Mines and Money spoke with Ghee Peh, Executive Director, Head of Metals and Mining Research, UBS Securities Asia at Mines and Money Beijing 2013 following his presentation.
Ghee explained how Chinese resource investors’ past experiences will influence future trends in outbound investment, which commodities he expects Chinese investors will have the most appetite for, what the common pitfalls of incomplete M&A negotiations are and an overview of the new league of resource investors in China.
M&M: In the last couple of days [at Mines and Money Beijing], there has been some discussion around the “lessons learned” from Chinese investors’ experience in outbound investment into foreign mining assets. I wonder if you could define, in your terms, what some of those key learnings have been?
GP: I think some of the key lessons are regulatory, political, environmental, environment of the countries where these assets are located, and obviously, you know in developed countries, like Australia and Canada, environmental standards are at a significant level, and to operate a resource asset in developed markets, you know, I think any potential buyer has to work within those standards and up to the standards. And also I think another approach is the regulators. And you could also work with locals of labor laws, and some of the cultural differences come into play as well. And working with the infrastructure that’s available and the steps that are required to get approval to build new infrastructure. I think these are some of the some of the major sort of lessons that have been learned at this conference.
M&M: And looking forward, how do you think those lessons can be used to be more operate more effectively in this next phase of going global?
GP: Well, I think the good news is that these lessons have taught potential buyers from China and Asia to build in sort of more realistic schedules, more realistic costs, more realistic projected earnings and evaluation when you assess a mining project in a different country. So the existence of infrastructure, whether you can access it, whether you’ve got to build your own infrastructure, environmental standards, minimum wage, and other sort of labor requirements, this will greatly help Chinese companies to assess potential projects, cash flow, evaluation, and the correct price to pay for them in future.
M&M: Which commodities do Chinese investors have the most appetite for?
GP: Well, I think, obviously iron ore. Iron ore is always interesting. China is the world’s largest importer of iron ore. I think increasingly I think thermal coal could be interesting as well, in a sense that if coal prices continue to climb, some of the valuations could look interesting. Metallurgical coal is always of interest to China, due to the size of its steel industry, which is also related obviously to iron ore. Gold is always interesting to China in terms of growing retail demand, as well as in terms of building national reserves, gold is always very interesting. I would also say copper. I mean China is and remains the world’s largest importer of copper, and China still has to build up the power grid. So copper will always be interesting. So, to summarise again; iron ore, met coal, thermal coal, copper, and gold.
M&M: I was wondering if you could comment on how the profile of the Chinese resource investment market is changing? Are you beginning to see a rise in the amount of private funds or private investors that are coming through, and if so, what sort of things have impacted that change?
GP: I think as the Chinese economy has grown, there are people who have made money on mining related projects, and they would like to replicate that model overseas. So, obviously, we’ve got more private companies now looking at projects outside of China. So, obviously, that’s the biggest change there. So it is not just state-lead companies that are looking at assets overseas nowadays.
M&M: There was a figure quoted recently that about $40 billion or more worth of various M&A deals had been halted in the latter stages of negotiation between Chinese companies and overseas mining companies. What do you think are some of the common pitfalls of those discussions that caused them not to not go through to the sign-off stage?
GP: Well, at this point in the commodities cycle, the biggest pitfall of always is the price, meaning that the vendor and the buyer may have very different views on the medium and long-term price, and unfortunately, only time can tell who is more correct. I think other issues would be whether the asset would be a significant asset in respect of that country’s reserves and production. I guess another issue would be environmental, labor, and infrastructure availability. I mean, these are always big issues. But I would just like to go back to price. I mean, right now, a lot of deals I would say the buying and asking prices are rather different. So, as part of the money cycle now, we’ll need time for price discovery and to find whose price was actually more reasonable.
M&M: Finally, how does Mines and Money Beijing contribute to the creation and nurturing of business partnerships between mining companies and the Chinese investor market?
GP: Well, I mean, this is my second Mines and Money. I am very pleased to be able to support this event. I look forward to coming next year. For me, this event is quite important in the sense that it brings people from all different areas of the mining industry together. So we don’t just have the banking and the finance types like myself. You would have mining engineers. You would have some of the financial investors. You will also have corporates with a very big profile of assets, both Chinese corporates as well as international corporates. And you bring all these different groups in one convenient location, and some of the interaction, like today I spent some time talking to some mining engineers, and I’ll be meeting up with some old corporate friends tonight as well. So it’s actually a very useful and constructive time, and I certainly enjoyed my second Mines and Money Beijing, and I look forward to coming back next year.
Mines and Money Beijing will return June 16-19, 2014. Visit the website for more information and keep informed of updates here.
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