China’s mining industry should draw lessons from the losses and gains of “Going Global”
Source: www.mlr.gov.cn Citation: www.gtzyb.com Date: October 22, 2015
“Though investment in the mining industry has entered the ‘winter’ period, in-depth readjustment in the industry will still bring business opportunities.” on the afternoon of Oct. 20, in the sub-forum “China’s Enterprises Outbound Investment” of CHINA MINING 2015, 8 Chinese and foreign guests, 7 enterprise representatives saw eye to eye to the above notion, and at the same time proposed that China’s mining industry should weigh the losses and gains of “going global”, and seek business opportunities in the period of “winter”.
The winter of mining industry chilled us present today. According to Ernst & Young statistics, the global M&A in the mining industry in the first half of 2015 decreased to 12.7 billion US dollars, a decline of 30% that of last year. However, for mining industry, it was of equal importance to build confidence and draw lessons.
China’s geological exploration units, mining companies and investment organizations once surged to move into the world market. Now with the ebbing mining boom, many mining companies were struggling in adversity. Progress could only bring through introspection. “We must sum up the experience of the failures of forging overseas so that we can regain momentum”, Wang Side, Vice President of Chinalco Resources Corporation analyzed the causes for the failures of outbound investment in this way.
First, we made a timing error. Since the global financial crisis in 2008, most of Chinese companies have mistaken that the situation has reached the bottom. 80% of the geological exploration units, mining companies chose to move into the world market from 2007 to 2012. In retrospection, those units bought a little high, leading to the rise in market value on the part of only one-digital number among the more than 100 mining companies that held and participated in the stocks overseas, the average market value declining more than 80%. Wang Side said that the best time for buying and selling was various for different mines and we needed to seek opportunity in times of crisis.
Second, we set a wrong target. China’s mining companies acquired and merged 110 iron ores in Australia where the western desert area has no access to convenient transport and infrastructure. It would be difficult to put the iron ores under operation if railways are still not available in the future. Moreover, vanadium titano-magnetite was not marketable ore in foreign countries but still of much use in China. It was a rarity that companies ever made successful investment in this type of ore in Southeast Asia and Africa.
Third, we made erroneous values judgment. In the due diligence of overseas project, geologist was the prior option for Chinese companies, which was a matter of course in judging the prospect and values of mining fields. However, it was far from enough only by depending on the judgment of geologists to decide whether the project deliver benefits or whether it was development-friendly or not. Experts in selecting and purchase, finance, trade, law and culture should participate in the judgment as well. Neglecting of the infrastructure and community-related problems would make it difficult for the huge investment to turn into cash flow.
After putting the overseas mining industry in perspective, Mr. Liu Yikang, Director of Sinomine Resources Exploration Co., Ltd. pointed out that the large-scale failures of the investment in overseas mining industry mainly attributed to, apart from lack of experience of operating overseas, the negligence of due diligence in the M&A. This was indicative of the lack of investment in the due diligence of the locals. He proposed that dependable due diligence should be done, different plans should be adopted in the event of low or high risk environment and use of domestic ways of thinking and operating cope with overseas situations should be prevented.
“In this sense, failure or success of overseas investment in the mining industry are not related to much of the investment environment but to how we cope with the projects with different risk degrees”, Liu Yikang said. (Qiao Siwei)
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