CMOC swoop shows China still hungry for resources

Part state-owned China Molybdenum’s purchase of niobium and phosphate businesses from Anglo American for $1.5 billion could herald fresh Chinese mining M&A boom.

The world’s biggest commodity companies are still hurting. And China’s miners are watching them hungrily, looking to pick up major assets.

China Molybdenum Co, also known as CMOC, has been one of the first to pounce. On Thursday it announced that it had acquired Anglo American's Brazil-based niobium and phosphates mining businesses for $1.5 billion.

For Hong Kong and Shanghai-listed CMOC it is an opportunistic purchase. Anglo American has embarked on a clear-out of non-essential assets as it seeks to raise $5 billion to $10 billion to cut its net debt from $12.9 billion at the end of 2015. Moody’s cut its credit rating to junk status in February, citing Anglo American's gross-debt-to-Ebitda ratio at the end of 2015 of around 4.2 times.

It's not the only humbled commodity player looking to sell. And CMOC is unlikely to be the only eager acquirer from China.

Switzerland-based Glencore, which mines 90 commodities, reported an Ebitda of $8.69 billion at the end of December, 32% down on the previous year. Worse still, the company was carrying $25.89 billion in debt. It announced a $10 billion debt-reduction plan in September.

Freeport McMoRan is in a similar position; the US mining company also had its rating cut to junk by Moody's in late January, with the ratings firm predicting a debt-to-equity ratio of as much as six times by the end of 2016.

Around the same time Freeport McMoRan, the world's largest copper miner, said it would seek to cut $5 billion to $10 billion in debt through asset sales.

“Mining companies have been feeling pain for a long time and when the prices came off everybody was trying to hold onto what they had and survive,” said a banker familiar with the Anglo American sale. “But prices haven’t improved, so these mining companies are having to fundamentally restructure themselves and sell larger assets that Chinese investors are interested in.”

The markets viewed Anglo American’s Brazilian mines sale as a positive for the company, lifting its London-listed shares by 4.6% on the day of the announcement.

Double the output

The balance sheet pressure being experienced by the world's leading diversified miners offers an excellent opportunity for their aspiring Chinese counterparts to grab some large assets.

“With respect to prices, the market view is that we are at the bottom or about to reach [the] bottom of the commodity market,” the banker told FinanceAsia. “And it's a good opportunity for China when this steep fall in prices has led major commodity companies to sell assets.” 

He added that Chinese companies were particularly interested in buying large copper assets, if they become available.

Anglo American's Brazilian mines sale certainly offered CMOC a unique opportunity. The niobium mine is the second-largest out of three major producers of the metal in the world.

Niobium, like molybdenum, is a metal used in the steel-making process to help harden the metal. Phosphates, meanwhile, are used in the production of fertilisers.

CMOC ended up buying the mines after winning a competitive auction process in which it was the only Chinese bidder. According to the banker, the company originally approached Anglo American in September, setting of an auction process around November. CMOC was then short-listed in February, made a final bid on April 20, and was issued a sales and purchase agreement on April 27. 

"That's different to what you see with many Chinese [state-owned enterprises]. This company is commercially savvy,” the banker said, referring to the speed with which CMOC had acted.

He partly put that down to the fact that while CMOC's largest shareholder is state-owned Luoyang Mining Group, with a 31.56% stake, the company is effectively run by Cathay Fortune, a private equity hedge fund with a 29.79% holding in the company. As a result, it takes a more commercial eye to business opportunities than most SOE-linked companies.

The estimated valuation of the mines, at approximately 10 times 2015 Ebitda, doesn’t look cheap – mining and fertiliser assets tend to sell in the high single digits.

But it looks more reasonable once a recent overhaul of the mine is taken into account, the banker said. This is expected to double its annual output of niobium to 9,000 tonnes. A potential doubling of the company’s Ebitda would make the ratio paid much more appealing.

China Molybdenum has been eager to expand and diversify itself through acquisitions. In 2013 it bought Rio Tinto's majority stake in the Northparkes copper mine for $820 million, during an earlier attempt by the Anglo-Australian company to cut costs by offloading assets.

Buying a phosphate mining business during this latest purchase helps to expand CMOC's product array.

“Steel and copper are more industrial commodities but the [Chinese] economy has moved more to a consumption phase of development than a construction or infrastructure phase,” the banker said. “Phosphate is linked to consumer demand; it helps to grow crops like soya beans and can be used to help feed cows.”

Calculated risks

While Chinese mining companies have the desire and financial heft to snap up big assets from struggling global players, questions linger about the sagacity of the strategy.

China's demand for commodities in the 2000s was behind much of the surge in prices, while its slowing growth is in large part to blame for the slump of the past few years. Given these poor conditions, it's risky to buy more assets in this market, no matter how cheaply valued.

However, observers argue that such acquisitions fit in with China's overall strategy. The country is seeking greater global influence and its largest companies have been able to rely on large amounts of cheap loans from state banks as they head offshore to buy assets. They are also typically under less shareholder pressure to deliver quick returns, and instead often look to 10 years or more for an asset to deliver value.

That heady cocktail gives Chinese companies a big financial advantage over international rivals when it comes to buying assets. But as FinanceAsia has argued previously, it also exacerbates the high levels of debt risk in China's banking sector and could spread the dangers of any debt crisis to foreign companies that have been acquired by Chinese peers. 

China's mining companies in particular are gambling that their cheap credit lines will remain secure, potentially for years, while they await a market turnaround. It could prove to be an astute gamble. But there are sizeable risks too.

Barclays and Deutsche Bank were the financial advisers for China Molybdenum, while Goldman Sachs and Morgan Stanley advised Anglo American on the disposal of the mines.

This article has been changed to reflect the fact Barclays was one of the buyside financial advisers.

¬ Haymarket Media Limited. All rights reserved.
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