China's Outbound Mining Investment: Digging To Continue

BMI View: While the cooling of Chinese economic growth will drag on import growth for industrial metals over the coming quarters, China will retain its appetite for direct overseas mining investment due to structural shortfalls in domestic production. We expect Africa to attract the bulk of Chinese interest due to growing commercial and political ties, as well as the rich deposits of high-grade iron ore on offer. Investment flows into copper and gold mines abroad should also continue over the coming years, although the path towards mine development will not be smooth-sailing for many Chinese investors.

We expect an increasing number of Chinese companies to venture abroad for mining investment in the coming years. While miners across the board are scaling back their ambitions with the softening of mineral prices, a structural shortfall in domestic production of key minerals will sustain the push for overseas mining by Chinese investors. Indeed, China is on a massive drive to improve its self-sufficiency in mineral production. Market sources indicated that the country is planning to import around 50% of its iron ore from Chinese-owned foreign assets by 2015. While this target may be overly ambitious, we see it as firm indication that the drive for direct access to foreign minerals will continue apace.

Africa Most Attractive

Domestic Shortfall To Drive Overseas Ventures
China - % Of Global Production & Consumption (2013)

BMI View: While the cooling of Chinese economic growth will drag on import growth for industrial metals over the coming quarters, China will retain its appetite for direct overseas mining investment due to structural shortfalls in domestic production. We expect Africa to attract the bulk of Chinese interest due to growing commercial and political ties, as well as the rich deposits of high-grade iron ore on offer. Investment flows into copper and gold mines abroad should also continue over the coming years, although the path towards mine development will not be smooth-sailing for many Chinese investors.

We expect an increasing number of Chinese companies to venture abroad for mining investment in the coming years. While miners across the board are scaling back their ambitions with the softening of mineral prices, a structural shortfall in domestic production of key minerals will sustain the push for overseas mining by Chinese investors. Indeed, China is on a massive drive to improve its self-sufficiency in mineral production. Market sources indicated that the country is planning to import around 50% of its iron ore from Chinese-owned foreign assets by 2015. While this target may be overly ambitious, we see it as firm indication that the drive for direct access to foreign minerals will continue apace.

Domestic Shortfall To Drive Overseas Ventures
China - % Of Global Production & Consumption (2013)

Africa Most Attractive

The bulk of Chinese outbound mining investment will continue to concentrate on Africa due to the growing commercial and political ties between both countries and the rich mineral deposits on offer ( see 'China's Push For African Riches To Continue', August 01, 2013). According to the Chinese State Council, China's cumulative investment in Africa more than doubled from US$9.3bn in 2009 to US$21.2bn in 2012.

China is clearly the driving force behind growing trade between Africa and Asia ( see 'Africa-Asia Trade: Looking Beyond China', September 24, 2013). The mainland is the destination for half of all African exports to Asia and the source of 48% of Africa's imports from the region. China's rapid economic growth and surging demand for foreign resources has boosted imports of oil, copper, iron ore, and other raw materials. On the other hand, the manufacturing powerhouses of China's southeast produce the consumer goods demanded by Africa's increasingly prosperous population.

China Dominates
Proportion Of Total Asian Trade With Africa (%, 2012)

Crucially, there are more than 35bn tonnes (bnt) of direct-shipping iron ore in Africa. These iron ore deposits can be fed directly into iron-making blast furnaces and are particularly attractive with Chinese miners due to the precipitous fall in domestic ore grades over the past decade. The average grade of marginal Chinese iron ore has reportedly fallen from 43% in 2004, to 15% in 2012.

Africa To Benefit As Chinese Ore Grade Falls
China - Iron Ore Grade

As environmental concerns continue to dominate the headlines in China, the mining of high-grade and less polluting ore will be of paramount importance to many Chinese miners. A growing number of Chinese miners are also looking to ease the concentration of market power enjoyed by the big three iron ore miners - BHP Billiton, Rio Tinto and Vale.

Iron Ore In West Africa

West Africa's iron ore sector will be a focal point of China's investment. The region hosts rich deposits of high grade iron ore reserves, with iron content estimated at around 50-60%. With cash costs as low as US$40/tonne, these high grades substantially lower the cost of production for many mining companies and enable them to reap some of the highest margins in the world. In contrast, our forecast for iron ore prices to average US$105/tonne between 2014 and 2018 would render the bulk of Chinese iron ore mines (which operate at a cash cost of US$120/tonne) unprofitable.

High-Cost Chinese Tonnage
Global - Iron Ore Cash Costs By Company (US$/tonne & Production As % Capacity)

We expect countries such as Sierra Leone, Guinea, Liberia and Mauritania to experience rapid growth in iron ore production over the coming years ( see 'Iron Ore: West Africa To Become Regional Powerhouse', December 27, 2013).

Ore-Some Boom In Africa
Select Countries - Iron Ore Production (mnt)

According to the Chinese embassy, China will expand trade with Sierra Leone by 33% this year to a record US$2bn as it expands its footprint in the iron ore sector. The country overtook South Africa to become Sierra Leone's largest trading partner in 2011 on the back of huge capital flows into the mining space. In September 2013, Tianjin Minerals and Equipment Group injected US$990mn into the Tonkolili deposit in Sierra Leone. With cash costs pegged at just US$30/tonne, the Tonkolili project has earlier secured a US$1.5bn investment from Shandong Iron & Steel Group in 2012.

