Download A Right Time for Chinese Enterprises to Go out Mining Overseas

2009---A Right Time for Chinese
Enterprises to Go out
Mining Overseas and Risk Hedge
Thereof
Consultant at Chinese Institute of
Metallurgical & Mining Enterprises
Senior engineer with professor title
By Jiao Yushu
March 18, 2009
Beijing
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Brief
introduction of Mr. Jiao Yushu
Mr. Jiao was born in 1933 in Tianjin, university graduate. He is a
senior engineer with professor title who is accorded the special
governmental allowance by the State Council.
Posts that Mr. Jiao currently holds:
Consultant at Chinese Institute of Metallurgical & Mining
Enterprises
Consultant at China Council for the Promotion of International
Trade (CCPIT), Metallurgy Sub-council
Consultant at China Shougang International Trade & Engineering
Corp
Consultant at Jianlong Steel Holding Ltd.
Editor-in-chief, Mine Engineering magazine
Posts that Mr. Jiao once held:
President of Anshan Metallurgical Design &Research Institute,
Ministry Of Metallurgical Industry
Engineering Manager on Chinese Side, Sino-Australian Joint
venture Channar Iron Mine, Australia
Chief Designer on Chinese Side, Sino-Brazilian Joint venture
Carajas Iron Mine, Brazil
Chief Designer on Chinese Side, Sino-Brazilian Joint venture
kabao·xiafeier Iron Mine, Brazil
Deputy Chairman of Chinese Institute of Metallurgical & Mining
Enterprises
2009---A Right Time for Chinese
Enterprises to Go out
Mining Overseas and Risk Hedge
Thereof
Foreword

1. Why is it a right time for Chinese enterprises to mine
overseas in 2009?
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1.1 The birth of , and impact by current financial crisis
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1.1.1 The birth of the world financial crisis
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1.1.2 The impact by the world financial crisis
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1.1.2.1 The American subprime crisis causes the global financial
storm
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1.1.2.2 The fast spread of the crisis has effect on international
mining enterprises
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1.1.2.3 Impact on Chinese markets by the world financial crisis
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2. Why is ‘Going Out’ a need for Chinese enterprises?
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2.1 A strategic requirement for China’s national economy to
reach a quadruple growth
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2.2 A strategic requirement for China to move forward to form a
strong nation of steel from a big nation of steel, and meet its
goal of sustainable development
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2.3 Lessons from history: World War II, a war for resources and
energy, was caused by the Great Depression in 1930s, which
shows the importance of the controls of mineral resources today
2.4 China can not afford to lag always behind the struggles for
foreign resources by multinational groups, to which more
attention should be paid.
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3. The goals for overseas mining
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3.1 The selection standards for overseas mining projects
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3.2 Other than the economic gain, environmental and social
benefits from the overseas mining projects should calculate
more.
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4. Modes and routes for overseas mining
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4.1 Modes
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4.2. Purchase of a listed shell company and specialized funds
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5. Steps to overseas mining
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5.1 Progressive achievement of overseas mining
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5.1.1 Joint venture projects that are now in practice
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5.1.2 Projects that are in preparation, prior to construction and
under construction.
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5.2 Steps to operate the overseas mining
5.2.1 Preparatory work and the procedure for production and
construction
5.2.2 Applications for EPM, MDL and ML
5.2.3 Project approval proceedings
5.2.4 Laws and regulations related
5.2.5 Criterions and standards
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6. Risk hedge of overseas mining
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6.1 Indicators for risk assessment
6.2 Lessons needed to learn
6.2.1 Risks of geologic resources
6.2.2 Risks of ore processing and minerals logistics
6.2.3 Risks of project approvals
6.2.4 Risks of labor relation system
6.2.5 Risks out of the different law systems
7. Role Model for the 21st century---CITIC Palma Iron Mine,
Western Australia
2009---A Right Time for Chinese
Enterprises to Go out
Mining Overseas and Risk Hedge
Thereof
1. Why is it a right time for Chinese enterprises
to mine overseas in 2009?
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1.1 The birth of , and impact by current
financial crisis
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1.1.1 The birth of the world financial crisis
Subprime problem is the most popular official
explanation for this financial crisis while the real
cause is the “leverage” used by financial
institutes. Behind the financial crisis is Credit
Default Swap (CDS), and then what is the
relation between subprime, leverage and CDS?
