China Seen Creating Its Own BHP to Boost Purchases Abroad

A record wave of consolidation in China’s mining industry is creating bigger companies that will have the muscle to compete with the likes of BHP Billiton Ltd. (BHP) for overseas acquisitions.

Even after Chinese domestic mining mergers reached $19.6 billion last year, double the tally for 2011, the government wants to see more. Easier access to capital and less Chinese competition for assets may make companies including China Minmetals Corp. and Aluminum Corp. of China more robust overseas buyers, said Deloitte & Touche LLP.

That’ll help reverse a slump in acquisitions of mining assets outside of China, which fell to a five-year low of $2.9 billion in 2012, data compiled by Bloomberg show. As the world’s biggest importer of iron ore and coal, China relies on foreign sources of the raw materials.

“With stronger and bigger Chinese players emerging, we could see a significant pickup in the volume of overseas acquisitions,” said Richard Tory, Hong Kong-based head of natural resources for the Asia-Pacific region at Morgan Stanley.

China’s mining industry, while one of the world’s largest producers of minerals including gold and tin, is now peppered with thousands of smaller companies. Minmetals, its largest miner by revenue, had assets of $36.6 billion at the end of 2011 -- dwarfed by BHP’s $122.1 billion, according to data compiled by Bloomberg.

Photographer: Nelson Ching/Bloomberg

A cyclist rides past the China Minmetals Corp. headquarters in Beijing. Minmetals, China's largest miner by revenue, had assets of $36.6 billion at the end of 2011-- dwarfed by BHP’s $122.1 billion, according to data compiled by Bloomberg. Close

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Photographer: Nelson Ching/Bloomberg

A cyclist rides past the China Minmetals Corp. headquarters in Beijing. Minmetals, China's largest miner by revenue, had assets of $36.6 billion at the end of 2011-- dwarfed by BHP’s $122.1 billion, according to data compiled by Bloomberg.

Globally Competitive

“China’s mining sector is too fragmented right now,” said Eugene Qian, head of global banking for China at Citigroup Inc., which advised Cnooc Ltd. on its $15.1 billion acquisition of Nexen Inc., the biggest outbound takeover by a Chinese company. “It needs a lot of consolidation to create majors.”

In January, the government said it would promote mergers in nine industries including steel, aluminum and rare earths to create “globally competitive” enterprises, according to a statement by the Ministry of Industry and Information Technology.

The announcement reinforced what’s already begun. Excluding deals between parent companies and their subsidiaries, the largest domestic acquisition last year was Hunan Jiangnan Red Arrow Co.’s $623 million takeover of Zhongnan Diamond Co.

National Champions

“Creating national champions makes sense because mining is very capital-intensive, said Jeremy South, who oversees global mining advisory at Deloitte & Touche. ‘‘It also makes no sense for Chinese companies to be competing with each other for overseas deals.’’

Photographer: Keith Bedford/Bloomberg

Miners look over a cart of ore in a mine owned by Silvercorp Metals, Inc. in Jiyuan, Henan Province, China. As the world’s biggest importer of iron ore and coal, China relies on foreign sources of the raw materials. Close

Miners look over a cart of ore in a mine owned by Silvercorp Metals, Inc. in Jiyuan,... Read More

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Photographer: Keith Bedford/Bloomberg

Miners look over a cart of ore in a mine owned by Silvercorp Metals, Inc. in Jiyuan, Henan Province, China. As the world’s biggest importer of iron ore and coal, China relies on foreign sources of the raw materials.

Shenhua Group Corp Ltd. bought China State Grid Corp.’s electric-generation unit for $8.2 billion last year. The Chinese state-owned miner is now studying an investment in Australia’s Whitehaven Coal Ltd. (WHC), two people with knowledge of the matter said. Whitehaven, part owned by Nathan Tinkler, has a market value of A$2.58 billion ($2.6 billion). The stock is trading at its lowest level since May 2009.

An official at Shenhua Group’s press department in Beijing declined to comment. Whitehaven Chairman Mark Vaile said Feb. 21 that the company hasn’t had any recent dialogue with Shenhua.

Citic Group Corp., China’s largest state-owned investment company, last month agreed to pay about A$452 million for a 13 percent stake in Australia’s Alumina Ltd. (AWC), partner in the world’s biggest alumina business.

Other Chinese miners are also searching for deals. Chinalco Mining Corporation International may seek assets in South America, Africa and Asia, Chief Executive Officer Peng Huaisheng said in Hong Kong on Jan. 17. Parent Aluminum Corp. of China was the most active overseas acquirer among Chinese miners in the past decade with $14 billion of deals, data compiled by Bloomberg show.

Deal Hunters

Minmetals could become one of the main Chinese buyers abroad, according to Deloitte’s South. Both Chinalco and Minmetals are state-controlled.

Zhaojin Mining Industry Co., China’s fourth-biggest gold producer, is studying takeovers in South America and other regions and may announce a deal ‘‘in the near future,” Chen He, assistant to the company’s president, said in November.

Two gold companies that could attract Chinese interest are Saracen Mineral Holdings Ltd. (SAR) of Perth and Englewood, Colorado- based Alacer Gold Corp. (AQG), which has assets in Australia and Turkey, according to Troy Irvin, a Perth-based analyst at Argonaut Securities Pty. Their large reserves and production assets typically appeal to Chinese companies, Irvin said. Officials at Saracen and Alacer declined to comment or weren’t immediately available. Saracen shares advanced 7.9 percent today, the biggest gain since Oct. 2.

“The Chinese see the value of building bigger companies to compete with major mining companies in the world,” said Deloitte’s South.

To contact Bloomberg News staff for this story: Zijing Wu in Hong Kong at zwu17@bloomberg.net; Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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