The Un-Played Game


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REPORT: How China's Resource Thirst is Reshaping the Global Mining Industry

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The Un-Played Game

  1. 1. The Un-Played GameHow China’s Resource Thirst is Reshaping the Rules of the GlobalMining Industry.Rapidly changing dynamics associ- have to be nimble enough to take ad- that their implementation would causeated with China’s economic growth vantage of the opportunities poised by on overseas markets. The 2011-2015continue to reshape the global mining the country’s growth. China’s advent program is particularly impressive, en-landscape. The world’s second largest has challenged the traditional rules of tailing a plan that will see crude steeleconomy is not only the largest pro- the mining game, and in the backdrop demand reach up to 750 million mt,ducer and consumer of minerals, but of global economic uncertainty, suc- high speed railways reaching lengthshas also become the world’s leading cess in the industry is becoming more of 45,000 km, highway networksinvestor in natural resources. In an ef- complex than before. reaching 83,000 km and urbaniza-fort to secure mineral and metal sup- The real story behind China’s en- tion growing from 47.5% in 2010 toplies, China’s actions both domesti- try onto the global mining scene in 51.5% by 2015.cally and overseas are producing large the last decade has been the simple Keen to avoid any economic stag-shifts in industry structures, national reality that China’s own impressive nation caused by resource insecurity,economies and the regulations that array of natural resources have failed China’s resolve to balance its growthgovern mining. As flows of capital to fulfill the requirements of the coun- and have the resources in place to fueland equity change, Chinese investors try’s economic growth. When, on 14th it, is playing out on both its domesticface a steep learning curve to man- March 2011, the National People’s and international arenas. This reportage their overseas acquisitions and Congress approved China’s 12th Five- examines how the international min-foreign companies have had to adapt Year plan, which sets goals for the ing community is being affected andto be better positioned to receive that country’s economic development, the how economic growth forces China toinvestment, while service companies targets clearly demonstrated the effect go further than it has ever gone before. This report was researched and prepared by Global Business Reports ( for Engineering & Mining Journal. Editorial researched and written by Eugene Yukin, Sidonie Pichard and Sarah Hussaini. For more details, please contact Cover photo courtesy of El Dorado. A REPORT BY GBR FOR E&MJ OCTOBER 2012
  2. 2. Mining IN China Short Honeymoon Modernization of Chinese Miners Comes at an Expense.GobiMin’s Sawayaerdun gold property in western Xinjiang, China. Photo courtesy of GobiMin.Swiftly developing regulatory policies aimed A New Kind of Consolidation necessary. There needs to be a focus onat spurring more efficient use of China’s Following in line with the 12th Five-Year the centralization of smelters. The govern-mineral assets have recently begun to im- plan, strong-handed government policies ment has been getting very tight on theprove the country’s sprawling and inef- have effectively began to consolidate par- environment as well.”ficient mining industry. The government ticular sectors of China’s mining industry, The policy is meant to ensure that com-has invested into the consolidation of the including coal and rare earths. By 2015, panies not only master the efficient usesector, with the dual purpose of ensuring the plan is to reduce roughly 11,000 coal of their resources domestically, but alsothat mining companies clean up their acts companies to 4,000. “There is a consoli- so they be better prepared should theyin the safety and environmental spheres, dation wave occurring because of mining acquire them abroad. “The governmentwhile also modernizing them for interna- accidents and duplicate investments. Since wants them to become more efficient intional investment. Meanwhile, the drive to so many of the mines are small, the own- order to gear them better for overseas in-modernize has also been accompanied by a ers cannot afford to invest properly. Less vestment,” explains Jeremy South, partnerreversal in the level of government encour- investment results in lower standards and and global mining leader at Deloitte.agement for foreign direct investment into worse equipment, which in effect causes The by-products of this consolida-the mining industry, largely negating the accidents. With the government paying tion drive are already beginning to makeresults of previous policies, which allowed closer attention to mines’ safety re cords, headlines abroad. Shandong Energy, fornumerous foreign companies to acquire ex- smaller players have no choice but to close example, was heaped together by theploration prospects back in the 2000s. As down or be acquired,” said Felipe Tan, CEO government in March 2011 from a groupgovernment reforms begin to pay off, they of GobiMin, a TSX listed explorer currently of leading Shandong province based coalare producing a new breed of better-posi- developing its Sawayaerdun gold project in companies to become a single entitytioned domestic companies to compete on Xinjiang province. with an 83 million mt/y coal capacity. Bythe global stage, while causing foreign min- “Another issue is duplicating construc- March this year, the group was alreadying companies to reassess their investments tion. Often miners choose to have their bidding for Australian explorer Rocklandsin the country. own smelters and this is sometimes un- Richfield.4 E&MJ • October 2012
  3. 3. Mining IN E&MJ • October 2012 5
  4. 4. Mining IN ChinaForeign Miners: A Dying Breed? country’s resources were explored in 2011) rewriting in 2006 and the latest revisionConversations with China’s mining industry provided the government impetus to bait in occurring in 2010. However, Gavin Yang,veterans about the role that foreign com- foreign explorers and miners, thus introduc- a partner at Chinese law firm, Dacheng,panies play in the country often yield the ing a new stream of technology and higher who worked with the government on thewords ‘dinosaurs’ or ‘dying breed,’ calling standards to what had been a largely home- last revision, still questions why foreigninto question what role foreign miners and grown industry. Companies came, many mining companies are increasingly findingexplorers can play in developing Chinese from Australia and Canada, in pursuit of China unappealing. “Many foreign investorsmineral wealth. One oft-cited challenge to valuable assets. After years of exploration, in China are now deciding whether to stayforeign companies has been the country’s companies who had already survived chal- here or go to other countries, and many ofMineral Resources Law. The law classifies lenging operating conditions began to face them are choosing to leave. We have beenminerals into several brackets: encouraged, tougher regulations and many sold off their studying the reasons why they have beenpermitted, restricted and prohibited, with assets and left. leaving China, especially at a time when oureach offering different investment options to Whether or not government regulations laws seem to be encouraging of foreign in-foreign companies. “A little more than 10 are really to blame for the stifling of foreign vestment and the licensing procedures areyears ago, the exploration and extraction of investment is not as clear as one might user friendly. What we found was a lackthe most basic minerals was encouraged think. Many of the foreign explorers ‘shot of implementation of central governmentfor foreign investment. Over the years the themselves in the foot as well,’ reckons policies at the provincial and local levels,encouraged list of minerals has shrunk to Kwauk. “Most of the companies who were which often discouraged foreign investors.almost nil,” said Robert Kwauk, managing operating in China were good entities, but Most often local governments would try topartner at Blakes law firm in Beijing who it just takes a few bad apples to ruin the prevent foreign activity in order to protecthas covered the mining space in China since whole barrel. Some of them ran into man- their own local interests. Provincial andthe 1990s. “Meanwhile, the prohibited list agement problems, others misused funds local opposition aside, China’s regulatoryhas grown from uranium and rare earths and fudged data. Foreign companies who framework has had an overall open positionsome ten years ago, to adding a number had these issues left many projects at the towards foreign investment,” he said.of other minerals such as tin, nickel, an- altar and not enough money was put into Stuart Bromley, CEO of CIC Miningtimony, manganese etc. And the restricted the ground,” he said. Resources, a Beijing based advisory firm,list is also growing, so things that have been Poor behavior by foreigners in a coun- said: “China is a bottom to top system;encouraged previously have now moved to try like China goes far to explain why the it’s not a Chinese regulatory problem caus-the restricted category,” Kwauk added. regulations have become tougher, and in- ing issues for foreigners, it’s the problem During the 1990’s, the country’s poorly deed the Mineral Resources Law underwent of the board not understanding how theexplored mineral resources (only 36% of the several major reshuffles, with a complete system works. You have to know the poli-6 E&MJ • October 2012
