Caution urged in overseas M&A deals

2016-05-11 08:35Global Times Editor: Li Yan

Low commodity prices creating chances: experts

Persistent downward pressure on commodity prices has given Chinese companies an opportunity to invest overseas, but they need to be cautious and take the right measures to avoid potential risks, analysts said on Tuesday.

As prices of commodities such as copper and crude oil have been declining in recent years, buying foreign companies that have been struggling financially is a good choice as the price is relatively favorable, copper mining analysts told the Global Times Tuesday, shortly after China's largest molybdenum producer announced it was buying a controlling stake in a copper mine in Africa.

Luoyang-based China Molybdenum Co announced late on Monday that it had reached an agreement with the world's largest publicly traded copper producer, Freeport-McMoRan Inc, to buy its Tenke Fungurume copper cobalt mine in the Democratic Republic of Congo (DRC).

The price was $2.65 billion, making it the second-largest Chinese copper mine deal since Glencore sold its Las Bambas mine to China Minmetals Corp for $5.85 billion in 2014.

"In terms of the price, it's a good deal as copper prices tumbled in 2015," said Wu Chenhui, a Beijing-based independent industry analyst. The buyout will help the company become one of the largest copper and cobalt producers in China, he noted.

Tenke produced 204,000 tons of copper and 16,000 tons of cobalt in 2015, according to a filing by China Molybdenum Co with the Hong Kong Stock Exchange on Monday. "There is strong demand for both elements in China, especially cobalt, which is used in making lithium-ion batteries for electric cars," Wu said.

Chinese demand strong

U.S.-based Freeport-McMoRan, which has an industry-leading global portfolio of mineral assets, is trying to strengthen its balance sheet and meet shareholders' expectations, CEO Richard C. Adkerson was quoted as saying in an announcement published on the company's website on Monday.

The company's debts totaled $20.8 billion at the end of March 2016, and it has been planning to sell assets to help tackle the debt problem since 2015, according to the company's website. "It has been expanding its business too much, especially into the oil sector, and weakened oil prices have weighed on its operations," Mao Fei, vice general manager at Sichuan-based chemical industry firm Tian Rui Ming Co, told the Global Times on Tuesday.

However, despite the fact that global copper prices dropped to a six-year low in 2015, the demand for copper has remained strong in China, and a large amount of it is imported from overseas, Huang Heng, CEO of Beijing Hot Mining Technology Co, told the Global Times on Tuesday. "Industries such as electricity and information technology all need copper," he said.

'Go out' with caution

Given the affordable price and its geographical advantages, Tenke had been eyed by other Chinese companies as well, Mao noted. "China Molybdenum took action very fast," he said.

U.S. consultancy Deloitte noted in a report in August 2015 that Chinese buyers used to be far more enthusiastic about energy sector merger and acquisition (M&A) deals overseas, but now they are only interested in assets that the country needs such as copper and gold.

Roughly 80 percent of the nation's overseas mining deals have been unsuccessful, and domestic firms have become more cautious about investment in Africa, South America and the Middle East, media reports noted.

The failure of the deals was mainly caused by a lack of proper consideration of the potential risks in the local culture, politics and environment in other countries, Shen Sheng, a lawyer at Rainmaker Lawyer, a Beijing-based law firm focused on mining and energy, told the Global Times on Tuesday.

Chinese firms should learn from their Japanese counterparts, some of which also actively invested in mines overseas in the 1990s, Mao noted. "Some of them, unlike more bold Chinese buyers, bought smaller stakes in overseas mines rather than purchasing them, in order to stabilize the corporate management and operations," he said.

Another factor behind the failure of Chinese mining M&A deals was the lack of cost evaluation of local transportation fees, according to Huang. "For example, Sinosteel was overoptimistic about its iron ore mining project in Australia, and then the related port and rail projects were delayed," he said.


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