Private firms eye overseas mining sector

As private Chinese companies invest more in overseas resources projects, they are seeing advantages from a new source: the acceleration in the global use of the renminbi.

Private mining companies, with the support of domestic banks, should seize opportunities they now have in the overseas resources industry, Guo Jianwei, deputy director-general at the monetary policy department of the People's Bank of China, said at the 2012 China Mining Expo in Tianjin over the weekend.

He also called on banks to pursue a "going-global strategy" and provide complementary services to those companies. Guo said the global use of the renminbi will encourage private companies to make direct investments in foreign countries, adding that domestic banks should prepare for that eventuality.

From 2008 to 2009, private companies invested heavily in the overseas mining industry. But because of the complicated approval process companies must go through to use foreign currency in overseas investments, they also missed many opportunities, Guo said.

That obstacle will be overcome as the renminbi becomes more internationalized, enabling private Chinese companies to make direct investments both domestically and abroad using a renminbi financing system. That will help feed investors' enthusiasm for the overseas mining industry and accelerate the internationalization of the renminbi.

By the end of September, 97.8 billion yuan ($15.5 billion) worth of loans had been approved to be issued from the overseas yuan-financing system, according to figures from the People's Bank of China, the country's central bank.

China began to invest more overseas in recent years, and the percentage of that investment coming from private capital has become larger as well.

In 2011, private companies made non-financial direct investments worth $30.78 billion. That was equal to 44.9 percent of the total investment from China, a percentage up 15.4 points year-on-year, according to statistics from the Ministry of Commerce.

About 13,500 domestic companies have established up to 18,000 companies abroad, among which about 90 percent are private enterprises. Their investments mainly go into mining.

Private mining-exploration companies in China had 14.05 billion yuan in annual revenue on average last year, four times more than the figure for 2007.

The average value of those private mining companies' assets increased from 2.7 billion yuan in 2007 to 18.47 billion yuan last year, according to figures from the All-China Federation of Industry and Commerce.

"The mining sector has become the fourth most attractive industry for China's private investors following the trading, services and financial industries," Yang Yihang, deputy director at the Ministry of Commerce's investment promotion agency, said during the expo.

"In the next 10 to 20 years, China's mining investments will continue to increase strongly as the country will continue to use a lot of mining resources," said Gan Fei, an official with the Chinese Academy of Land and Resources Economics.

He said China is making ever-larger private investments into the mining industry and those investments are coming in more and more diverse forms.

Growing investments

Private Chinese companies have three main means of investing in the overseas mining industry: exploring mines directly, pursuing mergers and acquisitions, and providing outsourcing services.

Xiangguang Copper Co Ltd, a privately owned copper smelting, refining and processing group based in Shandong province, announced plans in February to acquire a 10 percent stake in Spain's EMED Mining Co Ltd for $15 million.

Rongtai International Group Holdings Ltd, a steel trader and shipping company in Fujian province, bought eight iron ore mines in Australia in August, enabling steel mills in the province to use iron ore produced by a local company.

To save expenses on raw materials, the smelters and processing companies have been expanding into the upstream mining business.

During the first half of 2012, China made 64 mining investments, involving $1.42 billion, into 32 countries. The projects pertained to coal and metals, said Chen Xianda, vice-chairman of the China Mining Association.

"Overseas mining investment in the first half has been slowing down," he said. "In the mining sector, China's investments in Australia have been reduced while the country's investments in Latin America have been increasing."

China's private investments in the overseas mining industry have been welcomed as the global economy continues to recover, Yang said.

And international investment is slowing down because of the global financial crisis, opening opportunities to private capital in China.

The Chinese government has meanwhile carried out a series of policies to encourage private capital to invest in the resources-mining industry.

The Ministry of Land and Resources, together with the All-China Federation of Industry and Commerce, has published instructions that call for private capital to be invested in the resources industry, encouraging private investors to participate in the exploration for non-conventional sources of oil and gas.

Gan said the policies have made it easier for private capital to enter the resources market.

In recent decades, various private Chinese companies have acquired experience and skill in resources exploration. They are capable of participating in the mining business at a higher level and on a larger scale.

The privately owned Jinan Yuxiao Group Co Ltd, formerly a real estate developer, applied in late October to establish five more mining subsidiaries in Mozambique, according to reports of the China Economic Herald.

Since establishing its business in the country in 2005, it has acquired seven mining rights and 60 exploration rights.

The company will start making profits by the end of the year from it's investments in two nonferrous metals mines in Africa, said Wu Tao, chairman of the company.

It also owns exploration rights in gold, iron ore and coal mines in Africa, as well as similar sorts of operations.

"We usually cooperate with listed companies or State-owned companies in the overseas mining businesses after we get exploration rights because those require huge capital investments in long-term exploration and mining abroad," Wu said.

Compared with Chinese State-owned companies, which have seen many failures in their attempts to make acquisitions in the overseas mining market, experts said private companies are finding it easier to win approvals from foreign governments for energy and resources investments.

Experts, though, also reminded private companies to do more to avoid risks when undertaking overseas mergers and acquisitions.

"They need to prepare detailed strategic plans and conduct enough preliminary research before reaching a formal contract," said Tong Junhu, general manager of China National Gold Group Corp's overseas development department.