  5. 5. Mining IN Chinacies at every level, village, county, local roads and people are all sorted. That is notdistrict, provincial and state; and the state a corruption thing–it is just in their best in-will never influence the province, and the terests to make these things happen. Regu-province will never influence the district, lations are growing tougher in China, but forthe village will influence the county and so everyone, not just foreigners,” said Collins.on. It’s like the communist party; every- Despite the legal framework offeringthing is founded by the village.” increasing hurdles, Eldorado’s experi- If numbers are a judge of whether tough ence demonstrates that foreign venturesregulations and operating conditions are can still be successful in China, though ithaving an effect on China’s foreign mining may be harder in the current environmentcompanies, then the answer is clear. Today, to start from scratch than at any previousthe total amount of foreign owned produc- time. One of the largest stumbling blocksers in China number around three. One of companies have faced is transitioningthem is Vancouver based gold miner Eldo- from exploration to production licenses, Peter Arkell, managing director of Asia for Swann Global and chairman of Global Miningrado Gold. The company’s story is extraor- and in China’s bottom to top system, de- Association (GMAC).dinary not only for being able to survive the pending on Central Government policies ordownturn in foreign presence, but actually contacts to get these will not help if you got on, China looks to be one thing fromfor thriving–56% of Eldorado’s gold pro- are facing local opposition to your mine out there, and you’ve made a whole bunchduction came from their China operations development plans. of business decisions based on that per-in late 2011. “Around 2009, they made “It is often the case that the Central ception. But then you come here, spendall gold restricted, which simply means Government says, ‘We welcome invest- time listening and learning and you dis-we have to joint venture (JV) with Chinese ment and your investment should be fine,’ cover that this isn’t the reality,” said Pe-companies and jump through a lot more but when the time comes to get approvals ter Arkell, managing director of Asia forhoops, although no more than we would and permits, then those need to be given by Swann Global, a leading executive searchanywhere else. There used to be a percep- someone at a different level and who is not and recruitment company specializing intion that China was really hard compared necessarily motivated by the same things,” the mining the rest of the world, but I would argue said Sarah Kutulakos, executive director of The changing nature of foreign invest-that the hardness has caught up. There is the Canada China Business Council. “The ment in China is evident in the make up ofnowhere that is easy anymore, and some further you go away from Beijing, the more members at the Global Mining Associationplaces are much more difficult than China,” autonomously you can do things, so you of China (GMAC). The association, whosesaid Greg Collins, China exploration manag- can have some random official who is slow- purpose is to lend a united voice to China’ser and chief geologist for Eldorado in China. ing you down.” international mining community, used to be “The good thing about mining in China Localization has been a winning strat- populated by explorers and miners. Theseis that the system is very supportive when egy for successful companies operating in days, most of the participants are miningyou comply,” said Felipe Tan. “If you want China. Indeed, often the only way to attain related service providers such as lawyersto talk to government officials, they are very required permits and approvals is making and consultants. Recent news that Rio Tintohelpful and help you push through your de- friends with those who ultimately decide had formed a JV with Chinalco to explorevelopment plans. The policy of transferring on your presence. “I have had four joint for copper deposits in China was greetedmining licenses however is tightening and ventures here in four provinces, and all warmly by the community who hope thatthat is tough. As long as you are planning to have worked… Honor the due diligence: such a venture may open the doors for otherbuild a mine and will fulfill the environmen- if you are supposed to hire 10 people, players. Whether or not that will happen re-tal compliance regulations, then the govern- hire 15; if they ask you to contribute a mains a question.ment is very helpful.” school, give a school and a half. Always “The Chinese mining industry is not the An area with great potential for pitfalls is go beyond what people ask you to do, and easiest one to work in for foreign miningwhen foreign companies attempt to acquire you will not have a problem enforcing legal companies. The major trend is that China100% of an asset. “Getting your own explo- agreements. Obviously, you are going to is ever increasingly intent on keeping itsration license requires, first of all, setting up get some people trying to screw you, but own resources for itself, and this will, toyour own business vehicle and understand- that’s just the nature of it,” said Dev Rand- a certain extent, always limit the role thating Chinese laws. In China, there are two hawa, CEO of Fission Energy, a Canadian foreign investors will be able to play here,”types of foreign vehicles: joint ventures and uranium explorer. said Jean-Michel Floc’h, senior corporateWholly Owned Foreign Enterprises (WOF- Have the majority of foreign enterprises advisor at China Bridge Capital, a BeijingEs). In a lot of other industries, WOFEs are implemented such localization measures in based fund manager.common, but they are an unproven entity China? Most often the answer is no. The However, Doug Jones, senior vice presi-for acquiring new assets in the country. On lack of desire to relocate or place senior dent of the China Region at Eldorado Gold,the other hand, if you acquire a new license management in China for lengthy periods of remains optimistic. “I am told it is just likevia a JV, you are immediately diluting to time often results in Chinese communities every other country. You have the open-three partners, which is ugly and hardly not taking foreign ventures too seriously. and closed-door guys, and the right and leftever works. However, I don’t think anyone Miners interested in exploring in China have wing factions within the party pushing andshould try to take 100% of a property in to spend long periods of time in the country pulling to radicalize or localize business.China, because you have to look at the posi- to make their investments sound. This results in the cyclic nature of doorstives of partnering up with a local county or “Looking through the Australian, or Ca- opening and closing. I think it is inevitablebrigade. If the county is on your side, water, nadian, or whatever set of glasses you’ve that doors will open again.” E&MJ • October 2012 7
  6. 6. Mining IN ChinaBracing the CurveOutbound Investment Forces Chinese Companies to Mature.With coal and iron ore consumption in Chi- is that things need to be automated andna steadily rising, the country has endured mechanized, return on investment needsa period of heavy reliance on the world’s to be as high as possible, and capital costslargest miners for its imports. To avoid be- should be as low as possible. That is aning at the mercy of the world’s largest coal international perspective of mine develop-and base metal producers, miners and end ment. China operates differently. Labor isconsumers are acquiring resources them- available and relatively cheap. The desireselves to secure supplies or, in the case of for mechanization is not there, nor is the ex-end consumers, to vertically integrate their perience available. Available capital is notoperations. a problem generally, and the return on in- Chinese demand is unlikely to wane vestment, for a company that is more inter-any time soon according to Ralph Lutes, ested in vertical integration, is a fundamen-vice president of Asian affairs for Teck Re- tally different calculation. So if that is yoursources: “The debate in the Western media framework of understanding then when you Ralph Lutes, vice president of Asian affairs forabout hard landings, soft landings, needs to Teck Resources. go abroad everything you think of as to howbe put to bed. These buzzwords seem par- mining should be done is fundamentally dif-ticularly inept. I don’t see any landing at all, Flawed Model ferent from what is actually being done,”hard or soft… The slowdown is of primary Upticks in outbound investment flow have said Brent Thompson, senior vice presidentconcern for financial institutions and those particularly occurred in the last few years. of Tetra Tech’s mining division.who are more focused on day-to-day trad- In 2008, when the commodities boom be- Initial failure to appreciate long-terming activities. From a