Chinese Raw Material Companies Continue on Acquisition Trail

Although all the news lately has focused on Chinalco’s recent financing deal with Rio Tinto, Chinese raw material firms are still looking far & wide for new opportunities, as discussed in our December article : China stocks up on raw materials. Other state owned / controlled corporations are looking at South Africa & South America as well as assets in Australia. As there is flurry of activity & reporting on the Rio Tinto deal, a look at some of the other activities would is warranted.

China has a long history of investing in operations in South America, back in 1992, we saw the first venture outside of mainland China when Capital Steel (now Shougang) acquired the Peruvian state owned iron ore mining concern HierroPeru. This company now operates as Shougang Hierro & it is currently ramping up its expansion activities in the region. At the time the company was the child of Den Xiopeng and its overseas venture was viewed as an experiment to see how smoothly a transition could be made from a closed, planned economy into one with wide-ranging connections to international markets.

Needless to say, the rest is history, as we have seen Chinese state backed institutions making deals on a global basis in oil, minerals & other strategic resources. Shouganh Hierro has recently announced that it will invest $ 1 billion in 2009 in order to expand production at its plant in southern Peru.

“The investment of $ 1 billion will help expand the plant’s production capacity by 10 million tonnes per year,” said Chief Executive, Wu Bin after meeting with Peru’s President Alan Garcia.

At the same time, Shougang Concord (the international arm of Shougang Group), has also announced the acquisition of 12.5% of coking coal producer Fushan International Energy Group, thus allowing it to secure coking reserves at a knock down price. This mirrors the strategy that Mittal have been following for the last five years, morphing from a pure steel play into a fully integrated producer (ore, coke,smelting & rolling).

Carrying on with this mandate, Chinese concerns have invested significantly in the mid-west region of Australia in the last year. Sinosteel acquired Midwest Mining through a hostile $ 1.47 billion takeover, defeating an attempt by local producer Murchison to merge the two companies, while Anshan Iron & Steel is increasing its stake in Gindalbie Metals from 12 per cent to 36 per cent. Shougang has also secured 40 per cent of Mt Gibson Iron Ore, one of Australia’s landmark ore mining firms.

This Australian activity has a knock on effect too, discounting the Rio Tinto story. Sinosteel and Anshan are both equity shareholders in local operator Yilgarn, which is pushing to develop both port & rail facilities in mid-western Australia on the Oakerjee project. This has turned into a political quagmire at State level, as local interest vie with the Chinese backed plans over the $ 2 billion project, as reported in The Australian.

Back to Peru & Chinalco is not resting on its laurels, rumours abound that it will be investing more than $ 1.5 billion on construction of its Toromocho copper mine. On completion, the annual copper output of Chinalco will increase to 200,000 tons, and Peru’s copper export will grow by 25%. Toromocho boasts a claimed reserve of 12 million tons of copper & annual production could reach as much as 19% China’s annual total requirements. Chinalco acquired all the outstanding shares in of the Peru Copper Corporation of Canada in August 2008, for a reputed $ 860 million.

Now following a recent feasibility study on the Galeno copper project showed that over a 20 year mine life, it will produce 144,000 tonnes of copper concentrate annually, averaging more than 200,000 tonnes per year in the first 5 years, Chinese company Minmetals Corporation, which owns 60% of the Galeno project is looking for financing to exploit the mine. It is estimated that Chinese firms are now commited to investing over $ 6 billion in Peru’s mining sector in the next five years.

Minmetals enjoyed a bumper 2008, having reported recently that for the ninth consecutive year, the country’s largest metals and minerals producer reported a growth in business and profits. This has led Minmetals to announce that it will pursue potential opportunities for overseas mergers and acquisitions in the ferrous and non-ferrous metal sectors.

“New opportunities for overseas investment and acquisitions are emerging as many international mining companies hit by the financial crisis see their market values shrinking,” stated Zhou Zhongshu, president of the company last week in Beijing.

The company’s sales revenue rose 28 percent year-on-year to $ 27.7 billion in 2008, while profit remained flat at $ 1.1 billion. Revenue growth this year could run into some rough weather as prices of metals have been falling due to the economic slowdown, Zhou said, which would seem to be the spur for using acquistions as a bolster to bottom line growth. This can already be seen as Minmetals is courting Chile & state owned miner Codelco, the world’s biggest copper producer, is working with Minmetals to develop new business and exploration opportunities in Latin America and in Africa.

I can see this trend continuing, as previously noted, Chinese firms have been looking at oil & gas reserves in Central Asia, Africa & South America. Deep pockets funded by a currently strong US dollar & vast foreign currency reserves can only lead to more acquisition activity, possibly at higher levels.