The rise, and rise, of Chinese miners

Thirteen of the world's 20 top-performing big miners are based in China, thriving amid profits, and hot on the merger and transactions trail.

JOHANNESBURG -

Mining stocks continue to lead the attempted recovery in global equities; from a country perspective, mining leadership is coming mainly from China, and from a commodities perspective, from specialist miners of zinc, nickel, tin, coal and copper. Gold and primary silver miners are pretty much out of the limelight for now, nursing several months' worth of speeding tickets.

Where the broad-based MSCI Barra dollar index for all global equities has risen 28% from recent multi year lows, the world's top 100 miners, measured by market value, have increased by an average of 92%. A good deal of the outperformance is explained by the general surge in Chinese stocks; the broad CSI 300 is now up by 67% from its lows; the 81% recovery in the Micex Russia has also played a part. Russian potash miner Uralkali has bounced by more than 300% from its price lows, and Polyus, the country's leading gold digger, by more than 200%.

The 20 top performing big mining stocks list is dominated by Chinese names such as Sichuan Hongda (zinc and derivatives), which has seen its stock price rise more than 300% from lows, Ji Lin Ji En (nickel), and SDIC Xinji (power generation, coal, and other), which recently announced that it anticipates that its net profit for the first quarter of 2009 would increase by over 50% compared to that of the same period for 2008.

Other top performers include Shanxi Lu'an (coal), Shanxi Xishan, (coal and power generation), Yunnan Chihong (zinc and other), Shandong Gold, Yunnan Copper, Jiangxi Copper, Tongling (copper and other), Shenzhen Zhongjin (lead, zinc and other), Western Mining (base metals), and Shanxi Lanhua (coal and fertilisers).

Chinese mining companies, which often have close ties to government, at all levels, are benefiting heavily from China's USD 585bn stimulus package, prompted by the so-called global markets crisis. At the same time, the strong financial position of Chinese mining companies, and indirect access to the world's biggest country foreign reserves, has seen a number of vulnerable mining companies in other jurisdictions scrambling to settle deals with Chinese entities.

The mood is buoyant indeed in Chinese mining investment circles, as seen in this week's news that China Zhong Wang, a big aluminium producer, aims to list in Hong Kong in May, selling about a quarter of its enlarged equity to raise a targeted equivalent of USD 1.6bn.

In terms of size, the leading (proposed) mining transaction out of China involves Rio Tinto, which, with massive net debt of USD 38.17bn on 31 December 2008, wants to raise USD 12.3bn from smaller rival Chinalco by selling equity stakes in some of Rio Tinto's most prized aluminium, copper and iron ore assets. Chinalco holds 38.6% of listed Chalco, a big Chinese aluminium producer, and also 26.6% of listed Yunnan Copper.

Rio Tinto also wants to sell convertibles worth USD 7.2bn to Chinalco; if these hybrid debt-equity instruments are indeed sold and one day converted, Chinalco's stake in Rio Tinto would increase to 18%. Alcoa, a US-based aluminium producer, and, like Rio Tinto, also somewhat challenged by debt issues, in February jointly announced with Chinalco that the duo "intend to explore opportunities to expand their commercial relationship by identifying strategic ventures that will benefit from the companies' complementary strengths in bauxite, alumina, aluminum and fabricated products".

In 2007 Rio Tinto paid a gigantic USD 38bn in cash for Alcan, trumping an earlier bid from Alcoa. This year has seen Rio Tinto sell USD 3.5bn in bonds, at fairly expensive coupons over five and ten years. In other bids to shore up it balance sheet after the Alcan experience, Rio Tinto has in 2009 sold some fine assets, separately to the proposed Chinalco deal: Jacobs Ranch for USD 761m; potash assets for USD 850m, and certain iron ore assets for USD 750m.

This week, it emerged that Rio Tinto planned to sell its 27% percent stake in Nonfemet International (China-Canada-Japan) Aluminum, a Chinese aluminium processing joint venture, to its partner, Shenzhen Zhongjin. Rio Tinto acquired the stake as part of the Alcan acquisition; this week Shenzhen Zhongjin said the transaction was "required by Alcan's global industry adjustment," in a statement in the official China Securities Journal. In late 2008, Rio Tinto agreed to sell its half in a Chinese aluminium smelting joint venture to its partner Qingtongxia Aluminium.

The global aluminium sector remains trouble prone. During the so-called commodities super cycle from early 200 to mid-2008, aluminium prices increased the least in percentage terms, within the base metals complex. By the same token, aluminium has shown the smallest percentage in price recoveries since multi year lows around five months ago. Lead leads with a 71% price recovery, compared to aluminum at the other end of the scale with 13%.

For years China has ranked as the top country producer (and consumer) of aluminium. While Chinese mined aluminum oxide (alumina) is at the higher end of the global industry cost curve, electrical smelting, the single biggest cost in primary aluminium production, is available with competitive advantages in China. The country has shown an ability to bring new power stations on line on time; huge markets for finished primary and extruded and formed product lie within close proximity.

The likes of Rio Tinto and Alcoa may have little choice other than to forge direct relationships at different levels with Chinese firms. Russia's debt-soaked Rusal has made little in the way of advances in this context, and is instead pre-occupied with legal and other challenges in Guinea, Nigeria and Jamaica. Last month Rusal won a limited standstill on debt of USD 14bn. Beyond the aluminium space, Chinese miners have been active across the world; Australia is often a favourite, both for its relative proximity and fabulous natural endowments.

Earlier this year, Shenzhen Zhongjin acquired a 50.1% stake in Australian base metals miner Perilya; Minmetals has struck a deal worth more than USD 1bn to take over most of the assets in the debt-troubled OZ Minerals, and Australian iron ore company Fortescue was recently involved in equity deals to Hunan Valin, selling AUD 558m worth of stock (225m shares) on 25 February when Hunan Valin also bought a further 275m Fortescue shares from an existing shareholder, and, on 8 March, by selling another 35m new Fortescue shares to raise AUD 87m. Other examples include European Nickel's multi-level partnership with China Tianchen Engineering Corporation, and Arafura Resources announcing a deal this week with Jiangsu Eastern China Non-Ferrous Metals Investment Holding.