Editor’s Note: At present, the global mining industry has entered a period of profound adjustment. Having taken the first step in “going global,” how should Chinese enterprises respond to the current sluggish international market conditions? What experiences and lessons have they accumulated during their “going global” journey? And how should they proceed with future M&A activities, and how can companies that have completed such acquisitions achieve smooth operations? Chang Xingguo, Investment Manager at Zhongkuang Kaitou Investment Management Co., Ltd., analyzed these factors for us and offered several recommendations: seizing the right timing, maintaining effective communication and coordination with all stakeholders, strengthening the development of internationally-minded talent, and enhancing risk management and control. By addressing these key challenges, Chinese enterprises can steadily and confidently take the next steps in their “going global” strategy.

Actively “going global” and engaging in overseas investment cooperation for mineral resources is not only an inevitable requirement to meet China’s ever-growing demand for mineral resources, but also a necessary path for enterprises to enhance their core competitiveness and continuously grow stronger, ultimately becoming internationally recognized mining companies. In the face of the grim reality of a prolonged downturn in the global mining economy, how best to “go global” has become a focal point of attention. Recently, a series of “Mining + Finance” salon events themed “Lessons and Experiences from China’s Mining Enterprises Going Global” was held at the Beijing International Mining City. Chang Xingguo, Investment Manager at Zhongkuang Kaitou Investment Management Co., Ltd., delivered a speech at the event. Between sessions of the symposium, a reporter from China Mining News interviewed him on this topic.

Chang Xingguo holds a Master’s degree in Engineering from China University of Geosciences (Beijing) and is currently pursuing a Master’s degree in Finance at the University of International Business and Economics. Previously, he worked for many years at the China Mining Association, where he served as Deputy Director of the International and Geological-Mining Finance Project Department, conducting ongoing research and analysis on Chinese enterprises’ overseas mining investments and operations. He currently serves as an Investment Manager at Zhongkuang Kaitou Investment Management Co., Ltd.

Chang Xingguo: Before 2002, China’s mining industry had accumulated foreign mining investments totaling 13.23 billion U.S. dollars. Since 2003, as the international mining market has experienced fluctuations and volatility, the scale of overseas investments by Chinese mining enterprises has remained high amid these fluctuations, generally showing an upward trend. By the end of 2014, China’s total outward direct investment in the mining sector (including oil and gas) had reached 125 billion U.S. dollars.

In recent years, China’s mining sector “going global” has shown a trend of overall decline coupled with a rebound in investments in solid minerals. In 2014, China’s overseas mining investment fell by 55% year-on-year, with overseas oil and gas M&A investments plunging by as much as 82%. Meanwhile, the value of investment agreements in solid minerals rose by 109.6% year-on-year. Oil and natural gas have consistently been the primary targets of China’s overseas mining investments, while ferrous metals have long ranked second. Starting in 2009, non-ferrous metals surpassed ferrous metals in terms of investment volume, and since 2011, coal has also overtaken ferrous metals.

After nearly 20 years of investment, China’s overseas equity resources have steadily increased, and some of these equity resources have begun to be converted into production capacity. In 2014, Chinese oil companies’ overseas oil and gas equity holdings exceeded 130 million tons; Chinese enterprises’ overseas iron ore equity resources reached 34 billion tons, and once fully developed, the annual production capacity of these equity-based mines will reach 278 million tons. Currently, Chinese enterprises have undertaken a total of 23 overseas copper mining projects, resulting in equity resource reserves of approximately 59.17 million tons, with a designed equity production capacity of 1.7 million tons per year. Several overseas oil and gas, iron ore, and copper mining projects have now entered the production phase, including Sudan Blocks 1, 2, and 4, the Karazhanbas oil and gas field, the Chana iron ore mine, the Kambashi copper mine, and the Saipan copper mine.

In terms of overseas iron ore exploration and development, there are over 200 investment projects, among which about 30 are major projects. These major projects are primarily located in three regions: Western Australia, northeastern Canada, and West Africa. The total amount of investment agreed upon by the Chinese side exceeds 34 billion U.S. dollars, and the proven reserves of resources secured through these investments reach 26.9 billion tons. Once all these projects are fully operational, the annual production capacity under equity interests will reach 278 million tons. In 2014, the actual output of equity-interest-bearing iron ore was 93.47 million tons. The issue of massive investment yielding meager returns has long remained unresolved; for most projects, the capacity utilization effect has not been significant. Some projects have already been successfully put into operation and have achieved relatively good returns, while others have encountered difficulties during development and operation and have been temporarily suspended. Still more projects are currently in the early stages of preparation, feasibility studies, or construction, leaving considerable uncertainty regarding their future production capacity and economic benefits.

