China’s Global Investment in Copper

China’sGlobal Investmentin Copper

China’sGlobal Investmentin Copper

Naturalresourcesare criticalforanycountrywith a visionforindustrialgrowthanddevelopment.Thisis thecaseforChina, which has thehighestdemandforcopper in theworld.Statistics showthatChina produces25 % of copper from thelocalminesandimports 75 % of theproductto satisfythelocalmarket(Pao, 2008). AnotherstudyindicatedthatChina’s demandforcopper has beengrowingat a rateof 13.6 % annually(Anyadike, 2012). Thehighdemandforvariouscommoditiesin theChinese markethas beenassociatedwith thehighrateof industrialization. However,thehighdemandhas pushedtheglobal pricesof theseassets significantly (Roache, 2012). Thehighlocaldemandhas pushedtheChinese firms to investin theoverseasassets, includingSouth Africa, Peru, Afghanistan, andChile.

Hostcountry:South Africa

HebeiIron andSteel Group Company investedin theSouth Africa Copper assets by purchasinga stakeof 74.5 % in Palabora Mining Company. HBIS paid$ 493 million forthistransaction,butthere wasnotake-over premiumrecordedforthistransaction(The Standard, 2014). The74.5 % stakewasabove therequiredcontrollingshareholding, which gaveHBIS thepowersto controloperationsof Palabora Mining. ThistransactionallowedHBIS to accesspartof the80,000 tonsof copper thatPalabora produceseachyear,which wasan additionalbenefiton topof theincreasein thefinancialgeneratingcapacity.Assets ownedby Palabora arelocatedin Limpopo Province, South Africa. Theremaininglifeof thecopper minereservesownedby Palabora wasnot disclosedormadepublicat thetimeof signingthedeal.Theexhaustionof copper depositsin Limpopo provincecould be an immediatefactorleadingtheterminationof therightsof theagreement.In addition,therightsof theagreementcould be terminatedin caseHBIS decidesto sellits staketo anotherinvestor. Accordingto The Standard (2014) China investedin copper assets locatedin South Africa in orderto accumulateinternalmanagementandoperatingexperience.In addition,thisinvestmentallowedChina to expandits supplyof copper to addressthehighdemandforcopperinthelocalmarket.Therefore,thehighdemandforcopper in theChinese marketwasthemajordriving forcethat motivatedHBIS to investin Palabora Mining.

Hostcountry:Peru

ChinaMinmetals is a statecorporationthat boughta 62.5 % stakein theGlencore Xstrata Plc. Minmetals paid$ 5.85 billion forthisglobal investment,butthere wasnotake-over premiumrecordedfro thistransaction(Blanchard, 2014). Thestakeof 62.5 % allowedMinmetals to controloperationsof Glencore Xstrata. ThistransactionallowedMinmetals to geta stakein 450,000 tonsof copper thatGlencore Xstrata produceseachyear.In addition,thisinvestmentincreasedMinmetals’ revenuegeneratingcapacity.Glencore Xstrata’s assets arelocatedin Las Bambas, Peru. Theremaininglifeof thecopper assets in Las Bambas wasnot disclosedwhentheagreementwasbeingmade.Therightsof theagreementcould beterminatedin caseMinmetals decidesto sellits staketo anotherinvestor orthecopper minesownedby Glencore Xstrata getexhausted.ChinaChose to investin Peru becauseitisrankedas thesecondlargestproducerof copper, which impliesthatitcould helpChina addressthehighdemandforcopper in thelocalmarket.RecordsshowthatChina has thehighestdemandformetalsthat fuelits economy(Blanchard, 2014). Thisimpliesthatthehighdemandformetals(includingcopper) in thelocalmarketwasthemajordriving forceforChina’s investmentin Peru since thehostcountryhadthecapacityto increaseChina’s securityof copper supplies.