Africa - Select Iron Ore Mines
Country Company Mine Asset Average Cash Cost (US$/tonne) Capex (US$mn)
DRC Exxaro Mayoko 50 320
Sierra Leone African Minerals Pepel35 35 2,400
Sierra Leone Cape Lambert Marampa 35 1,100
Sierra Leone London Mining Marampa 35 340
Sierra Leone Arfican Minerals Tonkolili 30 na
South Africa Anglo American Kolomela 65 na
Cameroon Sundance Resources Mbalam Iron Ore Deposit 50 4,700
DRC Core Mining Avima 30 4,500
Guinea Rio Tinto Simandou 35 na
na = not available. Source: Bloomberg Industries

Copper In Central & Southern Africa

Aside from West African iron ore, we expect continued Chinese interest in Central & Southern Africa. Countries such as Zambia and the Democratic Republic of Congo (DRC) are home to high-grade copper reserves, a metal for which China has a clear structural deficit.

Select Mines - China Mining Investment In Africa
Country Company Mine Output Year
Zambia Jinchuan Mnari Nickel: 8.5ktpa 2013
Zambia NFC Africa Luanshya Copper: Increase from 149-250ktpa 2014
Guinea Bellzone / China Investment Fund Kalia 20mntpa 2014
Guinea Rio / Chinalco Simandou 95mntpa 2015
Mozambique China Kingho Maravi Coal: Preliminary Results na
DR Congo NFC Africa Katanga Province Copper & Gold: Preliminary Drilling na
Guinea Bellzone / China Investment Fund Forecariah High-grade deposit na
Gabon CMEC Belinga Reserves: 100mnt na
Liberia China-Africa Development Fund Bong Reserves: 110mnt na
na = not available. Source: Company Announcements, BMI

Eyeing Peru Too

We believe the abundance of copper deposits in Peru will continue to garner the interest of Chinese miners over the coming years. At present, China is the largest investor in Peru's mining sector, at around a quarter of all investment. This is followed by the US and Canada, at approximately 17% and 16%, respectively. The majority of Chinese investment is catered to the purchase of mining rights to untapped deposits or the development of mining-related infrastructure projects.

Of critical importance, China Minmetals could potentially secure the sale of the US$5.9bn Las Bambas project by Glencore Xstrata in the coming months. If successful, the Las Bambas copper mine would rank as one of the biggest overseas acquisitions by a Chinese company. Subsequently, this would enhance the share of Chinese investment in Peruvian mining to more than 30%.

On A Golden Quest

Aside from iron ore and copper, Chinese miners will continue to pour investment into gold mines around the world despite our forecast for lower prices in the coming years ( see 'Gold Rush To Continue On Robust Appetite', September 25, 2013). Growth in Chinese gold output will be insufficient to meet rising domestic demand which is playing catch up after being repressed for decades. Depleting reserves, falling ore grades and the relatively short life span of domestic mines will continue to take their toll on mining production.

Lower Prices, But Chinese Miners Undeterred
Average Gold Price (US$/oz)

The Chinese government is pushing many of the state-owned miners to boost the development of gold resources in regions such as Australia, Africa and Latin America. According to Bloomberg, acquisitions by Chinese gold miners rose to a record US$2.2bn in 2013, a 14% y-o-y increase from the previous year. Unsurprisingly, a large number of Chinese miners are acquiring assets on the cheap following the spate of writedowns and earnings downgrade in the gold mining industry.

More Private Players To Step Into The Breach

We believe Chinese private players could gradually replace state-run firms to become the leading investors in overseas mining. China Mining Association (CMA) stated that overseas mining investment by China's state-run firms reached US$1.2bn in the first three quarters of 2013, compared with US$1.9bn by private investors. Perhaps more evidently, the number of overseas mining projects launched by state-owned firms stood at 30 over the same period, in contrast with 73 by private businesses. The economic slowdown in China will dampen the ability of many state-run firms to invest abroad due to deteriorating bottom line and the inherently high-risk nature of greenfield development. Indeed, Chinese steelmakers could put their upstream expansion plans on the backburner as domestic operations come under duress from the gradual embrace of free market economics in China.

Still A Rocky Road Ahead

The path towards mine development will not be a smooth ride for Chinese investors. Despite having committed extensive amount of capital to expand its resource base abroad, it is estimated that approximately 80% of China's overseas mining investment had largely failed.

Apart from criticism against the poor operational record of Chinese miners, the paucity of sound infrastructure remains a major roadblock for many mining companies. In many cases, investment by Chinese miners often extend beyond the scope of mining assets to include projects in railways, power plants and social infrastructure. Furthermore, the lack of operational expertise particularly with adherence to local environmental and mining regulations has delayed projects on numerous occasions.

Mind The Gap
Select Countries - Quality of Transport Network
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Related sectors of this article: Mining, Copper - Mining, Iron Ore - Mining, Gold - Mining
Geography: China, Peru
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