China has 23 major overseas copper mining investment projects, with a total agreed investment of 33.8 billion U.S. dollars. These projects have secured overseas mineral rights and resource reserves totaling approximately 66.07 million tons, and their designed equity production capacity stands at 2.015 million tons per year. However, whether the full production capacity can be realized and when it will begin operating remain uncertain. Some enterprises have already started producing from their invested companies or projects and are reaping positive returns. For instance, China Nonferrous Mining Co., Ltd.—whose primary asset is a copper mine in Zambia; Minmetals Resources Ltd., controlled by the Five Minerals Group; Jinchuan International Resources Co., Ltd., controlled by Jinchuan Group; Pengxin International Resources Co., Ltd.; the copper-gold mining project of Luoyang Molybdenum Industry Co., Ltd.; the Lüsha copper-cobalt mine jointly developed by China Railway Resources Group Ltd.; and the Sandak copper-gold mine in Pakistan operated by China Metallurgical Science & Industry Technology Corporation—all these projects have achieved normal production and profitability. Nevertheless, some enterprises face challenges in their independently developed projects, resulting in slower progress and significant uncertainties.

Chang Xingguo: The mining industry has consistently been a major sector for Chinese enterprises’ overseas investments. Before 2007, its share in overseas investments reached as high as 30% to 50%, after which it generally remained between 10% and 25%. The “going global” journey of China’s mining sector can be roughly divided into four stages: The first stage (mid-1980s to mid-1990s) was characterized by exploration and initial steps, accumulating experience, cultivating talent, and familiarizing oneself with foreign environments. According to relevant data, China’s mining sector first began “going global” in the mid-1980s. At that time, the overall “going global” policy was still largely restrictive, and most “going global” initiatives took the form of exploratory projects without substantial investment. The second stage (late 1990s to around 2005) marked the consolidation of earlier achievements. After the mid-to-late 1990s, the world plunged into an economic crisis, particularly from 1997 to 2005, during which the global mining industry experienced a prolonged downturn. Both domestic and international mining sectors were severely affected. As a result, the pace of overseas investment by domestic mining companies slowed down somewhat. Building on the extensive explorations of the first stage, large state-owned enterprises such as China Steel Corporation, PetroChina, Sinopec, Shanghai Baosteel, and CNOOC not only continued to undertake overseas projects comprehensively but also gradually focused on specific projects, making substantive investments and entering a phase of consolidating their existing ventures. The third stage (2005–2011) was a period of rapid development. Starting in 2005, the pace of China’s mining sector “going global” accelerated. A key feature of this stage was the diversification of investors: in addition to large state-owned enterprises, many private enterprises entered the field of overseas mining investment. The proportion of private enterprises in overseas solid-mineral investments rose to 40%. Meanwhile, numerous cross-industry companies also entered the mining sector; enterprises from industries such as trade, manufacturing, construction, and real estate saw their share in overseas mining investments increase to around 50%. The fourth stage (2012 to present) is a period marked by intensifying contradictions and structural transformation, during which solid-mineral investments have entered a phase of stable development. Many earlier, blind and irrational investments, after massive capital injections, could no longer sustain themselves, pushing the mining industry into a new cycle. China’s overseas mining investments now stand at a new juncture. Several major mining nations have expanded and made more explicit their restrictions on state-owned enterprises’ investments in resource sectors. Coupled with the State-owned Assets Supervision and Administration Commission’s stringent management of state-owned assets, the proportion of private enterprises has further increased. Direct financing has grown, the number of investment funds has risen, and both Hong Kong and the domestic capital markets have played an increasingly important role. Domestic listed companies have taken on greater significance. Investments in gold, platinum-group metals, and uranium have increased, while investments in iron and potash have declined. This stage exhibits the following characteristics: First, the proportion of investment by private enterprises has risen. Private enterprise investment grew from 3.53 billion U.S. dollars in 2013 to 5.842 billion U.S. dollars in 2014. Second, cross-industry enterprises’ investments have shown steady growth. In 2014, cross-industry enterprises’ oil and gas investments reached 1.636 billion U.S. dollars, more than doubling compared to 2013; investments in solid minerals (3.174 billion U.S. dollars) remained roughly unchanged from 2013’s level (3.101 billion U.S. dollars). Third, energy and mineral investments have diverged. In 2014, oil and gas investments fell from 21.7 billion U.S. dollars to 3.867 billion U.S. dollars, while metal-mineral investments increased. Fourth, investment regions have become even more concentrated. The primary destinations for solid-mineral investments are Southern Africa, Australia, and Latin America; the main destinations for oil and gas investments are transition countries (Central Asia and Russia) and North America, accounting for 67% and 23% of total investments, respectively.

