Alternative strategies for securing access to resources - Presented at www.minesandmoney.com

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Approaches to outbound investment: Alternative strategies for securing access to resources

Is 100% direst ownership the best investment approach in an era of increasing resource nationalism?
Challenges China’s SOE’s have faced as they look to invest around the world
Examining alternative investment strategies to secure resources while overcoming political hurdles
Exploring outbound investment strategies employed by other major outbound investing countries

Philip Newman, CEO, Newman Strategies

Published in: Travel, Business
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Alternative strategies for securing access to resources - Presented at www.minesandmoney.com

  1. 1. Approaches to outbound investment: Alternative strategies for securing access to resources 31 Mount Pleasant, 517, Tower 2, Augusto Leguía Norte PO Box 1269, 2911 West 54th Street, Level 2, Kalpataru Synergy, London Bright China Chang An Nº 100 of.506, Langley, Minneapolis, Opp. Grand Hyatt WC1X 0AD Building, Las Condes, WA 98260 MN 55410, Santa Cruz (East), UK 7 Jianguomennei Avenue, Santiago, USA USA Mumbai 400055, Beijing 100005, China Chile India Tel: +44 20 7903 2000 Tel: +86 10 6510 2206 Tel: +56 2 231 3900 Tel: +1 360 321 4707 Tel: +1 612 922 9092 Tel: +91 22 3953 7395 Fax: +44 20 7278 0003 Fax: +86 10 6510 2207 Fax: +56 2 231 4314 Fax: +1 360 321 4709 Fax: +1 612 920 3225 Fax: +91 22 3953 7200CRU STRATEGIES a division of CRU International Limited
  2. 2. Presentation outlinePreamble – the European issue!• The context of outbound investment• Learning from Japan’s experience• China’s outbound investment challenge• Are there alternative strategies?• Summary (a reminder that Chinese OI represents opportunities) 2CRU STRATEGIES
  3. 3. Preamble.....Europe – from CRU’s perspective..... Downside to GDP growth (% change) 8 6 4 2 0 -2 -4 -6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Eurozone Eurozone peripheral contagion World World peripheral contagion 3CRU STRATEGIES
  4. 4. Presentation outlinePreamble – the European issue!• The context of outbound investment• Learning from Japan’s experience• China’s outbound investment challenge• Are there alternative strategies?• Summary (a reminder that Chinese OI represents opportunities) 4CRU STRATEGIES
  5. 5. What do these 4 ‘resources’ have in common?1. Pepper 2. Gold 3. Coal 4. ..and Water 5CRU STRATEGIES
  6. 6. Planet Earth : Everything we need but not necessarily allin the right place!• When primary consumption was food and firewood – most populations could support themselves• Early civilizations outgrew their local resources and hence the emergence of trade (= outbound investment) 6CRU STRATEGIES
  7. 7. What are the drivers for outbound investment? • Market-seeking • Efficiency-seeking • Resource-seeking • Reduce trade gap 7CRU STRATEGIES
  8. 8. China’s investment in Latin America is a great example...The bulk of Chinese investments in LA is to secure commodity supply(with thanks to SinoLatin Capital for permission to reproduce) Efficiency Seeking Investments from 2005 CHERY AUTO US$ 1.2 billion URUGUAY 2007 up to April 2012 SINOTEX FOTON MEXICO MEXICO 2008 MEXICO 2010 HEBEI ZHONGXIN HUAWEI MEXICO 2009 BRAZIL 2011 LENOVO WUHAN IRON AND STEEL CHERY AUTO MEXICO 2009 BRAZIL 2009 BRAZIL 2010 Market Seeking US$ 6.5 billion STATE CONSTRUCTION ENGINEERING BAHAMAS 2009 SANY HEAVY INDUSTRY BRAZIL 2010 LENOVO ICBC JAC  BRAZIL 2012 BRAZIL 2011 BRAZIL 2012 MINMETALS ZUIN CHINALCO  STATE GRID CNOOC STATE GRID CUBA 2005 PERU 2007 PERU 2008 CHILE 2009 ARGENTINA 2010 BRAZIL 2010 MINMETALS GOLDEN DRAGON SINOPEC JINCHUAN GROUP CNPC Resource Seeking CHILE 2005 MEXICO 2007 COLOMBIA 2006 MEXICO 2008 VENEZUELA 2010 US$ 41.1 billion CNPC & SINOPEC CHALCO MINMETALS JIANGXI COPPER SHOUGANG GROUP ECE SINOCHEM  ECUADOR 2005 PERU 2007 PERU 2007 PERU 2009 BRAZIL 2010 BRAZIL 2010 SINOPEC CHONGQING GRAIN TAIYUN STEEL SHUNDE RIXIN CNOOC CHINA SCI‐TECH  CHONGQING CO BRAZIL 2010 ARGENTINA 2012 BRAZIL 2011 CHILE 2009 ARGENTINA 2010 PERU 2010 BRAZIL 2010 8CRU STRATEGIES SinoLatin Capital Analysis with the Federicks Pardee Center