Figure1: Location of Las Bambas mines

Source:Proactive Investors (2014)

Hostcountry:Afghanistan

TheChina Metallurgical Group Corporation boughta stakeof 35 % in Mes Aynak copper minesin 2013. Metallurgical Group paid$ 3.5 billion forthepurchase,butthere wasnotake-over premiumrecordedforthistransaction(Waslat, 2013). The35 % stakecould not allowMetallurgical Group to controltheoperationsof Mes Aynak mines.Thistransactionwould allowMetallurgical Group increaseits supplyof copper in thelocalmarketandexpandits revenuegeneratingcapacity.Mes Aynak assets arelocatedin Logar Province, Afghanistan. Theremaininglifeof Mes Aynak copper mineswasnot madepublicwhenthedealwasbeingmade.Thehighrateof insecurityin Afghanistan iscitedas amajorfactorthat might resultin theterminationof therightsof theagreement(Waslat, 2013). In addition,partof thecopper depositedsits under a 15,000-year oldtemplethat has to besecured(Waslat, 2013). Thissoundsimpracticalandmight resultin theterminationof therightsof theagreement.Chinachoseto investin Afghanistan becauseitcould getcheapercopper assets in a countrywhose90 % of thebudgetis financedby foreigndonors.Thehighdemandforcopper in theChinese marketwasthemajordriving forceforthisinvestment.Since Mes Aynak is theworld’slargestunexploited, itwill giveChina a reliablesupplyof copper.

Hostcountry:Chile

Chinainvestedin Chile’s copper assets in 2006 whenChina Minmetals boughta stakeof 25 % (with an optionof extendingitto 49 %in future)in Codelco. Minmetals paid$ 2 billion forthistransaction,butthere wasnotake-over premiumrecorded(Pica, 2011). Thestakeof 25 % didnot giveMinmetals thepowersto controloperationsof Codelco. However,thistransactionallowedMinmetals to acquire4,650 tonsof copper from Codelco in additiontoan increasein theincome&nbspgeneratingcapacityfromthisinvestment(Pica, 2011). Assets ownedby Codelco arelocatedin Gaby, Chile. Theremaininglifeof assetswasnot disclosed,butitwasrevealedthattheGaby mineshada remainingdepositof 541 million tons(Vidal, 2008). Thetermsof theagreementstatedthatCodelco would supplyMinmetals with copper for15 years,which meansthattherightscould beterminatedat theexpiry of the15-year contract.However,thetwo companieshadagreedto exploreadditionalopportunitiesin Chile, which impliesthatthecontractmight beextended.Chinachoseto investin Chile becauseitisrecordedas thesecondlargestproducerof red copper in theworld(Pica, 2011). Thehighdemandforred copper in China wasthemajordriving forceforthisinvestment.

Conclusion

Thedemandforcopper in theChinese marketcan beattributedto thehighrateat which theChinese economyhas beenindustrializing. Thisimpliesthatthehighdemandforcopper is themajordriving forceforChina’s investmentin theassets overseas.However,therisksof insecurity,exhaustionof copper deposits,andthe expiryof contractsare themajorchallengesthat might resultin theterminationof rightsofthe agreementbetween theChinese companiesandthehostcountries.Thismyriad of riskshas forcedChina to investin multiplecountriesin orderto enhancethesecurityof copper supply.

Summary

Hostcountry:South Africa

Transactioncostandpercentage

HebeinIron andSteel Group boughta stakeof 74.5 % in Palabora Mining at $ 493 million.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

Hebeinacquiredpowersto controloperationsof Palabora.

Productionrights

Hebeinacquireda stakeout of 80,000 copper thatPalabora processeachyear.

Location

Palaboraassets arelocatedin Limpopo Province, South Africa.

Remaininglife

Theremainingof assets wasnot disclosed

Terminationof rights

Therightsof theagreementcould be terminatedfollowingtheexhaustionof copper deposits.

Reasonsforchoosingthehostcountry

TheneedforChina to accumulateinternalmanagementandoperatingexperience

Drivingforceforinvestment

Highdemandforcopper in theChinese market

Hostcountry:Peru

Transactioncostandpercentage

ChinaMinmetals boughta stakeof 62.5 % in Glencore Xstrata Plc at $ 5.85 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

Minmetalsacquiredpowersto controloperationsof Glencore Xstrata.