mining perspective gan to increase prices for iron ore and coal, investment horizons has been one suchwe need to take a much longer-term view. it forced many end receivers in China to re- fundamental difference. “The Chinese wantIn that respect, we are very confident and luctantly agree to hefty price increases from to lock up the resource and bring it backoptimistic about China’s medium and long- major suppliers. The same year saw China home,” said Syd Chesson, chairman ofterm prospects. The Chinese government become, for the first time, a net importer of Yellow Rock Resources, an Australian va-has an impressive array of tools to manage coking coal, having already become a net nadium explorer currently courting Chineseits economy. The slowdown that people are iron ore importer several years earlier. With investment. “They don’t care if they makevery concerned about in some quarters is this in mind, the concept that one could money in Australia, they don’t care if theylargely a policy-driven slow down of its own buy a mine, develop it, and send the ground make profit; what they want is to bring theeconomy. So the concern about China expe- back home was too appealing. resource here to China.”riencing a hard landing, I think, is overdone. The first miscalculation occurred when This approach largely characterizes theI see China continuing to be a driver of glob- Chinese investors thought that they could prime motivators of Chinese outbound in-al commodity consumption. No landing at bring the resources back home quickly. vestments, but it also underscores theirall, just a slightly lower altitude directed by Jumping through regulatory hoops and hav- greatest pitfall. There is a vast differenceair-traffic control.” ing the capital to survive unexpected delays between buying a mine, developing it, and China’s movement abroad, though begin- have become commonplace concerns in the using the resources to sell to a client as op-ning in the late 1990’s, accelerated as prices western mindset. Within the Chinese con- posed to buying a mine, developing it, andfor commodities ballooned in the 2000s. text however, as long as you have govern- being in effect your own client by import-Chinese investors, awash with cash and with ment support, such problems are largely ing the minerals back to yourself. Multiplethe government’s blessing, rapidly began non-existent. State owned enterprises accounts of Chinese investments abroadinvesting into overseas mining acquisitions. (SOEs) and private entities with official or demonstrate that the vertically integratedLast year, this investment reached a record semi official backing from the government approach has been flawed, not in its theo-high and raw materials accounted for nearly can get mining operations underway quick- retical basis, but rather in its existing imple-30% of all M&A transactions. Meanwhile, as ly; state owned banks readily provide loans mentation. Too often, the desire to get tothe trend of equity fleeing the West contin- and regulatory issues tend to be avoided. quick production and delivery of materialsues, an increasing amount of mine owners As investors acquired assets overseas back home resulted in decision making pro-fiercely seek avenues to raise capital to de- and began to develop them, the perception cesses that made overseas operations muchvelop their projects. In the resulting free-for- that replicating favorable domestic environ- more costly and challenging than they couldall, the past several years have seen the con- ments abroad was possible soon caused have been.frontation of largely cash rich inexperienced massive disappointments. Tetra Tech, anChinese entities with cash poor junior min- engineering and consulting company that “One thousand days at home isers. Many good and bad investments later, works on Chinese mining ventures abroad always good, but even one daythe Chinese are beginning to learn and their has firsthand experience of this. “In the Eu- abroad is very hard”investing strategies continue to evolve with a ropean context, labor costs are high and la- So goes a Chinese traditional saying, re-variety of consequences. bor is not easily available. So the framework counted by a Chinese lawyer referring to8 E&MJ • October 2012
  7. 7. Mining IN Chinathe challenges that his country’s investors there is not a culture in China at the mo- property developers who made a lot of mon-face overseas. The top trouble spots have ment of engaging external advisers early or ey over the last five to six years, and whostemmed from three areas: inexperience, at the right sort of level. Chinese companies are now investing in mines abroad given thefailure to seek professional help, and com- often think they can do all the work alone.” current state of the housing market,” saidmunication issues. Lack of engagement is attributed in part Jamon Rahn, vice president of Emerging “There is still a long way for us to go. Ja- to the other facet of Chinese appreciation Asia Capital, a mining investment advisory.pan started making natural resource invest- for vertical integration: the fact that mostments for their smelters back in the 60s. enterprises, especially state owned, tend The Backlash: GovernmentChina had enough of those resources and to have in-house capabilities for services Takes Actionwe had a planned economy at the time, not that most western firms would outsource “It’s been a mess and it hasn’t just hap-a market economy. We failed to take that to others. “Outsourcing is about packaging pened to one or two companies, but withfirst step in the beginning; now that we are services in a different way and taking ad- many… many projects have come to a stopgoing overseas, it is not really easy for us,” vantage of expertise. They are still on the and investments have been lost,” says Si-said Zhang Xin, chairman of Metal Challenge journey to figure whether they need that. mon Dai, development manager for globalGroup, a leading Chinese metals trader. I regularly bump into clients who have 20 engineering firm, Hatch. “A major recent “Unlike many Western companies which people in their M&A department and they event is that the Chinese Central Govern-have much cross-border experience, many haven’t done a deal. It’s difficult for these ment has started cracking down on poorlyChinese companies are undertaking off- companies to then come to Deloitte, Gold- executed projects…The government’s mes-shore investments for the first time,” said man, or JP Morgan and say, ‘Look we have sage is a wakeup call to many overseas in-David Olsson, partner at King, Wood & people who do this, but can you please do vestors.”Mallesons. “A lot of Chinese companies, this for us?’ That’s a pretty tough sell,” said In the majority of cases, improper con-when they make a strategic decision to in- Jeremy South. sideration of local regulations, infrastruc-vest in resources, do not put enough effort Failure to invest in due diligence is not ture, and labor laws led to the perfectinto the legal and regulatory preparation. the only feature that has characterized in- storm: cost overruns and delays. NotableWe spend a lot of time helping clients un- vesting firms’ inexperience. Another equally and oft talked about examples have in-derstand what the foreign investment rules important one has become the popularity cluded CITIC Pacific’s disastrous Sino Ironare, and doing non-legal work–explaining of mine acquisitions for industry groups lo- project in Western Australia, where costhow to manage investments, and who the cated either segmentally or in some cases overruns grew from an initial US$2.5 billionstakeholders are that they need to engage: right outside traditional mining expertise. dollar estimate to most recently standing atgovernments, local communities and those “Many of the investors have surprising a reported US$8 billion in August. But therewith environmental concerns... because backgrounds. For example, there are many have been E&MJ • October 2012 9