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Ⅰ. Leverage. At present, to gain staggering profits, many investment
banks have their leverage operations about 20—30 folds high.
Ⅱ. CDS Contract. Due to the huge risks of leverage, banks are not
permitted to this risky operation if they follow the rules. So someone
made up an approach to insure the investment by leverage, which is
CDS.
Ⅲ. CDS Market.
Ⅳ. Subprime. The U.S. mortgage market comprises of Subprime and
Prime markets, and the subprime loan is a mortgage home loan for
those who have poor credit standings, no proof of their incomes and
repayment capabilities, and some debts.
Dollar
Crisis
Financial
Crisis
Subprime
Crisis
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1.1.2 The impact by the world financial crisis
1.1.2.1 The American subprime crisis causes the global financial storm
Current financial
crisis is described
as “once in a
century” by
Greenspan and “a
big crisis never seen
before by the living
people on earth”
1) quickly spread to
the real economy
Financial crisis in Wall Street
Real economy
(real estate)
virtual economy
(financial sectors)
real economy (car
industry)
The financial crisis in Wall Street was caused by the U.S. subprime crisis in August, 2007. It formed a
vicious circle of Real economy (real estate)--virtual economy (financial sectors)--real economy (car)
This round of slow-down
2） Quickly spread to
emerging economies
with unknown severity.
The United States
(R&D center for
consumption)
developed economies like
Europe and Japan
(manufacture axes) are in
recession
China and other
manufacturing countries
(raw materials bases)
slow down in their growth
1 .This round of slow-down shows a periodic feature that the bow wave of recession will spread along the
food chain of global labor division as R&D center for consumption-- manufacture axes-- raw materials
bases, and 2 with the U.S. whirlpool not yet calming down completely, the turmoil of the global financial
system caused by the subprime crisis will still be there
World steel consumption
in 2007
The big losses of Fannie Mae and Freddie Mac
predicted a sagged American Real Estate market.
To prevent Fannie Mae and Freddie Mac from
bankruptcy, the U.S. bailed them out.
construction
The sales of U.S. existing homes are 5.02 m and 5.32 m
in 2008 and 2009, both are less than that of 5.65 m in
2007. The mean prices of U.S. homes in 2008 and 2009
are $198,600 and $200,800 respectively, also less than
that of $218,900 in 2007. These data indicate a
downcast real estate market of the U.S., which shows
that the U.S. economy is on the brink of recession and
the expected purchasing power of the residents will be
lowered. Most organizations expected that the U.S. real
estate market will continue its recession for quite a long
time.
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The U.S. financial crisis slides the macroeconomic down
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1.Unemployment up to 6.5%
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2.Shrinking manufacturing sectors with an activity index
of 38.9.The index indicates the expansion of manufacture if it is
more than 50, and shrinkage if less than 50.
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3.Slump in CPI
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4.Slump in house prices
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5.Trade deficit touched bottom in this financial year.
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1.1.2.2 The fast spread of the crisis has effect on international
mining enterprises
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The world financial crisis dropped the share prices of mining
enterprises and it caused their market values shrank. The debtridden mining sectors are in a hurry to find their “patron saint”. I
will take the changes in the share prices of Australian mining
enterprises as an example.
Australian Stock Market
ASX falls from 6747.6 on Oct. 26, 2007 to current low point of 3052.5.
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（1））BHP.B
from ＄50 on May 16, 2008 to＄20 on Oct.21,2008;
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（2）Rio tinto
from ＄157.45 on May 16, 2008 to＄29.91 on Dec.25,2008;
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（3）One steel
from ＄7.88 on June 20, 2008 to＄1.53 on Mar.6,2009
（4）Fortescue metals Ltd
from ＄13.15 on June 27, 2008 to＄1.16 on Nov.24, 2008
（5）Grange Resources
from ＄3.0 on Aug.17, 2007 to＄0.325 on Jan.2,2009
（6）Gindalbie metals Ltd
from ＄1.98 on Sep.7, 2007 to＄0.32 on
（7）Atlas Iron
from ＄4.37 on May 6, 2008 to＄0.405 on Oct.20,2008
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Oct.10,2008
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(8)Golden west Resonces
from ＄3.35 on Dec.18, 2006 to＄0.21 on Dec.19,2008
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(9) Cape Cambert Iron
from ＄0.92 on July 25, 2008 to＄0.155 on Nov.21,2008
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Metal market performance
Metal
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Market performance of major listed mining corporations
1.1.2.3 Impact on Chinese markets by the world financial crisis
The U.S. subprime crisis led to a financial storm
Since the subprime crisis, the biggest threat posed by downward world economy
is the further decrease of foreign demand, which is one of the major factors that
impact on China’s exports
The financial crisis in Wall Street affects China
indirect effect
The crisis in Wall Street deteriorated
China’s export. In 2007, the U.S is
China’s second largest trade partner
with a total trade of $302.09 billions, up
15%. Total imports and exports
between China and the U.S. from Jan.
