Simple Analysis on Features of Overseas Merger and Acquisition Made by China’s Metal Mining Industry in Post Financial Crisis Era

The global economy has entered postfinancial crisis era since 2013, during which a continuous falling, hovering at the bottom and a steep rise were successively seen in global metal mining industry, followed by a slump after the outbreak of epidemic worldwide, and then a new growth cycle.In the meantime, China’s metal mining industry is exposed to new opportunities brought by quality development of domestic economy and swift development in global NEV industry, as well as challenges and impacts brought by harsh strategic competition by USA and COVID-19 worldwide.In this period, China’s metal mining companies are actively engaged in overseas merger and acquisition, with developing countries chosen as our partners and mature big mines chosen as our targets, mainly covering urgently needed mineral species.Analysis on features of our overseas M&A provides valuable references for us in further optimizing overseas mining industry layout and reduce risks.

1.Overall situation of overseas M&A made by China’s metal mining companies1

(1)Ranking top 3 worldwide in total M&A amount, with rather big per-deal amount averagely

From 2013 to 2020, a total of 4939 overseas M&As were initiated globally, 3127 deals of which got finalized (1549 from Canada, 488 from Australia, 237 from USA and 233 from Britain), reaching a total amount of USD 130.668 billion and the average transaction amount of USD 41.79 million per deal.

Comparatively, China’s metal mining companies initiated 227 overseas M&As,136 of which got finalized, ranking the 5th worldwide.Total amount was USD 18.935 billion, ranking the 3rd worldwide (only following Canada, USD 33.239 billion and USA, USD 21.084 billion), with average amount of USD 139 million per deal.As a latecomer in global mining industry, China is taking the lead in a competition with western resource powers boasting capital and resource strengths, indicating that China is getting vigorous in involving and competing in global metal mining industry.

What calls for special attention is that although overseas M&As made by China took up a small proportion of total deals worldwide, the average amount of our single deal is three times that of global average,which reflects the fact that China’s metal mining companies are making more efforts in developed large mine projects.The reason for this is that China’s metal mining companies plan to swiftly control and obtain stable and substantial resource rights and interests via block overseas M&A, so as to meet huge demands raised by domestic urbanization and industrialization.Specifically, among the successful 136 deals, 20 deals have the single amount of over USD 100 million and 5 deals have the single amount of over USD 1 billion.

(2)Relative success rate of M&A is on the same level with global average

International political and economic environment is getting more unfriendly these years, however, relative success rate of overseas M&A (success rate = finalized deals/terminated deals)by China’s metal mining companies is approaching the same level with global average.With respect to quantities, relative success rate of overseas M&A by China’s metal mining companies is 3.487, a big higher than the global average of 3.482; with respect to volume,relative success rate of overseas M&A by China’s metal mining companies is 4.853,higher than the global average of 3.944.The M&A progress is robust in an overall way.Nonetheless, China’s metal mining companies do encounter some setbacks these years in deals with western countries like Canada and Australia, even some transactions being forced to terminate.In June, 2020, Canadian government banned the full-payout 1.5-billion M&A between Shandong Gold and Canada TMAC in the name of national security.It is foreseeable that China’s companies are going to have a bumpy future when it comes to M&A in western countries.

2.Cyclical features of China’s metal mining companies making overseas M&A

In 2013-2020, just like overseas M&As made by global mining companies, overseas M&As made by China’s metal mining companies also have “bumper year/poor year” --- transaction amount ebbs and flows every other year, basically centering around USD 1 billion to USD 2 billion.This mainly resulted from two reasons.

One is getting boosted by one or two big projects.Peak value in 2016 and 2018 was mainly boosted by single or multiple large-scale M&As.Specifically, a total M&A amount of USD 4.4 billion in 2016 was boosted by M&A between Luoyang Molybdenum and Tenke Fungurume, i.e.USD 2.77 billion; a total M&A amount of USD 5.95 billion in 2018 was boosted by M&A between Tianqi Lithium and SQM, i.e.USD 4 billion.