  8. 8. Mining IN China The Hon. Cheryl Edwardes, former attor- tions and also the question of how to deal Getting the Message Rightney general of Western Australia and now a with employees, contractors, etc. Local The gradual outsourcing of explorationpartner at Holman, Fenwick, Willan relayed knowledge is extremely important. To lose by major mining producers to junior min-a story involving a Chinese investor. “In one local knowledge is quite likely to mean you ers over the last decade has firmly placedcase, a client that did not carry out due dili- have lost the ability to operate effectively in smaller and mid cap exploration companiesgence at the beginning of a transaction was this environment.” at the receiving end of Chinese investment.left with an environmental debt of US$20 The Minmetals acquisition of Australian However, attracting that investment is notmillion. I am very happy to assist them in Oz Minerals in 2009 has been a good ex- easy and requires companies to get theovercoming these problems, but they could ample of how such an approach has been message right. Several factors have madehave been avoided at a much earlier stage. gradually taken on board by Chinese enter- this difficult. Since the beginning of China’sThis is the message we are giving the key prises. Minmetals kept Oz Minerals CEO, ‘going out’ policy, inexperienced Chinese in-decision-makers in Beijing for them to pass Andrew Michelmore on as the head of the vestors often overvalued assets and lackedon when they talk to companies.” newly formed acquisition and, in 2010, the ability to properly assess mining prop- Recent government moves suggest that placed him at the head of their Hong Kong erties. Sellers and agents involved in theseBeijing is getting the message. In early listed Minmetals Resources, which focuses transactions have often taken advantage ofApril, the government finally stepped in on overseas acquisitions. Since then, the this. However, the unrealistic stereotypewhen the State Assets Supervision and US$1.3 billion acquisition of Anvil Mining that Chinese overspend (caused by suchAdministration Commission declared new by the company, which was finalized in deals in the past) has only hurt sellers’ in-rules and penalties for companies not in- February, has cemented Minmetals Corp. terests as they increasingly encounter inves-vesting into their core areas. The main mes- as one of China’s more successful overseas tors burnt by bad deals and whose collectivesage as put by Jeremy South was that “coal investors. experience has made them more conserva-companies should be buying coal and not An increasing appetite for off take agree- tive and aware of their interests than malls.” ments has also become a feature of the What led Chinese companies to over- more passive and maturing Chinese inves- spend in the first place was once againLearning Fast tor. “In all fairness, the strategic desire is their desire to get to production as quicklyForegoing the government’s April announce- to secure supply,” said Wayne Basford, as possible. Edmond Cibamba Diata, seniorment, there have already been signs that partner at accounting firm BDO. “Three or partner at African law firm Cabemery andChinese companies are beginning to adapt. four years ago this involved getting 100%, Partners, related a story about how Chinese“A number of Chinese companies have gone but now they can understand that the off companies came to overspend. “When onethrough these growing pains. They have take agreement is what they really want and discovers an asset, one must transform itstried a number of approaches that have they won’t have to deal with the hassle of title from a research title to an explorationnot worked and they have had to learn new changing the management. Going forward, title. Chinese companies do not want to gomethods, so now there are Chinese compa- you will very likely see a lot more sophisti- through this preliminary research stage.nies emerging with much more experience cation in the way that Chinese companies They want to directly obtain the asset andand a strong ability to operate globally,” take ownership. There will be many 75% start mining. This is a real challenge forsays Thompson of Tetra Tech. Chinese owned Australian listed companies Chinese companies because they trust the As the more inexperienced companies being the vehicle of getting around the per- estimates given to them by mine ownersand smaller provincial SOEs become dis- ceived Chinese negativity, and they won’t and, as a result, they can easily get fooled.couraged from investment, the bulk of Chi- be called Sino this or Dragon that - it will be The assets can be overvalued and sold tonese investors are getting smarter and more an Australian company extracting and work- them at a price which does not reflect thesophisticated. This is being reflected in a ing as it usually does but it will be owned real value of the mining asset. Oftentimesvariety of ways, but the overall sense is that by Chinese.” Chinese investors realize one or two yearscompanies are learning through adaptation As this experience trickles down to the later that they have been fooled.”rather than a rejection of their whole invest- rest of the system, asset owners worldwide While this particular example referredment model. “You don’t need to throw out can expect to see more qualified and ma- to African investments, anecdotal evidenceyour Chinese business model to be success- ture Chinese investors. Moreover, those suggests that these incidents have beenful abroad, what you need to do is adapt who have been recipients of such invest- widespread across a variety of countries.your business to make it work,” said Peter ment in the past often mention that loyalty Unfortunately, the ultimate outcome ofArkell. “This can be achieved by putting into is a defining characteristic of a high qual- such deals has arguably hurt companies’key positions personnel who appreciate the ity Chinese investor. Paul McGroary, cur- abilities to raise styles and culture of the head of- rently a director at Bullabulling Gold, an Tim Wang, a partner at Clifford Chance,fice as well as the new market.” exploration company in Australia, says that says that one such reason has been a new- “If a Chinese entity comes across good Chinese partners have stuck by his side found conservative streak in expenditures:executives in Australia, to think how to best from an earlier time when he was involved “Chinese companies may try to take a con-use those people and leverage their skills in exploring for mainland gold and copper servative view when acquiring a mine, andis a smart strategy,” said James Philips, assets. “Chinese investors, as long as you I have seen many deals fail as a result of apartner at Minter Ellison, who has been keep them informed and you appear to be disagreement between the buyer and seller.involved in Chinese investments into Aus- doing the right thing, will continue to back I have seen foreign investors try to sell attralia. “To run a mining operation in a regu- you even when things get more difficult. If steep prices, but Chinese do not want tolated environment like Australia is not just you can develop the relationships and find pay high prices anymore and they have be-a matter of digging stuff out of the ground; quality investors in China, they will be some come more experienced in mining acquisi-there is a lot of regulation around the opera- of the best you will ever see anywhere.” tions. This is different than before, when10 E&MJ • October 2012
  9. 9. during a rush to secure resources Chineseinvestors overpaid for mines. This is a keyissue. Sellers have a tendency to think thatthe Chinese will pay high prices but thisis not reflective of reality. The expectationfrom sellers is too high.” Failure to recognize this has been a sec-ond reason hurting juniors’ abilities to raisemoney. “When you sit down with an inves-tor, it’s important that you really understandwhy they are sitting across the table andwhy they are interested in your resource.Western companies often tend to be someof the worst offenders in this,” said JeremySouth. “They don’t spend enough time toget their message right. They think thatChina is just full of a bunch of people withlots of money who don’t really know whatthey are doing. While this may be partly thecase, what’s driving most companies rightnow is the desire to secure the commoditiesthat they actually need.” So what are Chinese companies look-ing for in their investments? The answerto the question has been evolving for sometime, but in light of the government’s recentcrackdown on poorly executed deals, onecan expect a growing focus by investors ontheir core commodities. “They want production but they do notwant to pay so much,” says Rahn of Emerg-ing Asia Capital. “I think it depends on whattype of asset you are talking about. If it iscoal, then they are looking for a turnaroundon investment within one to two years, cop-per and gold are two to three years. But fiveto seven year investment horizons are notthat appealing unless it is a major discoveryand the infrastructure is good.” Demonstrating a quick window to produc-tion is a winner with Chinese investors. Howcompanies go about this depends on the as-set, but in the past year, Bandanna Energy,a Queensland coal explorer seeking to raiseseveral hundred million dollars to fund theirSpringsure Creek project, has put more thana quarter of the company’s capital worth intodeveloping port capacity. Marketing that in-vestment has already placed them in nego-tiations with a handful of Chinese SOEs. “Securing that port capacity is a trans-formational event for the company, allowingus to move from being an explorer with a lotof coal on the ground to now actually hav-ing a pathway to production. Because wenow have a pathway to production we area unique opportunity for investment for nearterm coal production and supply,” said Mi-chael Gray, Bandanna’s managing director. Does this mean game over for smallergreenfield explorers who are still unsure ofwhat is in the ground? Adam Myers, E&MJ • October 2012 11
