No longer can it be said that the Chinese are coming...they’ve arrived! They’ve just joined in the fight over Rio Tinto. Desperate for minerals and with huge volumes of cash, they have been scouring the world, almost for any mines going. The rewards for pouring untold amounts of cash into Africa have not been great — too many wars and too much disease. To the consternation of established interests they’re turning their attention to South America.
We heard about the Chinese moves down there from friends in Mexico City. Apparently they’ve been stacking up deals. When your central bank is sitting on $1.3 trillion there’s nothing a state owned company can’t go for!
Globally the Chinese miners are certainly not visible from here on anything like the scale of the Russians — yet. But, their emergence as mining powers in Africa and South America is what the shift eastwards in the world’s economic axis is all about! At the moment the shift seems to be causing some culture clashes. And pushing up prices for mines.
By the standards of the usual mega-bids of the mining world, the successful Chinese deals have been small. Toronto broker Davis’s senior partner and M&A analyst Bill Ainley was quoted saying in the Toronto Globe & Mail that it will be a while before China will succeed with a major takeover: "China is getting used to the transactional marketplace ... they're saying, 'let's get used to doing these deals at a smaller level.’"
The Chinese hinted that they want to be allowed into Canada’s resources. Opening remarks by Liu Guosheng from the Chinese Embassy in Canada at a recent Canada-China Mining Investment Forum spoke of metals and mining "cooperation".
Canadians are getting nervous
The Canadians are getting nervous. Another broker-friend in Toronto told Erin that unions and newspapers were lobbying for protection, fearing for jobs. This is after a stock quoted there, Canadian Northern Peru Copper, was bought for $450m by a Chinese state controlled company. News from Ottawa is that the government is considering guidelines.
What it says it has in mind, according to the local press, is something that would allow it to block takeovers by state-owned companies. The condition would be that the bids were motivated by political or "strategic" concerns. It also will take a tough look at foreign deals to make sure they are on market principles.
Given strict international rule-books these days, however, protectionism could be hard to apply. China Minmetals’ attempt to buy the Canadian Noranda mines a couple of years ago certainly failed. But, only because Noranda found a commercial solution. It merged with Falconbridge, which was then taken over by Swiss-based Xstrata.
Though "strategic" grounds might work. In 2005 the US Congress did certainly bock the sale of Occidental Petroleum (OXY) to the Chinese state owned CNOOC for ‘security’ reasons. White knight, Chevron was brought in to keep OXY in ‘domestic’ hands. China had kept low profile in major Western markets since.
Chinese gain from lower costs
The Chinese can work profitably where Western companies can’t. As broker Seymour Pierce’s analyst Charles Kernot says, their costs are lower. Apparently as much as 50% lower to open a new mine. They import cheaper Chinese equipment. They have experienced engineers... but at much lower wage costs.
South America was a natural move. Much simpler to get to than Africa, just across the Pacific. Easy for access for people and machinery and just as easy to ship ores back.
Northern Peru Copper, which operates in copper and gold in Peru, is the third Chinese acquisition in 2007. Before that came Peru Copper, and Monterrico and talks are going on with Petaquilla.
The question is, however, how will the Chinese cope on the ground? Striking local miners have repeatedly shut mines down in Mexico. The cost to the industry is put at knocking on for two and a half billion dollars. Will the Chinese companies want to bring in their own labour?
Also, Latin American local authorities have been wary about a low-cost mining approach to their environment. In September three towns in Peru voted to reject a $1.4bn development by China’s Zijin Mining Group. They were afraid of polluting the area’s rich agricultural lands — the source of workers’ current livelihood. Peru’s government is siding with the company. But the local population has forced out foreign miners before.
China found Africa easier. Its approach in Africa has not been via stock markets and investors. The deals have been with governments. Last year alone it pledged $20bn to finance trade and infrastructure. On the one hand it has been putting in roads and goods (and also, as alleged in a House of Lords debate last year, arms). With the other it has been acquiring rights to mines. After the US, it is Africa’s largest aid donor. Plus, Chinese trade with Africa is now valued at around $40bn a year.
China’s official Xinhua news agency recently said there were at least 750,000 Chinese working or living in Africa. Chinese investment has galvanised mineral production — from manganese in South Africa to uranium in Nigeria.
Investors are happy with the cash
Last autumn China signed a $5bn loan for the Democratic Republic of Congo, for example. This was for roads, hospitals, housing and universities. It is the largest Africa deal so far. The roads will include a link between the main Atlantic port and the southern mining heartland. A further $2bn will to go into rehabilitating the crumbling mining infrastructure and setting up local joint ventures.
Russian companies are generally taking a different approach. Cash for assets, not aid, seems to be the main message. But then, unlike China, Russia has plenty of minerals at home. The deals are more about putting money beyond the reach of the Kremlin.
Since 2004, four of Russia’s top metal companies — Norilsk Nickel, Rusal, Renova and Alrosa - have invested more than $5 billion in sub-Saharan Africa alone. In South Africa Norilsk has bought LionOre, and at one time had 20% of Goldfields. Norilsk Nickel’s top management has said it sees South Africa and Botswana as its continental bridgeheads.
Local companies are not happy. Whether China and Russia turn out to be better than Western companies for mining in Africa remains to be seen. South African companies will surely be finding expansion blocked by Chinese or Russians.
Of course, investors don’t mind. At the very least, the Russians in Africa and Chinese in South America are bringing in cash.
Keep bidding.
Erin and Isabel
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