Productionrights

Minmetalsacquiredtherightforsupplyof 450,000 tonsof copper annually.

Location

GlencoreXstrata’s assets arelocatedin Las Bambas, Peru.

Remaininglife

Theremainingof assets wasnot disclosed.

Terminationof rights

Therightsof theagreementcould be terminatedfollowingtheexhaustionof copper deposits.

Reasonsforchoosingthehostcountry

Availabilityof largedepositsof copper

Drivingforceforinvestment

HighCopper`sdemandin theChinese market

Hostcountry:Afghanistan

Transactioncostandpercentage

ChinaMetallurgical boughta stakeof 35 % in Mes Aynak at $ 3.5 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

ChinaMetallurgical didnot acquirethepowerto controlMes Aynak operations.

Productionrights

ChinaMetallurgical expandedthesupplyof copper andrevenuegeneratingcapacity.

Location

MesAynak assets arelocatedin Logar Province, Afghanistan.

Remaininglife

Theremainingof assets wasnot disclosed.

Terminationof rights

Therightsof theagreementcould be terminatedfollowingtheincreasein insecurityandtheneedto protectthe15,000-year oldtemple.

Reasonsforchoosingthehostcountry

Availabilityof cheapcopper assets

Drivingforceforinvestment

HighCopper`sdemandin theChinese market

Hostcountry:Chile

Transactioncostandpercentage

ChinaMinmetals boughta stakeof 25 % in Codelco at $ 2 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

Minmetalsdidnot acquirethepowerto controlCodelco operations.

Productionrights

Minmetalsacquiredtherightto supplyof 4,650 tonsof copper annually.

Location

Codelco’sassets arelocatedin Gaby, Chile.

Remaininglife

Theremainingof assets wasnot disclosed.

Terminationof rights

Theendof 15-yearcontractorexhaustionof copper deposits

Reasonsforchoosingthehostcountry

Availabilityof largedepositsof red copper

Drivingforceforinvestment

Highcopper`sdemandin theChinese market

References

Anyadike,N. (2012). Copper:A material for new millennium.Saston: Woodhead Publishing.

Blanchard,D. (2014, April 14). China consortium buys Peru copper mine stake for$ 5.85 billion. Penton.Retrieved February 28, 2015, fromhttp://www.industryweek.com/supply-chain/china-consortium-buys-peru-copper-mine-stake-585-billion

Pao,J. (2008). Jiangxi copper to buy stake in Afghan mine. SouthMining Post.Retrieved February 28, 2015, fromhttp://www.scmp.com/article/639283/jiangxi-copper-buy-stake-afghan-mine

Pica,C. (2011). China Minmetals inks deal with Chile’s Codelco. MarketWatch Incorporation.Retrieved February 28, 2015, fromhttp://www.marketwatch.com/story/china-minmetals-inks-deal-with-chiles-codelco-2011-06-09

ProactiveInvestors (2014). AXG mining enters world class Peruvian copper belt.ProactiveInvestors.Retrieved February 28, 2015, fromhttp://www.proactiveinvestors.com.au/companies/news/23980/axg-mining-enters-world-class-peruvian-copper-belt-23980.html

Roache,K. (2012). China’simpact on world commodity markets.Washington, DC: International Monet.

TheStandard (2014). Chinese steelmaker buys South African copperproducer. TheStandard.Retrieved February 28, 2015, fromhttp://www.thestandard.com.hk/breaking_news_detail.asp?id=39820

Vidal,V. (2008). Investmentin the Chilean copper and gold mining sector estimations for2008-2012.Santiago: Chilean Copper Commission.

Waslat,H. (2013). Afghan mining deal with China facing failure. DeutscheWelle.Retrieved February 28, 2015, fromhttp://www.dw.de/afghan-mining-deal-with-china-facing-failure/a-16989797