to Aug. 2008 are $219.7 billions, which
keeps the U.S. its status as the second
largest trade partner of China. The
financial crises led to a slow American
economy, and then further slow down
the growth of world economy. This will
finally affect China’s foreign trade.
The burst of financial crisis
will lead to the depreciation
of the Dollar, which is also a
policy the U.S. government
would like to take when
dealing with the crisis. The
depreciation of the Dollar on
a long-term basis will
increase the prices of
international bulk
commodities, which will
eventually produce an
increasing pressure from
imported inflation.
Direct effect
The pressure
to China’s
financial
sectors as a
whole is
unprecedent
ed, which
has a deep
influence on
the reform
and opening
of China’s
financial
system.
China’s Losses in Wall Street.
China’s foreign exchange reserve that
holds dollar asset, as well as some
China’s commercial banks that hold assets
in Wall Street, loss in this financial crisis. A
statistics based on published data shows
that China’s national debt, china-funded
financial institutes and investors get an
unrealized loss about $160 billions.
Calculating with the spot Dollar/Yuan
exchange rate of 6.8 by China’s OTC
foreign exchange trade system, the total
loss is about 1000 billion yuan, nearing
one twenty-fourth of China’s GDP in 2007.
Under the influence of slowing world economy, China’s steel and iron ore
markets slump and the prices of steel and iron ore fall sharply. The spot price of
imported iron ore drops by 60—65%. The CIF Tianjin Port is $58 in 2009.
10 k t
5.71 100 m t/a
5.28100 m t/a
5.01100 m t/a
4.82100 m t/a
steel output per day
January
February
March
April
May
June
July
August
September October November Decemb
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The output capacity of Chinese-made steel got a notable fall
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Since June 2008, steel enterprises reduce output, how much do they
reduce?
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China yielded 1.5648 million tons of crude steel every single day in
June 2008, equal to an annual steel output of 571 million tons.
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China yielded 1.1581 million tons of crude steel every single day in
October 2008, equal to an annual steel output of 422.7 million tons.
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It is expected that China will yield 460—500 million tons of steel in
2009.
Steel enterprises’ profits drop markedly
January
February
March
April
May
June
July
August September October November December
•In Oct. 2008, key large and medium metallurgic enterprises as a whole
were in the red. 50 out of 89, say, 56.28% of the enterprises lost a total
of 5.924 billion yuan, followed by 12.78 billion and 29.122 billion in
deficit in Nov. and Dec. respectively, and 44 enterprises were involved
accounting for 61.97%.
In its report titled World Economy Situation and Prospects 2009, the
UN requests all the nations to take economic stimulus plans to deal
with the global financial crisis. According to the UN estimate, world
economy is below 1% of growth in 2009, lower than that of 2.55% in
2008 and yet much more less than that of 3.5-4% in last 4 years. In
2009, Minus growth of 0.5% will occur in developed countries,
among which -1% in the U.S., -0.7% in Euro zone, and -0.3% in
Japan, in contrast, developing countries will see a growth of 4.6%
while countries in economic transform 5.3%. It is expected that china
will grow in a rate of 7.5% (China has set up its GDP growth as 8%).
The World Bank estimated that the world economy growth will be
0.9%.
In order to pull through the hardship, the world steel enterprises like
Nippon Steel Corporation and ArcelorMitta, took measures of
reduction of output and redundancy, and China’s steel enterprises
also took measures like product optimization, cost cuts, reduction of
output, investment delay and small layoff.
China’s enterprises should go out to take a share in international mineral
resources when the global mining is freezing in a time of world economic
crisis. By taking the opportunity of reshuffling mining sectors, China will
build up a stable supply system of mineral resources to guarantee its
great goal that its national economy will quadruple by 2020.