  10. 10. Mining IN Chinaner at accounting firm BDO, suggests that advisers, because we sell our services for along the way have been to really build hiswhile greenfield interest by Chinese is pos- a fixed price–as they often want–and a six knowledge about projects and mining, yetsible, minimizing some risk prior to a deal is month project can suddenly become nine, in the same organization sitting above himimportant: “While there might be a desire for 12 or 18 months, leaving us stuck with an he has experienced geologists. So it’s quitea Chinese company to sign an off take with a inappropriate fee. In the meantime, they difficult to bring this all together. There isgreenfield exploration project, you will need continue to ask questions throughout the a perception that the Chinese don’t moveto eliminate some of the geological risk to process and re-visit the same things many fast enough; well I think a major cause isgenerate investment. It might be a good way times. Some are getting quicker, and some that there is an internal breakdown in com-to first raise some funds in Australia or Can- aren’t. It really depends on the bureaucracy munication in getting the message across toada, start up the drilling, eliminate the risk within particular organizations, and also on the right people. The English speaking frontand then start negotiating with the Chinese.” the messages they receive from up high, as line negotiating team don’t understand the the state plays a major role in deciding who questions that they are asked from a techni-Patience is Key goes into certain investments and when. cal point of view, so when they translate theOnce you do get started in negotiations, Within a lot of the very big SOEs, there answers they get back, they might translateawareness of the Chinese concept of time is are many layers of bureaucracy in multiple it correctly from English to Mandarin butcrucial to getting through them. Communi- departments, with so many stakeholders they are not actually getting the geologi-cation issues and the Chinese need to cre- whose views have to be taken into account; cal or engineering meaning across to theirate trust prior to a deal often delay negotia- but when it is decided from somebody at superiors. This necessitates another roundtions significantly, so patience is the key to the top that a deal needs to be done, things of questions to clarify these issues and thisgetting a contract signed. often happen at the speed of light–we can slows things down.” Not all entities investing are slow, but be called in at 10 p.m. to complete a deal Building trust is another key elementgenerally speaking, most advisers involved that has been running for six months by the in scoring a successful deal and compa-in such negotiations place them in two next morning,” said one lawyer involved in nies undergoing negotiations are advised togroups: SOEs and private companies. Pri- numerous outbound Chinese M&A deals. come to China as often as possible, withvate investors can be more nimble, while Adam Myers attributes part of the blame the more serious ones opening offices inSOEs tend to be slower, as being govern- to language issues. “I have been dealing the country to show their dedication. “Oncement owned involves having a more onerous with a potential Chinese mining investor for you have built the relationships and haveapprovals process, though many countries about 10 months now. The contact that I’m partners, they will not easily walk awayhave also made it difficult by placing extra having is with a junior staffer who is an Eng- from you. To have relationships, we haveconditions on foreign government owned lish major and he is doing project evaluation to be here,” said Dev Randhawa, who iscompanies. “We get frustrated at times as right now. The questions he has been asking currently seeking to sell his Athabasca Ba- sin uranium assets to Chinese end users. “We don’t want to be bringing suitcases and then leave, which I find quite offensive. That is why we are opening a full time of- fice in China. The questions you get asked in Asia are never the ones you hear in North America. The first question everyone asks is, ‘Do you have an office in Beijing?’ - how serious are you about doing business here? In Europe, they always want to know how much money you have; in North America, they don’t care. Here, you have to be willing to spend time…” Wayne Basford agrees: “The Chinese way of business is just completely differ- ent from the West; the Chinese will only do business with people they like. ‘You came to Perth, we went out to dinner, we all got drunk, and you haven’t signed the contract. A month later you come back to Perth, we all went out to dinner, got drunk and we still haven’t signed the contract.’ The West has no understanding or tolerance of why we have to go to dinner again and why it’s taking several months for a contract to get signed. But that is how Chinese do busi- ness; just accept it. Patience is key. Just when you start thinking, ‘I just can’t do any more dinners, I just can’t get drunk so much ever again’ that’s when you get the contract and the deal is on.”12 E&MJ • October 2012
  11. 11. Mining IN ChinaA New WayIs the HKEx the Latest Fad in Mining IPOs?As more miners begin to regard China as one To battle the perception that the ex- “This is obviously an important stra-of their main clients, the more they search change was too difficult for miners to list on tegic move for the Hong Kong stock ex-for a better platform to gain the attention and recognizing the reputation that it was change. This will allow Hong Kong to pres-of Asian investors. As a result, the last gaining within the mining community, the ent itself as an IPO venue for listings, notfew years have seen the Hong Kong Stock HKEx undertook a rewriting of its Chapter just in China, but also Central Asia,” saidExchange (HKEx) emerge as a strong con- 18 listing rules in 2010. James Phillips of Minter Ellison, who wastender for mining IPOs, more than tripling “Until two years ago, it was not totally involved in the amendment efforts. “Onlisted mining stocks in just four years. How- user friendly and it was revamped to bring the other hand, Hong Kong perhaps doesever, poor average performance of resource it more in line with international practice,” not yet have the depth of analytical capa-stocks has raised concerns about its ability said Julia Charlton, partner of Charltons, a bility in the broking houses covering theto raise money as effectively as the more law firm that assists companies to list on resources sector that you have in marketstraditional exchanges like the TSX, ASX or the HKEx. “It is much more objective, and such as Australia and Canada.”the AIM market in London. Changes in the it is easier for companies seeking to list to Gaining that capability has been anlisting rules, introduced by the exchange in objectively identify the standards that they uphill struggle reckons Chris Justice, who2010, have made it easier for companies are seeking to comply with, whereas before it heads Quam IR, a service designed to helpin pre-production to launch an IPO, but the was more vague.” As a result, the new Chap- companies gain traction and attract aware-city’s capacity to properly evaluate natural ter 18 rules were changed to allow junior ex- ness from Chinese investors: “Quam IR’sresource listings has been questioned. ploration companies to list, as long as they first resource client, who was not an SOE, The first mining IPOs to occur were demonstrate sufficient indicated resources, was a gold mining mid cap junior com-by large-scale Chinese SOEs who were using one of three major reporting standards pany that was listed on the ASX and hadseeking outward expansion and better fi- (JORC, NI 43-101, and SAMREC) and have put together the largest collection of foreignnancial and corporate integration with the a competent person’s report to substantiate owned gold mines in China. They did theirworld’s top finance and service providers. it. There also has to be enough working capi- secondary listing here in Hong Kong five“Hong Kong has a presence of 70 of the tal for at least 12 months. years ago. We took them on as a client toworld’s top 100 banks, so if a companyneeds access to other types of finance,then Hong Kong has a very competitiveenvironment for such products. There arealso many service providers in Hong Kong(legal, consulting, accounting, brand-ing agencies) that have wide experiencedealing with mainland companies, whoalso speak their language and understandtheir economic environment,” said SimonGalpin, director-general of Invest HK, agovernment agency promoting the city asan investment destination for Chinese andinternational companies. Seeing these benefits convinced manySOEs that listing in Hong Kong was thesmart way to go. First came the large com-panies such as Chalco, which listed in2001, Shenhua Energy in 2005 and ChinaCoal in 2006. This encouraged internation-al mining players to list as well; by 2008there were seven mining listed entities, to-day there are ninety-eight. However, industry experts have ques-tioned whether the HKEx could really dis-place the well-established reputation of theAIM, TSX or ASX markets. The two majorquestions have been who the listing rulesare best suited for, and, if you fit the bill,then is the investor understanding sufficientto make your listing successful? E&MJ • October 2012 13