  9. 9. Presentation outlinePreamble – the European issue!• The context of outbound investment• Learning from Japan’s experience• China’s outbound investment challenge• Are there alternative strategies?• Summary (a reminder that Chinese OI represents opportunities) 9CRU STRATEGIES
  10. 10. Recent experiences• Japan post WWII  80’s• Japan’s 1980’s Outbound Investment Boom• Japanese Companies Around the World 10CRU STRATEGIES
  11. 11. Japan post WWII  1980’s Government guided model established Transition to development of collective goals more capital intensive sectors Outbound Investment Boom 1945 1950’s 1960’s 1970’s 1980’s Textile and Worldwide leading light industry exporter across development many sectors 11CRU STRATEGIES
  12. 12. Japan’s Outbound Investment boomed in the 1980sJapan’s OI outflows for 1986-89 surpassed the country’s total OI for theentire postwar period up to 1986 Japan’s Outbound Investment Outflows 1982 - 1995 80 8% 70 7% 60 6% 50 5% USD$ Bn 4% 40 3% 30 2% 20 1% 10 0% 0 -1% Outflows Outflows as % of GDP 12CRU STRATEGIES Sources: Japan, Ministry of Finance and Economic Planning Agency, World Bank
  13. 13. Comparing China and Japan: before their OI boom… Total Outbound Investment Flows from China (88’-02’) and Japan (68’-82’) 10 9 Japan (68- 82) 8 China (88- 02) 7 Japan Trend (68 - 82) US$ billion China Trend (88 - 02) 6 5 4 3 2 1 0 1988 89 90 91 92 93 94 95 96 97 98 99 00 01 02 1968 69 70 71 72 73 74 75 76 77 78 79 80 81 82 Year 13CRU STRATEGIES Source: IMF, International Financial Statistics
  14. 14. ...and during their boom (is China’s boom just beginning?) Total Outbound Investment Flows from China (03’-15’ projected) and Japan (83’-95’) 140 Japan (83- 95) 120 China (03- 15) 100 Japan Trend (83 - 95)US$ billion China Trend (03 - 15) 80 60 40 20 0 2003 04 05 06 07 08 09 10 11 12 13 14 15 1983 84 85 86 87 88 89 90 91 92 93 94 95 14CRU STRATEGIES Source: IMF, International Financial Statistics
  15. 15. Presentation outlinePreamble – the European issue!• The context of outbound investment• Learning from Japan’s experience• China’s outbound investment challenge• Are there alternative strategies?• Summary (a reminder that Chinese OI represents opportunities) 15CRU STRATEGIES
  16. 16. China catching up on the world’s biggest economies… Outbound Investment Flows and Stock of Major Economies 2010 350 328.9 300 FlowsBn USD$ 250 200 150 104.86 100 84.11 76.01 68.81 56.26 51.7 38.58 50 31.9 19.23 14.63 0 6000 5000 4843.3 Stocks 4000Bn USD$ 3000 2000 1689.3 1523 1421.3 831.1 1000 433.6 336.1 317.2 300 180.9 92.4 0 16 CRU STRATEGIES Source: 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment
  17. 17. Comparing China and Japan Japan’s Boom Current China’s Future (1986-92) Japan Boom (now!) China? Investment Minority Larger stakes More than 51% approach / stakes in a in companies, control / Beginning with Full control? strategy large number influencing but JVs of companies not controlling Growth, securing Investment resources, technology Value Growth Value preservation goals control, know-how preservation? Economy Developing Developed Developing Developed? OI Flows #1 in 1989 6th 5th Top 3 Ranking Outbound Investment per USD$355 USD$440 USD$51 ? Person Index Level of 60-65% 67% 51% (2011) (74-80 mn) 58% (2025) Urbanization (86 mn) (691 mn) OI per Person Living in Urban USD$568 USD$654 USD$107 ? Areas Index 17CRU STRATEGIES
  18. 18. China’s Outbound Investment flows 2002-2015 120 110 100 ? 48% on 90 mining 40% 24% Growth in 2010 was 80 21.7% Bn USD$ 70 60 Growth is likely to 50 continue to be strong 40 30 $100Bn by 2014 (or even 20 2013?) 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Flows OI in Mining Trend 18CRU STRATEGIES Source: 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment
  19. 19. 2010 Chinese Outbound Investment flows distribution byRegion and Industry in % Region Industry North Transport, Oceania America Storage and 3% Post 4% 8% Banking Latin 13% America Manufacturing Leasing and 15% 7% Asia Business 65% Mining Services Europe 44% 10% 8% Other 10% Africa 3% Wholesale and Retail Trade 10% 19CRU STRATEGIES Source: 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment
  20. 20. Chinese investment in mining is extensive.... Of 7963 projects in production, feasibility or reserves development, 194 involve Chinese companies (outside China): What Where 80 70Number of projects 60 50 40 30 20 10 0 20 CRU STRATEGIES Metal Economics Group