Two is getting cyclical impact from metal prices.M&A in gold and copper presents some countercyclical features: M&A amount is low when price is at high level, and M&A amount is low when price is at low level.Specifically, in 2016, when copper price was at low level, M&A amount of copper mines/copper companies soared, which was given the reason by the market that copper price hit bottom then.In 2015-2019, when gold price was at a relatively low level, M&A amount of gold mines/gold companies globally was rather big.M&A activities usually respond strongly to significant reversal in metal price from high level or from low level.With respect to lithium mines, as downstream market highly relies on lithium battery industry, especially opportunities in NEV industry, M&A amount of lithium mines is of obvious pro-cyclicality: in 2013-2015 and 2019-2020, two low-price cycles, M&A amount fell significantly.In 2016-2018, highprice cycle, M&A amount of lithium mines globally soared from USD 200 million/year at the beginning, to USD 6 billion/year, when lithium price reached the highest in 2018.

3.Regional features of overseas M&As by China’s metal mining companies

With respect to regions, impacted by resource endowment, macro political environment,social and economic conditions in target countries, overseas M&As by China’s metal mining companies are relatively concentrated in region and getting predominant in developing countries.

(1)Overseas M&As by China’s metal mining companies are relatively concentrated in region

In 2013-2020, there were 116 target countries and regions for global overseas mining M&A.In terms of quantity, among 37 target countries with over 10 deals each, 6 countries had over 100 deals each, 927 of which were in USA, 355 of which were in Australia,353 of which were in Canada, 238 of which were in Mexico, 121 of which were in Peru,100 of which were in Chili.In terms of amount, there were 5 target countries having the amount of over USD 11 billion each,accounting for 70% of total M&A amount in target countries globally.Specifically, USD 30 billion in Canada, USD 22.56 billion in Britain, USD 15.62 billion in Australia, USD 11.79 billion in USA and USD 11 billion in Chili.

Comparatively, target countries for China’s metal mining companies to make overseas M&As are more concentrated, mainly covering 31 countries and regions.In terms of quantity, only Australia and Canada had over 10 deals each, i.e.76 deals and 13 deals respectively.The others were 8 deals in Democratic Republic of Congo, 4 deals in Argentina and 3 deals in Mexico.In terms of amount, 5 target countries had over USD 1.1 billion each, accounting for 86% among all M&A target countries.They are: USD 5.05 billion in Democratic Republic of Congo,USD 4.07 billion in Chili, USD 3.19 billion in Australia, USD 2.89 billion in Canada and USD 1.1 billion in Argentina.

(2)China’s metal mining companies are playing a predominant role in overseas M&As in developing countries.

When choosing target countries, China’s metal mining companies are adopting the strategies different from international leading metal mining companies worldwide.International leading mining companies choose European and American countries as their target countries, where China’s metal mining companies seldom make large-amount M&As.Besides, the M&As China makes in mainstream mining market in Australia and Canada take up a small proportion.In contrast, China accounts for over 60% in M&A amount in developing countries including Democratic Republic of Congo, Argentina and Serbia, indicating a strong preponderance.

(3)Three major factors for China’s metal mining companies to choose target countries for overseas M&A

Generally speaking, there are three major factors for China’s metal mining companies to choose target countries for overseas M&A,i.e.resource endowment, macro-political environment and social-economic conditions.Resource endowment is the fundamental factor, macro-political environment is the predominant role and social-economic conditions are important reference factors.Specifically, firstly, China’s metal mining companies basically choose resource countries as target countries, aiming to directly acquire metal minerals China is in short of, such as important metal mineral countries including Chili, Australia and Canada.These countries are where China has been making huge investments.On the contrary, metal mining projects are relatively small in European regions, so these regions are less attractive to China’s metal mining companies.Secondly,China’s metal mining companies choose the target countries that are friendly to China,so it is easier for China to handle investment interests safeguarding and personnel security.Target countries where China is playing a predominant role, like Democratic Republic of Congo, Argentina and Serbia are friendly to China.Comparatively, USA is continuously intensifying the competition against China, and even with hostilities, which causes big political risks.China’s metal mining companies seldom make investments in USA.Thirdly, under the circumstance of target countries boasting the favorable resource endowment and political environment on the same level, China’s metal mining companies will choose countries with more favorable social and economic conditions.Taking Laos and Burma as an example, they both are Southeast Asian countries boasting favorable resource endowment and both are friendly to China, but China’s companies prefer to make bigger investments in Laos that has better social and economic conditions.

