Chinese companies continue to explore Latin America for its resources. Aluminum Corporation of China (中國鋁業公司 or Chinalco), the nation’s largest producer of aluminum, is eyeing entering its Peruvian copper miner Peru Copper (秘魯銅礦) into the Hong Kong IPO market in a listing that may be as sizeable as US$1 billion.
It is a major move from Chinalco, especially considering that the Toromocho (特羅莫克銅礦) project, its key copper mine in Peru, only began construction in May 2011 and is slated to begin operations in the third quarter of 2013.
It will be taking advantage of the Chapter 18 exclusion, a waiver from the Hong Kong authorities that allows mining companies to list before they are even profitable, as opposed to the standard minimum of three years of profitability.
|Bethel: Adhering to environmental laws is an absolute must
“[Chinalco] is going to use it as a platform to acquire other assets in Latin America and potentially in other parts of the world,” comments Erik Bethel, co-founder and partner at SinoLatin Capital, a merchant bank focussed exclusively on cross-border transactions between China and Latin America.
“This is an interesting development and a lot of people are watching it closely. Here is a company that has purchased a large asset in Latin America, is listing it in Hong Kong, and then using it as a platform to acquire additional overseas mining assets. I think that is a great strategy, and it demonstrates a growing sophistication.”
An evolving relationship
This type of “growing sophistication” is indicative of the growing relationship between China and Latin America, both within and outside of the mining space. The latter is abundant with a sundry of natural resources to be mined, from steel to copper to gold to iron and beyond – resources of which China is in great need.
“Ultimately, the end result is that China needs everything. China is trying to urbanize hundreds of millions of people and feed an exploding middle class without a large enough domestic reservoir of natural resources. It is therefore forced to acquire farmland, oil fields and mines abroad,” Bethel says.
||Tian: It’s a totally new territory, so there is a learning curve|
Charlie Tian (田玉川), CEO of manganese miner CITIC Dameng Holdings (中信大錳控股) used to run some of CITIC’s Chile operations. He agrees that China may indeed have some of the necessary reserves to meet the needs of its burgeoning population, but points out that mining these is fast becoming pricier.
“The Chinese market is...a major consumer of those commodities. While China does have some reserves, but as the economy develops and as mining and land costs are getting more expensive, it’s not economical to mine those resources in China. Thus it maybe makes more sense to import such commodities from abroad.”
Latin America offers a relatively stable political environment, friendly relations with China, and a market that remains, as of yet, not crowded by Chinese companies.
Dameng, China’s largest manganese company, is being approached by several manganese resource owners from the region that are pitching the possibility of a partnership with them or a sale of their whole holdings. While Dameng has not yet taken any offers, they are “keeping our eyes open for opportunities in Latin American countries.”
This story is fast becoming a familiar one. Indeed, China is rapidly becoming a pivotal driver in Latin American mining. A January 2012 report from Bank of America Merrill Lynch names China as its first key theme for the Latin American mining industry for the year. “As in the past seven years, Chinese growth should continue to be one of them main themes in the sector,” it says. “China continues to represent 70% to 80% of metals demand growth, and, over the next few years, we expect Chinese consumption of metals to shift to late-development commodities (copper, oil, fertilizers) and not just steel and cement.”
Not all smooth sailing
While Latin America is indeed rich with a host of resources that China needs, there are several factors that must be taken into consideration when investing into a region that is relatively unknown and geographically distant.
Tian warns that it does not suffice for key metals or other resources to be present. Investors must review if these can be economically extracted. Infrastructure is essential – and the lack of it is often a reason that some corporations may shy away from investing in Latin America.
“It is fine to say that you have a large, world-class iron ore reserve in Brazil. And perhaps you do. But iron is really heavy. And trucking iron 400 km to a port is cost prohibitive,” Bethel agrees. “So if you don’t have a way to get iron to the port, the world-class mine you spent a lot of money on is really quite worthless.”
“It is a whole new territory,” Tian adds. “So it would probably take them a while to get over that learning curve. There is no easy way around it... companies still have to learn to understand Latin American countries, their political systems and their various regulatory regimes. These are still unknowns to the Chinese companies.” For him, awareness must continue to be raised, and that this responsibility falls squarely on the shoulders of the governments of both China and Latin American countries.
Bethel, who began his business in 2008, is more ebullient. He notes that there has been a “startling change” in the past four to five years as China’s interest in Latin America becomes stronger, with the push for more information coming from many of the corporations themselves.
When their business was just starting, “Latin America was a remote, mysterious and faraway place for many Chinese companies. But today, there is an incredible interest for investing in Latin America, and an exploding amount of knowledge about the region.” They have seen many Chinese firms sending teams to Latin America or even travelling with business/government delegations. With most of the major Chinese companies having already made investments in Latin America, many know the region quite well and are a far cry from five years ago in terms of the level of sophistication.
When learning how to adapt to doing business in a territory that is so foreign and potentially unfamiliar, one of the major areas of adjustment is regulation and business practices.
“It is a different regulatory system from what Chinese companies are used to back home. You really have to play by local rules. Certainly, Chinese companies cannot just transfer whatever knowledge they have in China and implement it without adapting to local environment or culture. It doesn’t work,” advises Tian. “You have to learn local customs, culture, regulatory regimes, and abide by local laws and regulations. That is lesson number one. Someone can be successful in China, but not necessary elsewhere by doing the same thing.”
Bethel, who travels frequently to Latin America, calls the region a “mixed bag” of varying ideologies and differing levels of ideology. For any investor in Latin America’s resource sector, adhering to environmental laws is an absolute must. A strong focus on local and community issues, which are central to the region’s lifestyle, is essential as well.
“You have to have a social programme in place. You can’t just go and start mining and only hire Chinese workers. You have to hire a local component of the workers, you have to make sure you have a social plan that helps the local population. They want mining companies to provide jobs, to build schools, and to provide benefits for the local community,” he explains.
“Because one thing that’s often forgotten – and it’s not just Latin America, but around the world – you have to make sure that the local community accepts you, and that they support you. It’s not only the right thing to do from the standpoint of being considerate to others, but also the right thing to do from a business standpoint. In Latin America, local communities can completely destroy mining projects. They can block these projects completely. So you’d better have a good relationship with the locals.” In Peru in the Cajamarca area, for instance, local protests against the unfair practices of gold mines there have hindered operations.
Both agree that a strong on-the-ground management team that can be trusted and that can speak the local language is pivotal to the success of a project.
Tian, who is more cautious on investing abroad especially in distant markets such as Latin America, believes that the environment will improve over time, but will bring difficulties along the way. “I think that Chinese companies will be quite selective on going into Latin America, but there is definitely going to be growing Chinese investment. Actually…
China is a major consumer of copper but it produces little. The largest copper reserves are really in Chile and Peru, and we are going to see investment in that space.”
Beyond copper in Chile and Peru, Bethel believes that as the market takes off more attention will also fall on frontier markets such as Bolivia, Paraguay and Guyana as major markets such as Brazil become pricier and China’s ever-climbing need for resources will make these countries’ resources more economically viable.