Nearly 30% of Centrallyadministered SOEs Suffer Losses from Overseas Investment

At the China Mining Congress, Tong Junhu,general manager of the Overseas Development Department of China National Gold Group Corp., told a reporter with Economic Information Daily that overseas M&A entailed a lot of uncertainties and huge risks, and enterprises should not act rashly because once they make payment, it would be difficult to control. This represents the voice of many delegates from centrally-administered SOEs investing in mining abroad. At China Mining Congress 2012,the reporter with Economic Information Daily learned that on the one hand the alarm bell was rung from time to time, and on the other hand investment in mining remained weak overall.For this reason, Chinese enterprises, including centrally-administered SOEs, are extraordinarily prudent about investing in mining abroad.

What is noteworthy is that in a speech delivered recently, Wang Yong, director of the State-owned Assets Supervision and Administration Commission, also pointed out that some enterprises lacked overall strategic and development planning for international operation, with poor awareness of risks in overseas operation and imperfect management system.Overseas major operational risks and asset loss occur from time to time. Meanwhile, he pointed out that SOEs needed to further improve their income distribution management,capital operation budget and especially overseas asset supervision system. According to data on foreign investments made by China released recently jointly by the Ministry of Commerce, the National Bureau of Statistics and State Administration of Foreign Exchange,among nearly 2,000 enterprises set up by centrally-administered SOEs, 72.7% made profit or broke even, and 27.3% suffered losses.

Many delegates from centrally-administered SOEs told the reporter with Economic Information Daily that as a lot of time and heavy investment were entailed, centrally-administered SOEs always took up a big chunk of investment in overseas mining. However, as the economic situation remains weak, the metal mining market faces the process of debubbling. Out of consideration for risk control, most centrally-administered SOEs become cautious about investing in overseas mineral resources,and even avoid talking about the matter.

“Investing in mining often requires billions and even tens of billions yuan of funds. Yet it is possible that the investment does not yield good returns.” A senior industry insider told the reporter with Economic Information Daily that as the SASAC raised higher requirements on overseas investment by centrallyadministered SOEs and conducted more rigorous assessment, business executives would naturally become more prudent about such investment.

At the conference, Chen Xianda, vice president of China Mining Association, pointed out that overseas investment in mining made by China was on the decline. Overseas investment by Chinese mining enterprises plunged 97% on a year-on-year basis. In the first half of this year,there were only five cases of overseas investment made by mining enterprises. In the first half of this year, private enterprises invested$1.18 billion in overseas mining projects, taking up 79% in the total, up 67% y-o-y; investment in each project averaged $2.5 million, up 44% from last year. In the case of SOEs, investment in each project averaged $13 million,down 79%.

Among overseas mining projects invested by Chinese enterprises, many were unsuccessful.Neither the iron-ore mine invested by Shougang in Peru nor the magnetite invested by CITIC Group in Western Australia was successful. At the end of 2008, Sinosteel Corporation acquired 100% stake in Midwest. In 2011,the project was suspended. In 2006, CITIC Pacific acquired two iron-ore mines in Western Australia. In six years, the project was delayed three times. So far, the investment has yielded no return.

“Currently, overseas mining investment has not hit bottom rock yet. In the second half of last year, overseas investment made by Chinese enterprises started to fall, and this year investment has dropped more significantly. Some exploration units working abroad want to get projects off their hands.” Gan Fei, deputy director of the Department of Resource Assets and Market at the Chinese Academy of Land and Resources Economics, told Economic Information Daily that although in the next one or two decades China’s mining investment would remain strong, the situation would look grim over the next few years. He gave an example. Mining projects involve long-term commitment. It takes many years to earn mineral rights. In some areas, it may take 2- 3 years to obtain EII.When an enterprise obtains EII, changes have taken place in prices and the market.

“Sluggish investment made by centrallyadministered SOEs at home and abroad has to do with both the macroeconomic situation and the adjustment of industry policy in China. Furthermore, Chinese enterprises encounter more and more problems when going international.Some of the problems are ascribable to foreign countries and others to China and Chinese enterprises.” Gan Fei told Economic Information Daily that there lacked a unified platform for enterprises to go international, there lacked coordination between enterprises and the government, and enterprises did not share information. ”The first order of business in prospecting abroad is to determine whether the mine exists.It is also imperative to identify the legal environment and political risks. There is no unified platform for this. Moreover, enterprises engage in cutthroat competition by bidding up, which is most deadly,” he said.

It is learned that risks entailed by overseas investment made by centrally-administered SOEs have caught the SASAC’s attention. The Ministry of Commerce and the SASAC recently signed an MOU on Collaboration, which regulates overseas investment made by centrallyadministered SOEs, and puts forward the requirements of reducing blindness in going international and averting short-term behavior and excessive competition.

At the same time, according to Wang Yong,director of the SASAC, it is imperative to tighten risk control in overseas operation, establish and improve a risk evaluation system for overseas operation, risk prevention mechanism and overseas risk emergency system. Efforts will be stepped up to foster professionals for overseas investment and cooperation and tighten management of staff assigned abroad. Chinese enterprises should actively perform social responsibility to win respect from the local governments and the public and build the image of responsible enterprises.