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2. Why is ‘Going Out’ a need for Chinese enterprises?
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2.1 A strategic requirement for China’s national economy to reach a
fast and stable growth.
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To become a new industrialized country, China needs fast development
in its mechanical, car, railroad, shipbuilding and construction sectors.
Demands on mineral resources such as iron, copper will be up for China
to reach its goal to quadruple GDP by 2020, as domestic mineral
resources are short for this goal. China has been adopting a strategic
policy of using foreign resources and domestic resources to develop
national economy and it proves that this policy is correct, especially in
today when economic globalization is popular. It is expected by the
author that in next few years, the output and imports of pig iron and
iron ore will still be in a moderate growth shown in the table as follow:
Mr. Jiao’s expectation for the outputs of steel, pig iron and
iron ore, and imported iron ore between 2007—2015
unit
2007
2008
2010
2015
100m t
4.8924
5.0048
5.5
6～6.5
Pig iron
100m
4.6945
47067
5.00
5.2～5.72
Domestic iron
ore
100m
7.0707
8.2401
9.3
11
Imported iron
ore
100m
38309
44356.8
4.75
5.0
item
Crude steel
In the consumption of iron ore, the dependence rate of imported iron ore is estimated as 45—50%.。
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Following table shows that China is in a great demand for Copper
Expectation of supply and demand for copper in China from 2008 to 2009
year
unit
2008
2009
yoy rate %
China’s domestic market
10 k t
375.0
402.0
7.2
Imports
10 k t
137.3
120.0
-12.6
Consumption
10 k t
9.8
15.0
53.06
Consumption
10 k t
480.6
490.6
2.08
S&D balance
10 k t
21.9
16.4
——
output
It is expected that the demand for copper will be 6—6.5 million
tons by 2015 with imports reach 3 million tons.
The imports of iron and copper is so large that spot goods only
will not meet the needs and China has to accelerate its overseas
mining to increase the weighted quota of imported minerals.
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2.2 A strategic requirement for China to meet its goal of
sustainable development in steel industry.
Scaling up the mining overseas to increase the weighted quota
of imports and decrease spot goods trading, this is an important
way to cut the costs of imported minerals.
It might reach 500 million tons imports in next few years. The
major obstacle is the high cost of the imports. In comparison
with Japan’s expenditure, it is about $10 billions higher, shown
as follow:
Comparison of CIFs between China and Japan on imported iron ore
Figure 14
year
2004
2005
2006
2007
Mean CIF China($/t)
61.09
66.77
64.12
88.2
Mean CIF Japan($/t)
29.61
42.0
53.28
63.85
CIF difference($/t)
31.48
24.77
10.84
24.35
China’s imports (10k
t)
20808.86
27526.05
32630.33
38309
66.255
68.18
35.37
93.28
China’s Excessive
payment
comparing to CIF
Japan ($100 m)
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Why is it higher in China’s imported cost? Apart from the freight costs
out of chartering foreign ships to transfer 90% of the imports, small
weighted imports quota is another key cause, as the small quota means
China is on a small scale of overseas mining. The annual Japanese
imports of mineral is about 130 million tons while its overseas mining
scale is known about 70 million tons more, accounting for 53.8% of the
total imports. The annual steel output of ArcelorMitlal, the world biggest
steel enterprise, reach 100 million tons, and the iron ore needed is
mainly supplied by its overseas mining enterprises at a rate of 70-75%
that it has been trying to reach. ArcelorMitlal now is in the world to
grasp the iron resource including the U.S. and Africa. The scale of
Chinese overseas mining is just about 50 million tons, which accounts
for 12% of imports. It is obvious that speeding the “Going Out” and
strengthening the efforts on overseas mining, is a must to set up a safe
iron ore supply system, which is helpful to balance the monopoly of
world iron ore market by the top three steel corporations, and reduce
Chinese imported costs as well.
2.3 Lessons from history: World War II, a war for resources and energy,
was caused by the Great Depression in 1930s. The war enhance
domestic demands and unemployment, but the world political situation
today is different from that in the war time, though the current crisis is
actually a combat for the power to control the energy sources and
mineral resources.
China should control some of the energy and resources if it is about to
uplift as a strong nation than a big nation.
