (GNPC) havesubmitted
a $5 billion bid for Kosmos Energy LLC's
assets
- Jinchuan
Group Ltd.'s $878 million takeover of South
African platinum explorer Wesizwe Platinum Ltd
- In
September 2010, Ghana signed a $12.87 billion loan with two Chinese banks,
China Development Bank and China Exim Bank, to
fund its oil, gas, agricultural and infrastructure projects
- July 2010,
Aluminium Corp of China Ltd (Chalco) agrees to invest $1.35 billion in a Guinea
joint venture to develop the Simandou project,
which partner Rio Tinto claims is the world's largest undeveloped iron
ore deposit
- July 2010,
China's Shandong Iron & Steel agrees to a $1.5 billion deal to buy into
African Minerals' Tonkolili project in Sierra
Leone
- April
2010, China Nonferrous Metal Mining Company (CNMC) plans to invest $600
million in Zambia
in 2010 and 2011. CNMC operates the Luanshya
copper mine and Chambishi smelter in Zambia,
Africa's biggest copper producer
- Bloomberg
reported, May 29th 2011, that China National Gold Group Corp., the
state-owned company, wants to invest in gold projects in Africa
as it expects bullion to trade near record levels for the next three
years
- Citic
Group, China’s biggest state owned investment company, and
partners, agreed to buy Gold One International Ltd. for about A$444
million ($469 million) to gain assets in South Africa
- In
November 2010 China pledged to grant African countries $10 billion in
low-interest development loans over the next three years, establish a $1
billion loan program for small and medium-size businesses, and forgive
the remaining debt on certain interest-free loans that China has granted
less developed African nations in the past
- China and
South Africa signed more than 10 deals in mining, finance, nuclear
energy and other sectors during a January 2011 visit by South African
President Jacob Zuma
- China
Railway Group began talks in August 2010 with South Africa's government
over a proposed US$30 billion high-speed rail project between
Johannesburg and the eastern port city of Durban
- China
Railway Materials Commercial Corporation acquire a12.5% stake in African
Minerals Limited (AML) for US$244m
- China
National Nuclear Corp announced it was in talks to build a nuclear power plant in South Africa
last year
- Standard
Bank is advising China Guangdong Nuclear Power in similar negotiations.
Major deals have been signed in the mining, consumer goods and auto
industries
Thanks to the trillions of foreign exchange reserves
it currently holds China offers loans at highly competitive interest rates.
For example, the Export-Import Bank of China (Exim
Bank) gave the Angolan government three loans at interest rates ranging from
LIBOR (London Interbank Offered Rate - the rate banks charge each other on
loans) plus 1.25 percent, up to LIBOR plus 1.75 percent, as well Exim Bank offered generous grace periods and long
repayment terms. Commercial lenders - such as Standard Chartered Bank - have
charged Angola LIBOR plus 2.5 percent or more, with no grace period and a
faster repayment schedule.
Reconstruction in war battered Angola was helped by
three *oil backed loans and then Chinese companies came in and built roads,
railways, hospitals, schools, and water systems. Nigeria took two loans from
China to finance electricity generating projects, the Chinese built a
hydropower project in the Republic of the Congo that’s repaid in oil
and built another hydropower project in Ghana that’s repaid in cocoa
beans.
*This kind of deal making isn’t unusual for
China - China has plans to construct its high speed rail line through Asia
and Eastern Europe in order to connect to the existing infrastructure in the
European Union (EU). Additional rail lines are planned into South East Asia
as well as Russia – this will likely be the largest infrastructure
project in history. Financing and planning for this monumental project is
being provided by China – who is already in negotiations with 17
countries to develop the project . In return
the partnering nation will provide natural resources to China.
Pan-African bank, Ecobank
Transnational Inc. opened a China desk - its purpose - to ease the flow of
Chinese loans for African infrastructure projects. The desk includes two Ecobank employees and two senior staff from the Bank of
China and the bank will offer a full range of banking services to Ghanaians,
Africans and the Chinese as it allows the two continents to overcome the
language and the cultural barriers.
“Africa
is a strategic market for China and we are anticipating huge volumes.”
Henry Ampong, Ecobank’s global account manager
Ecobank
will systematically roll out the services to its other branches on the
African continent once the challenges of the pilot are dealt with.
China is building special trade and economic
cooperation zones in Africa which provide a promising new approach to
sustainable industrialization. Seven such zones are in the works: two in
Nigeria, one each in Egypt, Ethiopia, Mauritius, Zambia and maybe one in
Algeria, (Mauritius-JinFei, Nigeria-Ogun, Nigeria-Lekki, Zambia-Chambishi/Lusaka, Egypt-Suez,
Ethiopia-Eastern). China has more than one hundred such areas and they were
an important part of China’s early development
Economic zones allow countries to improve poor
infrastructure, inadequate services, and weak institutions by focusing
efforts on a limited geographical area. China's venture capital fund for
Africa, the $5 billion China-Africa Development Fund, has taken equity shares
in three of the seven planned zones. A new $1 billion fund for small and
medium enterprises in Africa, will help African
entrepreneurs set up businesses in the zones.
Conclusion
In a decade China’s economy will be much
different than today’s. Instead of being mainly an export driven one it
will rely more and more on internal consumption as the countries massive urbanization growth fuels a
rapidly expanding middle class. To feed this growth in consumption China is
taking a leading role in the developing world.
I suggest PwC’s six and one are perhaps just
the tip of the iceburg regarding Chinese M&A
activities and like an iceburg’s true size
the reality of China’s deal making is mostly out of sight. Many of the
deals China signed would not show up in the PWC report because they take a
non-controlling position – China funds undeveloped projects for
off-take supply agreements without purchasing equity in the controlling
company and often deal on a government to government level regarding loans,
infrastructure build out and using the recipient countries resources for
payback.
The Chinese are making massive loans, building huge
infrastructure projects such as high speed rail, dams and other
projects like bridges, roads, schools and hospitals. While SOEs and SWFs are
making deals for the countries resources other Chinese companies are building
the necessary infrastructure that every country needs to build a future for
its citizens. This is the key to China’s overseas investments - adding
infrastructure capacity makes their massive, most often early stage, resource
investments viable and creates a long lasting economic legacy for the host country.
The overall Chinese package is very attractive and
there are a lot of resource rich countries taking the Chinese up on their
offers.
“While
the West supports microfinance for the poor in Africa, China is setting up a
$5 billion equity fund to foster investment there. The West advocates trade
liberalization to open African markets; China constructs special economic
zones to draw Chinese firms to the continent. Westerners support government
and democracy; the Chinese build roads and dams.” Isaac Twumasi Quantus
The fact that China is intent on acquiring
Africa’s (and many other countries) resources for itself should be on
everyone’s radar screen. Is it on yours?
Richard Mills
Aheadoftheherd.com
If you're
interested in learning more about the junior resource market please come and
visit Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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