  12. 12. Mining IN Chinahelp fine-tune their message and their very has arguably further cemented its edge in successful, however, one needs to have agood ASX investor relations materials for commodity markets and is drawing more China connection. “We have a variety ofthe Hong Kong market. We would take this mining and metals expertise into the city. clients that are involved in a range of re-company to visit investors and fund man- However, investor inexperience does not sources and stages of development; oil andagers and they would say, ‘Where is the fully explain why HKEx listed mining stocks gas in Central Asia, gold in China, coal bedcashflow? What do you mean this company have been trading below their IPO prices. methane in Australia and unconventionaldoes not have any cashflow… why are you “In a weak market you already have valu- gas in China,” said Justice. “We also haveshowing it to me? What kind of company ations that are cheap. There is definitely a been in discussions with South Americanis this?’ At that stage it was, of course, in reluctance to take on an IPO risk of a new based coal companies and have clients inpre production but investors simply did not offering with assets and a new manage- copper, uranium and iron ore, but the re-understand the mining lifecycle. We had to ment team that are not necessarily known. source companies who have a tie back tofight a long battle to educate investors.” This is more to do with the state of global China and Hong Kong are the most success- Nicholas Bias, head of investor relations equity markets at this point in time as op- ful in raising capital.”for IRC Ltd., thinks that investor aware- posed to some of these companies per se,” Nicholas Bias agrees: “One of the firstness is improving. IRC listed on the HKEx explains Matthew Whittall, former Head of questions I usually get is why we are listedin 2010 and is an industrial commodities Global Metals and Mining Research for Re- here. The answer is very simple. All of ourexplorer and producer with operations in naissance Capital. “I think that within the assets are located very close to the ChinaRussia’s Far East close to the border with China mining space there is definitely a re- border in eastern Russia. We connect di-China. “You see in our shareholder base quirement by investors to do considerable rectly to railways in China and we supplythat we have the major mining investors due diligence to make sure that they are 100% of our iron ore into China. Our proj-in London: BlackRock, JP Morgan etc., comfortable with the assets, but when you ects, such as K&S, are being funded withbut you don’t see many large shareholders already have world class companies trading Chinese finance and being built by Chinesefrom Hong Kong. The situation is changing at low single digits, then it is difficult for contractors. So what we have in IRC is re-though. More mining companies are coming new IPOs to get away.” ally a genuine Sino-Russian story. Much ofand more well established sell side analysts what you see in terms of companies lookingare coming. You also have more investors, Sell Your Story to list in Hong Kong has nothing to do withand some of the really big global hedge The path to listing in Hong Kong is not the China but they just think that the equity isfunds setting up mining desks in Hong easiest or the cheapest, but what it has here and they go for it. So it can be an Afri-Kong,” Bias said. demonstrated is a growing ability to provide can gold miner or a Brazilian iron ore miner The successful bid to acquire the London a platform for mining companies to raise but really you have to ask the question, is itMetal Exchange (LME) by the HKEx in July money close to their customer base. To be a Chinese story?”14 E&MJ • October 2012
  13. 13. Mining IN China“Getting closer to the demand side ofthe equation.”Interview with Eric Landheer, Head of Issuer Marketing Department, HongKong Stock Exchange raising like the one we have today, if you do not have a great story, strong controls in place, no strong management team, and of course some significant assets, then it is go- ing to be very difficult to get listed. Obvious- ly there are bad apples in every exchange. We do what we can to ensure that the com- panies that list here are of high quality, with high standards and controls. While we are making some of our rules more flexible, like Chapter 18, to facilitate these listings, we are also not opening up the door to junior explorers as of yet. We feel that the investor public here does not have a strong enough understanding of the risks associated with junior explorers. Many stocks of HKEx listed mining companies are now trading at pric-Please introduce us to the Hong serves, scoping studies, a competent per- es below their original listing price.Kong Stock Exchange and the role sons report, and with sufficient capital for What are the main causes for this?it is playing in the mining sector? 12 months foreseeable needs around fi- The markets overall are extremely challeng-The Hong Kong Exchanges and Clearing nancing can list here. You do not have to be ing. I have been in the financial industry forLtd. is a vertically integrated exchange. It in production or be a profitable company. over 20 years and this is one of the mostis one of the largest exchanges in the world This is completely separate from our gen- challenging environments I have ever seenin terms of market capitalization as a public eral listing rules, and is completely tailored for fundraising. I do not necessarily thinkcompany. Our recent market capitalization to the mining and mineral and natural re- this is an issue with the companies them-is US$15 billion. At the end of last year, it source industries. Since we have made selves who are applying and trying to list,was around US$17 billion and we were the these changes, we have seen significant it is rather the overall environment we arelargest exchange in the world. One of the growth and interest. This is a key focus area currently facing. In the mining and miner-reasons we are one of the largest exchanges for us. Today we have 82 energy companies als and natural resources sector, there is ais because we have a completely vertically and 94 pure mining and metal companies lot of concern about slowdown and demandintegrated business model. listed with us. The story behind this and from Asia, and China more specifically. This International companies are increasingly why companies are listing here is first of is hurting everyone, no matter where theysaying that demand and growth are coming all that we are a great platform on which want to list.from Asia, and China more specifically. If to raise capital, but it is also about gettingyou go back 15 to 20 years, Asia and China closer to the demand side of the equation, How do you see the development ofwere primarily a destination for investment. to customers, and to where the growth driv- the Hong Kong Stock Exchange inToday, they are increasingly becoming an ers are located. the near future given the currentexporter of capital. This is the fundamental market environment?shift that we have seen and it is one of the What are some of the challenges We see Hong Kong as an important centrereasons why I have joined the Exchange. that Chinese mainland companies for mining and minerals and natural resource Now, moving specifically to mining, we have to go through to list on the companies. It is an area we are very focusedhave done a lot of work in terms of making Hong Kong Stock Exchange? on and place much emphasis. Despite a veryour standards more aligned with other ex- Well, I think this goes for all companies no challenging environment, we believe thatchanges and listing centers. In June 2010, matter where they are from. They need to when things improve, Hong Kong has thewe instituted our revised Chapter 18 rules. have a good corporate governance structure ability to become one of the largest finan-Chapter 18 says a mining and mineral or and a good management team. In particu- cial centers for the mining and minerals andnatural resource company with proven re- lar, in a challenging environment for capital natural resources sector in the E&MJ • October 2012 15
  14. 14. Mining IN China Raising the Bar Efforts to Improve Chinese Mining Standards Provide New Opportunities for Services.Hanking’s Mengjia iron ore processing plant located in Benxi, Liaoning province. Photo Courtesy of SRK Consulting.Long plagued with negative stereotypes try,” said Peter Arkell of Swann Global. “The Degrees at which profits come from inter-concerning safety and quality, the Chinese Chinese government has been very anxious national work varies company to company,government has funneled much effort to- to improve productivity, safety, and so on. but most service providers recognize thewards raising the mining industry to global So there’s been an important place for inter- benefits of diversifying and focusing effortsstandards. The effects of these policies can national companies in changing that model.” on foreign bound Chinese players. Yonglianbe particularly observed within the services Sun, managing director of SRK Consulting insector. Trends and Growth Areas China argues that a key strength of having “China now has a very clear plan to de- Whereas before, many international service a China based office is not only to engagevelop it services sector as part of the restruc- companies came to China to cater to China’s in domestic projects, but also to becometuring of its economic growth model,” said foreign players who could afford them, their the main contact for Chinese firms who de-David Olsson of King, Wood & Mallesons. diminishing number has forced many ser- sire to engage foreign consultancies in their“While there remain barriers to entry, the vice providers to switch attention to Chinese overseas projects: “About 60% of our clientsmarket