Chinese mining M&A revival

China's oil and gas giants are focused on integration after acquisition sprees, while mining companies drive acquisition volumes.

From China Minmetals to Baosteel, Chinese miners have been bulking up on offshore acquisitions this year, chalking up the highest year-to-date volumes in five years.

According to Dealogic data, Chinese miners have announced $8.7 billion worth of acquisitions so far this year, exceeding the $2.8 billion-worth of business conducted by oil and gas companies. This is a reversal of past trends, when much of the activity was focused on China's oil and gas sector, with the likes of Cnooc, Sinopec and CNPC closing jumbo acquisitions.

In the last two years, Asian national oil companies accounted for $87.6 billion of offshore acquisitions, of which $56.8 billion came from China's national oil companies, according to Citi research.

“That’s an unprecedented level of M&A in the oil and gas sector, even for the Chinese," said Jason Johnson, head of Asia Pacific natural resources investment banking at Citi. But with many energy companies now focused on integration, "cross-border M&A from the mining sector could exceed the oil and gas sector in China this year for the first time" he added.

So far, a large chunk of the deal-flow has come from Minmetal's $5.85 billion acquisition of Las Bambas in Peru, which has yet to close.

China's oil and gas giants are typically well-banked and have the capacity to raise funds from bond markets and lenders. However, after recent acquisition sprees, most of them are focused on integrating acquisitions and selling assets to private investors as the government pushes for reform of its state-owned enterprises.

Earlier this year, Sinopec hired CICC, Deutsche Bank, Citic Securities and Bank of America as financial advisors for the restructuring of its marketing and retail arm. According to banking sources, the plan is to eventually spinoff the business via an initial public offering of shares, so Sinopec is presently trying to rope in strategic investors for its pre-IPO financing and looking to improve its retail network. In May, CNPC said it plans to sell its assets in the eastern part of two major transmission pipelines to investors.

"It's natural for the energy companies to slow down in M&A and integrate and develop their recent acquisitions," Johnson said. "They have done a lot of M&A, raised a lot of debt and now some are exploring ways to enhance portfolios by spinning off assets or bringing in investors." 

The recent acquisition spree among oil and gas companies has driven activity in the bond markets but limited lending opportunities to foreign banks. On the Minmetals acquisition loan, for example, are Chinese Development Bank, ICBC and Bank of China.

Miners have their day

Source: Dealogic

Unlike oil and gas groups Cnooc and CNPC, which are global titans in their own right, Chinese miners are smaller-scale and do not have the same heft. But they have ambitions to grow and the battered mining sector is currently seen offering value. Baosteel, which first bought a stake in Aquila Resources in 2009 when steel prices were higher, has jointly bid for the rest of Aquila this year with Australian rail company Aurizon. 

"Valuations are moving closer to the bottom of the cycle for metals and mining," Chen Shen, Morgan Stanley's co-head of natural resources group, said. "Strategic [investors] may have taken strategic minority [positions] a few years ago and now see attractive buying opportunities."

Chinese companies have been more focused on returns and taken a smarter approach to deals, targeting more developed projects. Due to intensive due diligence and negotiations, recent M&A deals have taken a longer time to close.

“Chinese companies are taking a leaf out of private equity players’ books,” David Wood, head of Australia investment banking at Bank of America Merrill Lynch, said. “The private equity approach is to buy an advanced development project and build a financing model as opposed to buying a greenfield project that will take a longer time and have a lot of risk."

With the availability of credit onshore now tightened, there is less of the flagrant spending that was seen in 2008 when Citic Pacific and Sinosteel were binge buying.

“There was an aggressive expansion into greenfield mining projects before, especially in iron ore. But many Chinese companies ran into project development issues which resulted in a conservative pullback in strategy. Taking minority stakes with local partners became the focus for M&A over the last couple of years, and now we see the trend shifting back to full control acquisitions,” Johnson said.

With global resource companies such as BHP Billiton and Shell increasingly focused on ensuring solid shareholder returns and controlling capital expenditure there could be more deal flow ahead. “There is a focus on simplifying portfolios, which means there are still assets to be divested and opportunities for Chinese companies,” Wood said.

The interest has also shifted to different mining sectors.

"If you look back a few years, iron ore and coal were hot, now its copper and gold," Ken Su, China mining & metals leader at PwC, said. "In 2004 and 2007, it was mostly the central SOEs undertaking the acquisitions, now you are seeing a broadening out with more smaller provincial level SOEs and private companies," he added.

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