Chang Xingguo: One of the lessons learned is that failing to seize the right timing led to poor project quality and a lack of strategic insight into and grasp of the market. In the 1980s and 1990s, international mining companies—including the three major iron ore giants and Hancock—proactively proposed cooperation with Chinese partners to develop iron ore resources. However, the Chinese side failed to recognize and seize these opportunities. Many Chinese-funded enterprises opted instead for greenfield projects that were still in the exploration or feasibility study stage. Although these projects boasted enormous resource reserves, they featured long development cycles, high development risks, massive capital requirements, significant uncertainties about their future prospects, and weak resilience against industry cyclical fluctuations. The key lesson here is to understand industry cycles and capitalize on strategic opportunities. In November 1987, during a trough in the global mining industry, China National Metallurgical Import & Export Corporation (the predecessor of MCC) established a joint venture with Australia’s CRA Company (the predecessor of Rio Tinto) to develop the Channar iron ore mine. In 2009, when the global financial crisis sent commodity prices plummeting and the Australian dollar depreciated sharply, Minmetals Group took advantage of this opportunity to acquire OZ Company—a firm facing severe financial difficulties—at a bargain price. Similarly, the Center for Geological Survey of Nonferrous Metals seized the moment presented by the global financial crisis to enter the Ghanaian company at a low price, laying a solid foundation for subsequent mineral exploration efforts.

The second lesson is the neglect of stakeholders. Some Chinese-funded enterprises are accustomed to negotiating solely with the government, believing that “if you can get the local government on your side, you’ve got everything sorted.” In fact, in many countries—especially those in the Western Hemisphere—the governments are generally weak, and the roles and influences of laws, labor unions, local communities, public oversight organizations, and the media are remarkably significant. By contrast, the government’s ability to exert influence is far less than in China. Some enterprises are also accustomed to prioritizing the interests of major shareholders above all else, thereby harming the interests of other shareholders. The lesson here is to engage in thorough and early communication with all relevant stakeholders; hostile takeovers rarely end in success. Before CNOOC’s acquisition of Canada’s Nexen, the company made extensive preparations, carefully taking into account the concerns of the company’s shareholders, its management team, and the host country’s government. It also put in place specific response measures for sensitive issues, earning full recognition from all parties involved and thus paving the way for a smooth merger and acquisition. During Sichuan Taifeng Group’s acquisition of the IMX iron ore project in Australia, the company achieved effective resolution of potential political obstacles arising from the project’s proximity to a military base by engaging in comprehensive dialogue with the host country’s government and emphasizing the commercial nature of its business operations.

The third lesson is to avoid rushing into international expansion when the pool of internationally qualified talent is insufficient. Given that China’s mining industry has a relatively short history of “going global,” enterprises generally lack familiarity with the operational rules for exploring and developing overseas mineral resources, and they are short of professional teams and talent capable of managing cross-border operations. As a result, most M&A projects encounter obstacles during integration—obstacles arising from political, economic, and cultural differences—which ultimately affect the success or failure of overseas investment initiatives. The key takeaway here is to make good use of international talent. A significant portion of an enterprise’s value lies in its team. After acquiring OZ Company’s assets, China Minmetals Corporation recruited OZ’s key managers and established a separate company specifically to manage these assets, using it as a platform to pursue overseas M&A deals. Similarly, after acquiring a junior exploration company in Canada, the Nonferrous Metals Geological Survey Center largely retained the company’s existing management team.