4.Features of mineral species involved in overseas M&As made by China’s metal mining companies

From 2013-2020, overseas M&As made by global metal mining companies are featured by species dispersing, involving gold, lithium,copper, silver, zinc, iron ore, nickel, cobalt,tin, tungsten, manganese, titanium, bauxite and rare earth, among which gold, copper, silver,iron ore and nickel are playing significant roles.M&A capital mainly concentrates in gold and copper, accounting for about 72%.Comparatively, China’s metal mining companies make M&As that involve rare species we need like gold, copper, lithium,silver, zinc, iron ore, platinum and cobalt,especially centering on gold and copper,accounting for 71%.For the remaining part,lithium ores take up a big proportion.This indicates that China’s metal mining companies are making overseas M&As with species more concentrated, which is in line with huge domestic demands for gold, copper and lithium in current economic and social development in China.

Currently, there are two problems worth concerning: One is continuity in China’s metal mining companies making overseas M&As.On one hand, it will cost domestic industries some time to digest bulk M&As made previously.On the other hand, a few countries are putting more energies on examination and regulation on investments from China.The aforesaid two factors will probably lead to a slide in scale of overseas M&As.The second is acquisition availability of iron ore resource for China in recent years.As the biggest importing country in the world, China has imported iron ore of over 1 billion tons each year for 5 consecutive years.China highly relies on import for iron ore, but above-scale iron ore M&As are seldom seen in recent years.The reason is high degree of monopoly of global iron ore resource and solid global pattern.Top 10 global mining giants take up 70% of iron ore resource worldwide.In addition, bulk iron ore M&As concentrate in Australia and Brazil for the past a few years, which are dominated by European capitals, making it harder for China’s companies to participate in big iron ore M&As.

5.Suggestions on China’s metal mining companies making overseas M&As

Based on the above analysis, in order to enhance our metal mining resource safeguarding capability and improve the safety of metal mining chain and supply chain, below suggestions are put forth:

Firstly, to improve exploring abilities in overseas regions and reasonably participate in greenfield projects.The overseas M&As featured by mature mine projects can help China to swiftly get rare resource as well as ensure substantial cash flow for domestic companies.However, these projects always require high M&A rate, which can easily impose heavy financial burdens on companies.Once the price of metal minerals reduces to feasibility price, related companies tend to fall into operation troubles, not to mention market competitiveness.In contrast, global leading mining companies are acquiring resources more in the way of exploring, greenfield project M&A and other low-cost approaches.Therefore, it is suggested that our companies give play to the technical strengths in domestic exploring and actively participate in geological survey and mineral exploring in developing countries, especially those along “OBOR”.It is also suggested that our companies actively get involved in greenfield projects boasting rich resource endowment and high operation certainties, so as to improve the toughness of China’s overseas M&A and resource safeguarding.

Secondly, to propel regional diversity through diversity in M&A approaches.For the problem that we are not fully involved in markets in North America, Oceania and Latin America,especially the problem that we are not fully involved in the global mining right market that is of high financial nature, it is suggested that our metal mining companies, apart from making M&As in mine projects, actively get involved in the above markets in the form of equity participation and fighting for exclusive selling rights.In this way, China will become more diversified in metal minerals sources and safeguarding approaches.In the meantime,China can get rid of troubles concerning environmental protection, community responsibilities and political investigations that may arise from direct holdings of these projects.