2.4 China can not afford to lag always behind the struggles for foreign
resources by multinational groups, to which more attention should be
paid.
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A grave situation by Multinationals in their efforts to control iron
ore
（1）The annual import of iron ore by Japan reaches 130 million
tons with 70 million tons of mining quota according to an
incomplete statistics.
Statistics of Foreign Iron mine controlled by Major Japanese enterprises
corporation
Mines under
control
Control
percentage
Percentage in
imports
Mitsui Iron Ore
Development
4563.9
65.08
37.22
Nippon Steel
Corporation
870
12.41
7.10
JFE
1261
17.98
10.29
Sumitomo Metal
Mining Co
270
3.85
2.20
Kobelco Steel
Group
28
0.39
0.23
Nippon
20
0.29
0.16
total
7012.9
100
57.00
（2）iron resources under control by ArcelorMitlal
Nation
Company
Capacity (10k t/a)
Share percentage%
Quota
America
Empire Iron Works
480
21
100.8
America
Xibin
850
62.3
529.55
Brazil
Belgo Mineira
150
100
150
Liberia
Western Mine
1500
$900 m of investment
1500
Senegal
Faleme Mine
1500-2500
$2.2 b of investment
1500-2500
Kazakhstan
Atasusky
unknown
Algeria
Mittal Steel Tebessa
Ukraine
Mittal Steel Kryvyi Rih
1170
South Africa
Mittal South Africa
300
Canada
QCM
700
Canada
Wabush
490
developing Bou Khadra mine area
1170
developing Thabazimbi mine area
700
28
137
（3）Indian Tata Steel
Cooperating with state-owned Sodemi corp. in the Republic of Ivory Coast to develop Mount Nimban Mine,
Tata invested $1.5 billion and expect to yield in 2-3 years.
Indian Jindal Steel & Power Ltd.（JINDALL）
In a bid of $2.3 billion (in place in 8 years) in June 2006 to get a long-term management right to develop 20
billion tons in the western part of El Mutún iron mine area. It is expected that in five years it will reach an
output of 10.5 million tons of concentrate ore, 9.5 million tons of pellet ore, 6 million tons of directly
reduced iron and 1.6 million tons of long products.
If China is going to move forward to form a strong nation of steel from a big nation of steel, it needs to take
a part in the competition with multinationals and make a great progress in overseas mining.
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3. The goals for overseas mining
In mineral-rich and investment-friendly countries, China should find mining points of great
reserve and good ore grade with good developing conditions and logistics, and then develop
them by joint venture or M&A.
Countries with rich iron resources are list as follow:
World iron resources published by the U.S Geological Survey unit: 100 m t
Resource reserve
(content of Iron)
Iron ore reserve
countries
Iron ore
grade
Brazil
67%
410
140
620
210
Russia
56%
310
140
560
250
Australia
61%
250
110
400
180
Ukraine
30%
200
90
680
300
China
33%
73
41
224
126
Kazakstan
40%
74
33
190
83
India
64%
62
42
98
66
Sweden
60%
50
22
78
35
The U.S.
30%
46
21
150
69
Venezuela
60%
36
24
60
40
Canada
65%
25
11
39
17
South Africa
65%
15
6.5
23
10
Global
50%
1800
800
3700
1600
Basic
reserve
Reserve
Basic
reserve
Reserve
(Data sources: Luo B.S. Supply Chain for Iron Ore---A Strategic Requirement for Developing
Steel Industry & 2007 Summit Forum on Supply Chain for Iron Ore, vol. 1 page 29
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Most countries with rich resources are located on America and
Africa, the total copper reserve measured is 350 million tons, in
which Chile at 24%, the U.S. at 16.9%, CIS at 10.15%, Zaire at
7.39%, Zambia at 4.5% and Peru at 3.41%.
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The “Going out” is to invest in these countries.
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3.1The selection standards for overseas mining projects
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1）Geological resources
High exploration of mine bed, rich reserve, good ore grade, easy for ore
dressing and able to pelletizing
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2）Good conditions for mine construction
Excellent in water and power supply, easy to construct.
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3）Geographical site and transportation outward
Topography, river, hydrology, culture, and farmland irrigation are involved.
The site should be in good conditions related to its position, such as short
distance to ports and good transportation.
