Chinese mining companies, while continuing to invest in Australia and Canada, will eye more mining opportunities in Africa, Central Asia and Russia in 2010, as they face more challenges in acquiring high-yield mines worldwide, according to an Ernst & Young report Thursday.
As commodity prices rally in a quicker than expected recovery, Australian and Canadian mining companies have withstood the test of financial difficulties and are not pressed to sell their assets for cash, said Eleanor Wu, transaction adviser at Ernst & Young.
"In the meantime, more buyers will compete with Chinese companies for quality assets in low-risk countries like Australia and Canada. Therefore, many of our customers showed interest in higher-risk investment destinations including Africa, Central Asia and Russia," said Wu.
Africa, Central Asia and Russia are attractive to Chinese investors because they are more likely to acquire a controlling stake in those countries.
But infrastructure in those countries is not well-established. Costs and risks are increased accordingly.
To hedge the risks and build infrastructure like ports and railways, Chinese miners might invite international investors and domestic contractors to be their business partners for mining projects in developing countries.
"Chinese buyers gradually realized that they cannot always take a majority stake, so there will be more cases but on a smaller scale," said Raymond Ng, assurance partner at Ernst & Young. "However, there is still a possibility to reach mega deals larger than $1 billion."
The report forecasts mergers and acquisitions in the mining sector would increase steadily in 2010, with mega deals remaining scarce.
As continued demand from China and India fuels a rapid economic recovery, the financial conditions of mining companies are largely improved. Borrowing will return to historic averages of 20 to 30 percent, compared with an average of 50 percent during the crisis period.
According to the report, cash-rich Chinese state-owned enterprises and massive sovereign wealth fund China Investment Corp have played leading roles in outbound deals for resource security concerns. In the meantime, a new breed of Chinese investors from the private sector will play a more active role in 2010, motivated by extensive technical due diligence and short term yields.
Source: China Daily