$45bn and counting: China's foreign mining misadventures

As the globe's number one consumer of commodities, China has been pushing hard to diversify its supply.

With domestic production of key resources including copper and particularly iron ore far below demand levels, China has been forced to look overseas to lock in supplies.

But the country's lumbering state-owned and large private firms have been met with little success abroad.

Numerous foreign takeover bids have fallen through and many acquired projects and companies turned out to be bad investments.

Bloomberg calculates that Hanlong Group’s  $1.2 billion bid for Australia’s Sundance Resources (ASX: SDL), which collapsed today, brings the tally of failed mining bids undertaken by Chinese companies to an eye-watering $45 billion.

Sichuan-based Hanlong's pursuit of Sundance — the value of which was duly slashed in half on the Sydney bourse after it was dropped — centred on the $5 billion Mbalam iron ore project straddling Cameroon and Congo-Brazzaville in Central Africa, but has the added twist that Hanlong's billionaire founder and chairman Liu Han has disappeared from view.

Liu is the subject of a police investigation, which is connected to his brother's arrest on triple murder charges, and hasn't been heard from since mid-March. Hanlong's deals seek to develop an iron ore and copper-molybdenum mine with Moly Mines (ASX: MOL) in the Pilbara and another molybdenum project with US-based General Moly (NYSE: GMO), of which it owns 25%, also now appears to hang in the balance.

While Hanlong's failure has many sensational details, the list of botched takeover attempts and precarious projects undertaken by China's miners is long and dear:

  • Sinosteel managed to tie up Australia’s Midwest Corp for a hefty premium at $1.5 billion in July 2008 — then the first successful hostile takeover undertaken by a Chinese mining company — but so far Midwest has only been able to bring to production a single project, the insignificant 1.5 million tpa Koolanooka & Blue Hills mine.
  • In September 2009 state-owned Chinalco's $19.5 billion proposed injection into Rio Tinto, which was suffering under a $40 billion debt load at the time and appeared ripe for the taking, collapsed after prolonged courting of the world's second biggest miner. A bitter Chinalco claimed a $195 million breakup fee, but lost out on a stake in the world richest iron ore fields and access to the world's biggest copper mine by picking up Rio's 30% stake in Chile's Escondida.
  • Zijin Mining Group dropped its $482 million bid for Indophil Resources NL in June 2010, losing out on a chance to develop Southeast Asia's largest untapped gold and copper deposit, Tampakan in the Philippines. The $5.9 billion Tampakan project, now in the hands of Xstrata, received environmental clearance against expectations in February.
  • In April 2011 Minmetals Resources, a unit of China’s largest metals trading company, abandoned its $6 billion offer for Perth-based copper-gold company Equinox Minerals, which eventually ended up in the arms of Canada's Barrick Gold (TSX: ABX).
  • A $938 million offer from Chalco, another Chinese state-run aluminum company, for SouthGobi, a coal producer, was accepted by parent Turquoise Hill, but Mongolia blocked the deal and Chalco officially abandoned the bid in September.
  • China is the world's number one gold producer by some margin, but it did not stop its National Gold Group Corp. talking to Barrick Gold about buying its African subsidiary. With its main assets in Tanzania, African Barrick had been struggling and the $2.2 billion offered seemed rich but negotiations went nowhere and in January the parties walked away.
  • Chinese billionaire Yu Yong’s Cathay Fortune Corp. together with the China-Africa Development Fund wagered $850 million on Australia’s Discovery Metals in October last year, but the bid for the Africa-focused copper miner fizzled out last month.

Apart from corporate takeovers, when going it alone on greenfields projects outside of its borders China also has a patchy history:

  • Citic Pacific's massive Sino Iron project in the Pilbara region of Australia first came off the drawing board in 2006. High-profile backers, including the China Development Bank, forecast the project to cost under $2 billion. Fast forward seven years and Sino Iron has already sucked up $8 billion. Production schedule for H2 2012 has now been delayed for the umpteenth time and the final bill for the magnetite mine could top $10 billion.

Showing a flair for understatement Bloomberg quotes industry veteran Xu Zhongbo, chief executive officer of Beijing Metal Consulting, as saying: “It would be great news to cool down the mania for rushing for overseas deals. We don’t have the ability yet to create a globally powerful mining company.”

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