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4）Draft-deep ports admitting Cape size ships
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5）Investment-friendly settings, includes:
Good political and economic settings, (economic growth)
Perfect policies and laws (Mining Act, Tax laws and so on)
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6）Good economic, environmental and social benefits
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Project’s economic, environmental and social benefits
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Assessment of economic benefits
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Assessment of economic benefits is the first job for mining overseas to
judge the competitive capability, involving the estimate of production
costs, FOB costs, ore prices, sales and profit capability.
Current practice is to calculate the FOBs and freight costs according to the
actual situation of the mine. Generally, the ore price and freight costs inyear as benchmark rates to estimate the sales and expenditure, as well as
the profits.
Then a sensitivity analysis will be made with the most sensitive variables.
The variables include prices, spending on construction, production costs,
exchange rates and discount rates.
Taking a pelletizing plant as an example
The benchmark price of pellet ore is set as 202.36 cent/dmtu, foreign
exchange rate as 0.75, capital expenditure for the ore price, operational
cost as±10%
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Foreign exchange rate change is set as±0.05
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The discount rate is set as±1%
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Making the sensitivity analysis based on these data to get the different net
present values under different conditions.
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The sensitivity analysis
annual 4 m t output of pellet ore
case
Net present value (Au$ Million)
variable
low
base
high
low
base
high
pellet price
182.13
USC/DMTU
202.36
USC/DMTU
222.6
USC/DMTU
890
1335
1780
Capital expenditure
90%
100%
110%
1348
1335
1322
operating expenditure
90%
100%
110%
1633
1335
1037
foreign exchange
0.7
0.75
USD/AUD
0.8
1653
1335
1057
Discount rate
8%
9%
10%
1494
1335
1197
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At present, China and other countries use this method to calculate the
economic benefit. Mean value is another way available. The average
production cost and average sales can be concluded during the mining
period, along with the mean freight fee, they can be put in comparison
with the floating costs relative to the mine’s competitive capability and
the floating prices, if the floating rates are under the mean values,
then the competitive capability is there. But the prices related to
production factors are floating in years and so do the ore prices that
they are unpredictable, so the mean values is difficult to be precise
ones.
In 1984, Australia Harmersley Iron joint hands with China Metallurgy
Import &Export to put forward flexibility study on Channar Iron mine.
They calculated the production costs and sale prices for the years
within the lifespan of the mine, referring to inflation rates (imaginary
values actually) that were estimated in those years. But it proves that
the calculation is meaningless to the actual situation that has changed
too much. Despite the complexity, a principle that overseas mining
must be profitable must be followed. The operation should be in line
with the principle of cash flow mining.
3.2 Other than the economic gain, environmental and social
benefits from the overseas mining projects should be calculated
too.
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The assessment of social benefits for previous overseas mining
was ignored, especially the practices in south America and
Africa where local resident’s living and local economic growth
were somewhat overlooked when attentions were put upon the
hold of mineral resources. With this, western media attacked
us, saying that China only cared about the resources. In this
respect, Marcona Peru Iron Mine
Iron mine that was M&A by Shougang Group in 1992, are still in
some management trouble.
Now it is time to change the concept. One Chinese enterprise
agreed that it will help build an agricultural display garden, a
high school, a prime school, a kindergarten, a hospital, a mining
lab and some other facilities when it was in a negotiation of
mining project with foreign partner. Though the costs are
increasing, but it is necessary for a harmonious world.
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4．Modes and routes for overseas mining
4.1 Modes
The man purpose for overseas mining is to stably hold and fairly make use of
foreign mineral resources with flexible modes conforming to local situations.
（1）Risk exploration
Geological exploration, according to international practice, comprises of four
stages: pre-survey, survey, detailed survey and exploration.
Pre-survey: under regional geology or geophysical and geochemical anomaly,
combine field observation with a little engineering test to survey and produce
some results that will afterward be compared with some known mine beds having
similar geology to the survey area. By doing so, a potential mineralization area is
predicted. If there is enough information, then the amount of mineral resource
might be estimated as a potential mineral resource.
Survey: do the outcrop check, geological mapping, small sample takings and
geophysical and geochemical prospecting to generally ascertain the form, the
occurrence texture and quality property of the orebody, and then decide whether
the mine area is worthy of detailed survey or sketch out the area for detailed
survey.
Risk exploration: do the detailed survey and exploration jobs on the base of the
results from pre-survey and survey. There are some risks in it, so it is name risk
exploration.