for professional services is opening companies. Traditionally, selling services have projects inside China, and the rest areup. As long as you are aligned with China’s to mainland clients has not been easy, but overseas: in Mongolia, Indonesia, Southeaststrategic goals, you will get a much clearer China’s overseas involvement has served as Asia, Central Asia, Africa, or even Central orpath to entry and expansion; if you are in a catalyst in changing this trend, and more South America. Even though SRK Consultingareas that are already competitive and well- foreign services companies are finding work has local offices around the world, Chineseserviced by the Chinese market, it will be with Chinese companies. clients often ask SRK China to take the leadmuch harder.” “For Tetra Tech, the market has changed in overseas projects because it is easier to In effect, this restructuring has manifested from foreign mining companies looking into communicate with us in Chinese, and evenitself in the emergence of two specific areas. projects in China, to Chinese companies if they can speak English, it may be moreWhere levels of expertise are already high, looking to do projects internationally. So, it convenient to use us as well. We would likeChinese companies have filled the void, and has flipped 180O,” said Brent Thompson. to engage our local offices, but Chinese com-their inherent capabilities doubled by ambi- “For us, it has meant we have had to be panies usually insist on having Chinese in-tion to expand outside China’s borders, are nimble to adapt to this change. Now, roughly volvement.”increasingly placing them as reliable global 70% of our work is for Chinese companies While the opportunities posed by Chineseservice providers. doing work internationally. It remains even projects abroad have proven lucrative for Where levels of standards are lower, for- more critical for us to remain in China given many service providers with offices in China,eign investment has been welcomed in order this trend because this is where the deci- there are signs that they are increasingly be-to contribute expertise and knowledge trans- sion making is done. The headquarters of all ing engaged domestically as well. Within thefer to domestic players. “The focus of the in- these Chinese mining companies make the engineering sector, for example, large multi-ternational mining companies in the industry decisions on how to execute these interna- national companies have long faced restric-has shifted over the years from exploration tional projects and who to work with. More- tions in the scope of their work. Simon Daito being more about the supply of commodi- over, Chinese companies like having such from Hatch says that challenges faced byties, while on the operational end it is largely foreign counterparts here with whom they Chinese companies abroad are making themabout supporting the Chinese mining indus- can interact.” more comfortable to seeking “more qualified16 E&MJ • October 2012
  15. 15. Mining IN E&MJ • October 2012 17
  16. 16. Mining IN Chinaengineering and service related advice” all market segments,” explained Sandeep Ray,around the board. Director of Global Sales for CAE Mining. After a presence in China of over two de- “Several local software houses are emergingcades, in May, Hatch finally received their in China, often catering to a particular com-first Class A engineering license allowing modity or mining method. To date, most ofthem to practice a much larger scope of en- our sales and services have been centeredgineering work in the Chinese market. “We around our flagship resource modeling andare seeing this not only abroad but also mine planning solutions. We can see in-domestically. Before, Chinese mining com- creasing demand for our exploration solu-panies only worked with domestic engineer- tions that are well suited to both large anding firms, but now they are speaking with small companies. We also expect our newforeign professionals. We are getting more CAE Terra equipment simulators to be pop-enquiries about our technologies and project ular in China as the adoption of mechaniza-services. The market is maturing and things tion in Chinese mines continues to increase CAE Terra CAT 793F mining truck simulator.are changing. China is starting to look more in line with production rates.” Photo Courtesy of CAE Mining.for technical solutions to improve their pro- One factor that has delayed the growthductivity.” of these capacities domestically, and which market has been a long process, but has still challenges the growth of such services, ultimately paid off for those willing to putSoftware and Resource has been China’s labor policies, which favor in the time and effort. Dean O’Keefe, groupEstimation manual labor as opposed to automation. general manager for Micromine, who hasForeign companies have been particularly “Although on the surface there is a lot of worked on developing the Chinese marketsuccessful in establishing a niche presence talk about improving efficiency, production, since 2000, said that it took coming upin areas where there is little domestic Chi- and minimizing maintenance, downtime with various innovative approaches in ordernese competition. Efforts to improve explo- and all of those sorts of things, the flip side to succeed in transferring that knowledgeration, resource estimation and production of that is the loss of jobs. So outwardly they to the market. Today, the company hasmethods have given a number of opportuni- do want to be improving technology, but around 400 clients in China. “Everyone isties to automation and software companies. they are also being pulled in the other direc- always very interested in good technology, “Within the software space for example, tion,” said Cameron Dorr, general manager but it is much harder to convince potentialcompetition is mostly based on the price of Asia for Sedgman. clients to make good use of that technology.differential between foreign software and As a result of this challenge, engrain- The fact that we succeeded in doing this ishome grown software aimed at narrow ing such technologies within the Chinese why we were able to take off,” O’Keefe said.18 E&MJ • October 2012
  17. 17. Mining IN China Resource estimation has also become sia’s, in which lots of things are not digitized companies investing in Indonesian assets.a key growth area for international mining and it is very hard to get original sources of “They are most interested in due diligence,consultancies as they take advantage of information. As a result, we often have to and seek information on certain companiesthe increasing spate of Chinese companies do a lot of confirmatory drilling to ensure and assets as they encounter much diffi-who either list or venture abroad and who that the data is reliable. We are sometimes culty in locating up to date and reliable in-thus are forced to transfer their Chinese es- unsure of how the initial data was collected, formation,” said Vasily Tsarev, president oftimation models to those accepted globally. unlike under JORC Code, which requires Bantry, speaking on some of the servicesThe difference between globally accepted companies to keep all original drilling and that his company has been providing. “Theyresource estimation codes and the Chinese sampling records. This actually generates a seek recommendations on negotiation tech-version has been the key to this growing lot of opportunities for us.” niques and tactics, so that they can betterbusiness. “Our bread and butter consult- define the financial aspects of a deal. Theing is resource and reserve estimation. We Consultancies difficulties that they face is not that theytake people’s data and we tell them the size Challenges experienced by Chinese compa- are being cheated by local companies, butof their deposit. Now, the methodology to nies abroad have also resulted in the emer- rather because they are not as experienceddo that in the West are guidelines such as gence of a new class of service providers, as the other party. There was one very largeJORC. Thus we use our software to make dedicated to making Chinese investments Chinese company that began investing instep-by-step mathematical processes to successful. As noted in the outbound invest- the Indonesian mining sector around threequantify those resources under the frame- ment chapter, numerous companies have years ago, and they quickly suffered two orwork of international guidelines. Now, in faced difficulties in overseas acquisitions. three failures with their Indonesian coun-China, most of the resource estimation pro- Service companies have addressed these terparts. Since last year, they have soughtcess is based on a more manual process issues by helping companies from market our services. Another area we help Chinesecalled the polygonal method,” said O’Keefe. research and geological help to negotiation companies with is in community outreach. “There are definitely differences,” said assistance and community outreach. While We have seen so many companies buy as-Yonglian Sun of SRK. “The Chinese system Chinese companies began to employ such sets and bring their own workers from China,uses a three digit numbering code–111, services earlier on in more mature markets, instead of hiring locals and this has often222, or 333–whereas JORC Code uses there are signs that such services are start- caused anger within the local communities.‘Measured’, ‘Indicated’ and ‘Inferred’ termi- ing to be utilized in less developed econo- We are seeing more interest by Chinese com-nologies, in order of decreasing confidence mies as well. panies to tackle these issues in the last yearin categorizing the resources. With JORC Bantry Corp., a company that owns nickel or two,” Tsarev said.Code, all data is available for audit, but ore deposits in Indonesia, has recently start- The realization that community relationsChina has long had a system similar to Rus- ed to offer consultancy services to Chinese are critical to operational successes on E&MJ • October 2012 19
