China’s Mining Companies Begin Moving Overseas

by Tony D'Altorio

China's Mining Companies Begin Moving Overseas

by Tony D'Altorio, Investment U Research

Monday, April 11, 2011

Not long ago, I wrote about how Chinese oil companies like PetroChina (NYSE: PTR) and CNOOC Ltd. (NYSE: CEO) are shifting their focus beyond their own backyard and have begun to expand overseas.

Over the past decade, Chinese oil companies have been snapping up energy-rich assets around the globe in order to fill China's growing need for resources. Just last year alone, China-based firms spent more than $30 billion in overseas deals.

In contrast, the world's largest importer of commodities, like copper and iron ore, spent a paltry $4.5 billion on overseas mining deals. According to PricewaterhouseCoopers, this comprised only 6% of global mining transactions in 2010. The discrepancy lies in the fact that China became a net oil importer in 1993. The country only recently became a net importer of metals and minerals. This transition has awakened the dragon, and China's largest mining firms seem determined to make up for lost time.

Recent acquisition activity suggests that the process is already well underway. In January, Shenhua Group, the parent of China's largest coal producer - China Shenhua Energy Co. (OTC: CSUAY.PK) - made a joint bid for Mongolia's Tavan Tolgoi coal mine. The company, together with Japan's Mitsui & Company, Ltd. (Nasdaq: MITSY) and Peabody Energy (NYSE: BTU), bid for one of the world's largest coal reserves.

In addition, Hong Kong-listed Minmetals Resources issued a $6.5-billion unsolicited bid for Equinox Minerals (OTC: EQXMF.PK), a mid-tier copper producer based in Zambia. While the bid had been rejected, it stands as the latest evidence of the country's ambition to become the bigger player in the global copper industry.

A Tough Start for Chinese Mining Companies

Chinese mining companies had made a few attempts into overseas expansion in the past few years. However, these takeover attempts usually ended in failure. The highest-profile bust occurred with Chinalco, also known as the Aluminum Company of China (NYSE: ACH) in 2009.

In early 2008, the company purchased a large stake in Rio Tinto (NYSE: RTP). It pressed its advantage as the financial crisis and a high debt level seemed ready to devour Rio Tinto. Under the terms of a deal signed in 2009, Chinalco was set to double its stake in Rio at 19% and to acquire board seats in return for cash.

Then the economic conditions changed. Prices for the metals produced by Rio began to rise in price. In effect, Rio Tinto was able to bail itself out. The company abandoned the $19.5-billion investment deal with Chinalco. Meanwhile, the Chinese firm was left with shares of Rio that have yet to reach the buy price from early 2008.

Chinese Mining Companies Are Finally Catching a Break

Despite the setbacks, conditions are shifting in favor of Chinese mining firms. Chinese manufacturers are now paying higher prices for raw materials as the country's own demand is driving global market prices.

Just recently, the Chinese government began to encourage its domestic companies to look for acquisition opportunities as its demand for metals continues to increase. This has intensified China's push to ensure a long-term supply of key metals while freeing itself from the punishing prices demanded by global mining firms.

Chinese mining companies are expected to follow in the steps of their oil brethren. Many observers of the global mining industry believe merger and acquisition activity is going to swell in the coming years. The head of metals and mining for Ernst & Young, Mike Elliott, said, "In five years' time, when you talk about the major diversified global mining houses, there will be at least one or two that will be based in China."

Of course, Chinese miners still face political obstacles abroad. Some countries just simply will not allow China to take over a major mine or oil field needed for strategic purposes.

But in many countries, particularly Africa, money is desperately needed. And China has plenty.

As a result, the deals will continue, and smart investors should continue to look for companies with access to cash and the need to expand in order to compete.

Good investing,

Tony D'Altorio

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