At present, some countries like those in South-eastern Asia are generally in this
situation. With basic pre-survey information, the risk exploration is the first stem
to hold mineral resource. Japan encourages its enterprises to go overseas to run
risk exploration of copper by offering governmental subsidy. From 1955 to 2001,
the budget for mineral seeking reached 82.4 billion yen. As for the exploration
spending, 50% of it is from loan that will be returned within 15 years. All these
show the national supports for overseas development of resources.
China should assume some selective risk exploration. I recommend that Chinese
government provide financial supports to those enterprises in risk exploration
work.
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（2） Joint venture mining
Joint venture mining refers to developing new mining site. The mining sites selected should be
those with rich reserve, good conditions for ore processing and mine construction, good
transportation and water & power supply system, as well as investment-friendly settings.
Exclusive investment and joint venture are two kinds of modes of joint venture mining.
Generally, exclusive investment is not recommended for overseas mining.
Shougang Group’s Peru Iron mine project is an exclusive investment project held by Chinese
with 98.4% of share holding. But there are lots of problems in years that can not be solved
perfectly.
Joint venture is recommended for overseas mining projects and Chinese could hold 50% of less
than 50% of stocks. As joint venture enterprises are easy to manage, especially when there are
problems related to labor relation, environmental protection and subsidy for resource usage
happen. After all, local staff is more helpful when dealing with these problems.
Sino-Australia joint venture Channar Iron Mine is a good example. There are two ways of
management in a joint venture mining enterprises where Chinese hold some share, one is to
have Chinese representatives in the team, while one is without but the foreign side has
authority on Chinese side, and the Chinese just regularly attend the directorate meetings.
Baosteel group takes 46% share in Sino-Australia joint venture BaoHI Ranges and 50% share
in Sino-Brazil joint venture Baovale mineracao, but Baosteel has no representative in the
management team.
Sinosteel Corporation holds 40% share in Sino-Australia joint venture Channar Iron Mine, all the
time in last 20 years, there are Chinese representatives in management team.
Practice has shown that sending representatives to take a part in management for joint venture
enterprises is useful in two ways, with Chinese staff in planning, sales, financial and QC
departments, Chinese side can take hold of the operations, and for Chinese staff, management
participation is also a training or learning.
The joint venture projects mean normally a new development project, whose process takes a
long period from site selection, site construction to production.
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（3）M&A or investment
It is a prevailing international practice by “Going Out” to hold foreign resources and
M&A foreign mining enterprises to implement a strategy of mineral globalization with
projects as start points.
Shougang Group’s Iron project in Peru and Chambeshi copper project in Zambia
belong to this type of practice. Both are exclusive investment projects by Chinese
and both are mines in their aging stages that are often off production and are waiting
reform. After taking over the mineral resources, the Chinese investor needs to spend
more to have a series of reform for further development.
The successful M&A by CNPC and BHP should be learned, which is to find foreign
mines in young age and invest when they are listed, so that the investors will fully
or partly take share in them to own part of their production capacity. This sort of
M&A is a union of two strong enterprises.
·A foreign example: consolidation of BHP and Billinton:
Billinton is a great multinational of metal and mineral mining. It developed bauxite
mining in Indonesia and Surinam in its earlier year, established international mineral
business in South Africa in 1990s and listed in 1997. Billinton works together with
BHP and brings the world a first-class and multidimensional company working on
natural resources. Billinton’s Iron, copper and coal products are world-class and its
market value is on the top of the list.
· Anglo American M&A Kumba, a South African company owning the famous Sishen
Iron Mine in South Africa. Sishen is a listed company with annual output of 27 million
t. Anglo American is a super company in South Africa, the third biggest world mining
enterprises with a market value of $37 billion. It invested and took 66.7% share in
Kumba
in
2002.
Investing or taking share is popular for controlling mines today
China’s enterprises has started taking share in foreign mining companies, for
example, Baotou Steel Group invested 24 million yuan to take share in Centrex
Metals, a company based in South America, and then developed its Bungalow/Minbrie
iron mine. Angang Steel Corp. invested 250 million yuan to take share in Gindalbie
Metals LTD to develop Karara iron mine. Their practices are worthy to be followed.