  21. 21. ...not difficult to understand the commodity choices: Import requirement (% of expected consumption) 100% 2012 50% 2015 2020 0% Iron Ore Copper Zinc Nickel Uranium* Potash** * Strategic stockpiling ** 2010 Data 21CRU STRATEGIES CRU
  22. 22. China is still a latecomer in Outbound Investment....• Increasing Chinese Outbound Investment• 2011 5th Largest investor in the world• End 2011 cumulative OI > US$380 billion• Funds  China – Africa Development Fund  China – ASEAN Fund  New Fund for Chinese investment in Latin America in 2012• 2010  5.2% of worldwide OI flows and 1.6% of total worldwide stock 22CRU STRATEGIES Source: Development Research Center of the State Council
  23. 23. Presentation outlinePreamble – the European issue!• The context of outbound investment• Learning from Japan’s experience• China’s outbound investment challenge• Are there alternative strategies?• Summary (a reminder that Chinese OI represents opportunities) 23CRU STRATEGIES
  24. 24. What is the alternative to understanding the risks?• CRU Strategies have completed a number of workshops looking at investment / diversification strategies• Identifying the commodity is just one part of the strategy• The focus is on identifying, and pricing risk.... Avoid, Identify eliminate ADD RISK or mitigate VALUE RISK 24CRU STRATEGIES CRU Strategies
  25. 25. The Ideal Commodity to Invest in – it’s not all about price!Understanding what the world will look like as the current boom dissipates isvital... Developing a methodology to evaluate commodities for investment Demand Issues Supply Constraints Regional issues – whatthe market now and in the is there a scramble are the risks? future emerging? Consumption growth Resource availability Entry opportunities Substitution Supply response Attitude to mining Recyclability Producer consolidation Synergy issuesCRU STRATEGIES 25
  26. 26. To simplify (?) here are 8 risks that impact mining projectsThese are assessed with reference to the criteria in the previous slide…. Category Sub-category Examples Price risk Copper price, gold price, etc Global financial Inflation, interest rates, WACC, etc Economic risk Input commodity Price of acid, explosives, chemicals, tires, etc National economic Exchange rates, taxation, etc Geological Grades and tonnages Resource risk Geotechnical Ability to mine in practice, loss of reserves Mine-related Geotechnical events, performance of bottlenecks Operational risk Mill/plant-related Metallurgical (recovery), performance of bottlenecks Management Management risk Who is running the project? Have they done it before? Team Primarily related to scale of operation and grade; and project Cost risk General opex location Environment Air quality, water, tailings, etc Location risk Infrastructure Power, transportation, etc Project risk Delays and capital cost over-runs CRU STRATEGIES
  27. 27. There are alternatives.....• Technology – Recycling – Substitution• Sub-sea mining• Or, my favourite, the only TRULY outbound investment opportunity: Planetary Resources aims to mine asteroids for water, platinum and gold 27CRU STRATEGIES
  28. 28. Presentation outlinePreamble – the European issue!• The context of outbound investment• Learning from Japan’s experience• China’s outbound investment challenge• Are there alternative strategies?• Summary (a reminder that Chinese OI represents opportunities) 28CRU STRATEGIES
  29. 29. “We (China) have long been providing products to othercountries with our own natural resources. Now its time tocontribute to the world economy with world resources”Xiao Yaqing, Former President of Chinalco, 2008 • China is deficient a number of important commodities • Investment overseas is likely to accelerate • This presents opportunities for mining companies around the world Xiao Yaqing • However – China is not more or less risk averse than any other investor... • ...and the projects will still need to prove their worth! 29CRU STRATEGIES China View
  30. 30. China is still on a shopping spree (and will be for someyears!) 30CRU STRATEGIES
  31. 31. Thank-you Phil Newman Annie Li CEO CRU Strategies Business Development, CRU Group phil.newman@crugroup.com annie.li@crugroup.comCRU STRATEGIES a division of CRU International Limited

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