  18. 18. Mining IN Chinaground has come rather late to the mining service providers, who are keen on offeringindustry but even in this space, opportuni- their services abroad. Those with strongties are sprouting and Chinese companies knowledge of Chinese mineral assets, oftenare more willing to learn about how sus- point to the fact that, by and large, manytainability can help their operations. BSR, mines tend to be lower grade and geologi-a non-profit membership organization that cally complex, and have thus brought abouthelps companies better integrate corporate high levels of technical abilities in China thatsocial responsibility (CSR) into their op- are not found in other countries.erations, does not have many members in “There are very many mines in ChinaChina so far, however, Terry Nelidov, man- with very complex geology, and as a trendager for advisory services, said that interest we are seeing that mines here are becom-is rising in this critical sector: “We believe it ing increasingly deeper as companies trywill happen in China as the country opens to reach ore deposits. China has a largeup more to the rest of the world, and as amount of complex mines located under Wu Shaohui, president of China ENFIChinese mining companies go overseas… water bodies, or those defined by low-grade Engineering Corporation.China does not have the same tradition ore bodies, and these are very challengingof mining activist groups that you have in for our design teams. Several years ago, institutes supported the growth of China’sother countries, so how can you expect its most mines were less than 1,100 meters, mining industry through R&D, manufactur-companies to be able to engage effectively but now mines that are over 1,100 meters ing and services. In 1999, around 80 in-with them in new countries outside of China are becoming more widespread and large stitutes with mining related activities werewhen they do not have that experience at scale. These are high temperature and high converted into enterprises, with the goal ofhome?... Chinese companies have to decide in-situ stresses mines with large scale op- becoming self-sustaining and profit orient-that this is a priority, like transnationals did erations,” said Wu Shaohui, president of ed companies.years ago with safety.” China ENFI Engineering Corp., a leader in “Chinese enterprises have a large focus project integration and resource develop- on process development and related tech-Chinese Domestic Players ment in the Chinese mining sector. nology R&D because we do not have manyDespite some of the improvement areas that ENFI, which stands for China Nonfer- high quality mineral deposits here. Most ofthe Chinese government has sought to plug rous Engineering and Research Institute, the deposits are quite small and complex,through foreign investment and expertise, is rooted in the country’s former system of which raises higher requirements on tech-China’s rich mining history has also produced government managed research institutes, a nology in order to economically recovera wealth of technologies and highly capable setup adopted from the Soviet Union. These minerals from the ores. Generally speaking,20 E&MJ • October 2012
  19. 19. Mining IN China and also for processing mining. We will also be looking at comprehensive recycling solutions, construction of green fields, digi- tal mining technologies and automation. In terms of strategy, we will be strengthening our training processes and will be sending our experts abroad to learn foreign tech- nologies. This will guarantee our ability to expand our business inside and outside of China,” said Wu Shaohui. Although many Chinese companies seek to develop advanced technical abilities, Jiang Kaixi considers that the technical collaboration between China and the in-Jiang Kaixi, president of Beijing Institute of Metal Reduction roasting and ammonia leaching plant.and Metallurgy (BGRIMM). Photo courtesy of BGRIMM. ternational mining industry has so far not reached its full potential: “I think today it isthe current technologies and equipment in cessing and metallurgy for non-ferrous met- time to strengthen cooperation with foreignChina have already acquired all-round com- als. Together, enterprises like ENFI and companies, but it is important to rethink thepetitiveness and can satisfy the demands of BGRIMM command tremendous resources dimension and terms of these partnerships.the mining industry, particularly in respect and size. As an example, 70% of total For example, BGRIMM is very experiencedto the comprehensive utilization of mineral non-ferrous mining operations in China use in processing complex ores and developingresources. In dealing with low-grade and BGRIMM’s technology. complicated processes. In the meantime,complex ores, our technologies have mani- Chinese service providers are also in- foreign companies usually are very strongfested good suitability, high efficiency and creasingly working on Chinese projects in equipment, automation and instruments,cost effectiveness. These features will be overseas, however, a growing number de- and have top international standards in en-even more welcome at the time of resourc- sire to work with international companies as gineering language. The cooperation thates depletion and degradation,” said Jiang well, and view diversification of their tech- we need to build is to take advantage ofKaixi, president of Beijing Institute of Metal nical abilities as key to that growth. both Chinese expertise and internationaland Metallurgy (BGRIMM). “ENFI wants to develop its technologies strengths, and make a full utilization of our BGRIMM, which was established in involved in deep mining, oversize scale of knowledge and skills to pursue investment1956, is largely focused on mineral pro- mining, challenging mining technologies into mining.” E&MJ • October 2012 21
  20. 20. What Next? Majors Remain Optimistic. Data that China’s econo- my has slowed to its low- est growth level in three years, doubled by per- sistent fears stemming from the European debt crisis continue to leave many companies with an uncertain outlook on minerals and metals de- mand. Moreover, news of rising stockpiles of coal, iron ore and other metals throughout China’s ports Abdumalik Mirakhmedov, vice president of marketing for ENRC. are undeniably stoking fears amongst mining companies who are questioning what happens next. Nevertheless, confidence that the poor economic data is but a bump in the road continues to be expressed by major producers, both foreign and Chinese. China’s commitment in fulfilling the lofty goals of their 12th Five-Year plan, doubled by rising production costs domestically also give reason for hope to Abdumalik Mirakhmedov, vice president of marketing for ENRC. The company, which is one of the world’s largest producers of ferrochrome, has been operating in China since 2000 and is a large supplier of high carbon ferrochrome and iron ore into the country. “There are massive plans by the Chinese Central Government to invest into the Gansu and Xinjiang provinces. That means that they will build more airports, roads, highways, and housing complexes, all of which are directly linked to steel production. For example, Baosteel, China’s largest steel maker, is currently producing nine million mt of steel in Xinjiang province, but in the next 3-4 years they will be producing 15 millions mt. So our outlook on commodities is still very positive,” said Mirakhm- edov. “We believe that steel growth will remain, maybe not as high as before, and China’s steel industry will continue to rely on foreign imports. Even though China has huge domestic iron ore production, they still cannot cover their own needs. The cost of production in China remains very high, their labor costs are ris- ing, their raw materials grades are poor and the RMB is becoming stronger, which are all having a further impact on the domestic cost of production. With all these elements in place, ENRC will continue playing an important role in the import of raw materials to China.” However, an even more important sign is that China’s largest companies remain strongly committed to leaving their mark on the global mining industry. “Despite the global economic recession, we still have a firm base in our domestic GDP growth, and we will stick to our long- term development strategy,” said Li Yihuang, Chairman of Chi- na’s largest copper producer, Jiangxi Copper. “In the next five years, our target is to rank in the top three of the world’s copper industry, to become one of the world’s top 500 companies. We will step out of Jiangxi and face the whole world.”22 E&MJ • October 2012