Mining firms face challenges in foreign market

http://news.alibaba.com/article/detail/business-in-china/100185808-1-mining-firms-face-challenges-foreign.html

Published: 19 Oct 2009 13:02:01 PST

By Wang Xinyuan

Chinese mining firms are running into obstacles abroad as international competition heats up.

"Chinese companies are in a strong position to secure mining and metals investments around the world, but there are challenges from rising equity markets, dedicated resource funds, sovereign wealth funds and from investors in India and Japan," said Mike Elliott, Global Mining & Metals Sector Leader at Ernst & Young, at a media briefing held Monday.

A total of 56 percent of China's outbound acquisitions for diversified mining this year were focused on base metals such as iron, nickel, lead, zinc and aluminum. The two largest purchases came from CIC, China's sovereign wealth fund, which recently invested C$1.74 billion ($1.68 billion) in Canadian Teck Resources, a lead and zinc producer, and China Minmetals' $1.35 billion acquisition of assets from Australian OZ Minerals.

Australia and Canada accounted for 60 percent and 32 percent of China's outbound investment in 2009 mainly due to the two countries' low political risks.

This is the right time to invest, as many mining companies in North America, Africa and Australia are short of cash to finance new and current projects, said Michael Lynch- Bell, EMEIA Mining & Metals Sector Leader at Ernst & Young.

However, the rebounding equities market may take away Chinese companies' capital advantage, according to Elliott. The market value of the top 30 mining companies worldwide bottomed out at $735 billion in November 2008 and has bounced back to around $1.12 trillion, though still much lower than the high of 1.78 trillion in April last year.

The recovering market forced China's second largest nickel miner, Jilin Jien Nickel Industry and Canada's Goldbrook Ventures to raise their cash offering for Canadian Royalties last week by about 30 percent in order to win the approval from the company.

Understanding the interest of the counterpart is also key to a successful investment. About half of Chinese transactions in Australia were unsuccessful due to misunderstanding of the other party's intention, according to Elliott.

"A lot of asset sellers were interested in maintaining the ability to run the assets, while the potential partner sometimes planned to have control. That's when the negotiations would break down," said Elliott.

According to Australian law, foreign companies cannot own more than 50 percent of a local firm's equity unless it can be demonstrated to be in the national interest.

When there is an absence of capital in the market, it is easy to make it clear that the foreign investment would be in the national interest, said Elliot.

As more capital becomes available, these deals may not necessarily be seen to be in the national interest.