4.2 Purchase of a listed shell company and specialized
funds

4.2.1 Purchase of a listed shell company

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The global financial crisis sharply drops the share prices
of some foreign listed mining companies, some even drop
by 80%. Among these listed mining companies, some
hold a great deal of resources so they have potentials for
future development. Taking share in these potential
companies is an effective way to go overseas and control
foreign resources. Because the listed companies can
finance from public, China’s enterprises might purchase
their “shell” to finance in foreign capital markets when
the global financial markets rebound.
“Purchase of listed shell company” means an unlisted
company invested in a listed company to get a position as
listed, and then insert its own business and assets to be
listed indirectly.
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4.2.2 Specialized funds
Mining overseas in a specialized business involving not only
mining technology, but also politics, economy and laws, so
specialized funds as a solution to this were made. For example,
SAMI（Strategic African Mineral Investments）is one of the
specialized funds, which is a medium to bridge mining
companies and mine buyers. SAMI can help China’s companies
to mine in Africa where project selection, project development
and project security are the main barriers for them. With some
local people SAMI find to help deal with these barriers, China’s
investors will take hold of the mineral resources original held by
the mining companies they invest into in a low price.
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China’s enterprises should care about SAMI’s credit and possible
misstep. 。
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5．Steps to overseas mining

5.1
Progressive achievement of overseas mining should be confirmed
Chinese Joint venture projects
Location
Share percentage
Capacity
(10 k t)
Channar 1987
Western Australia
Harmersley 60%
Sinosteel 40%
1000
Marcona 1992
Peru
Shougang 98.5%
700
Baovale mineracao 2001
Brazil
Baosteel 50%
CRVD 50%
600
Eastern range Mine,
Pilbara 2002
Australia
Harmersley 54%
Baosteel 46%
1000
Wheelarra 2003
Australia
Tanggang10%,
Wuhan Iron&Steel10%,
Ma steel10%,
Sha Gang Group 10%,
Mitsui 4.2%,
Itochu 4.8%,
BHPB51%
1200
Quy Sa iron mine 2005
Lao Cai province ,
Vietnam
Kunming Iron & Steel corp.
Vietnam Steel corp.
150～300
Mine
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Construction-ready Mines with output capacity (raw ore) of 140—
150 million t
China’s overseas mining project in recent years
country
mine
Share percentage
Capacity (10 k t/a)
Western Australia,
Australia
Palma Iron Mine
CITIC Pacific 80%
China metallurgical Group 20%
80 m t/a raw ore, 27.6 m t/a iron concentrate
and 6 m t/a pellet ore
Western Australia,
Australia
Karara Iron Mine
Gindalbie Metal 50%
Angang group 50%
20 m t/a raw ore, 8 m t/a iron concentrate and 4
m t/a pellet ore
Western Australia,
Australia
Koolanooka Iron Mine,
Weld Range Iron
Mine
Sinosteel works with Midwest
Corporation in preparatory
investigation.
12 m t in Koolanooka
15—20 m t in Weld Range
Western Australia,
Australia
Australasian Resources,
Balmoral South
Shougang Group spent A$56
million on preparatory
investigation, expected
investment US$1.5 billion
undetermined
Australia
F.M.G
1.45 b t in Christmas Creek,
Nicolas and Mount Lewin，
Fe 56-60%, 25-40 m t/a;
Total investment US$1.6
billion; ports and railroad
are built by the investors.
Baosteel signed a long-term sales agreement
&memo of development, agree to an
annual sales of 15—20 m t;
Tanggang also signed a sales agreement;
Hualing Corp invested 5.3 yuan to take
16.8% share in FNG, annual supply of 10 m
t ore product
Russia
Federal Mining
Management(Cita,
Russia)
Luneng Group
Exclusive investment in
developing Berezov Iron
Mine
Resource reserve 447 m t; Fe 37-42% in
Limonite; resource expenditure 95 m yuan,
investment 5.7 b yuan; 10 m t/a raw ore, 5
m t/a pellet ore
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Baotou Steel Group invested A$40 million to take 10.1% share in
Centrex Metals Ltd（CXM.AU）
Baotou Steel Group agreed with CXM.AU that it will invest less than
A$40 m on geological exploration and bank flexibility study on
CXM.AU ‘s Bunglow Iron Mine
Tonghua Iron &Steel Corp invested 90 m yuan in South Australia to
take 9.99% share in IMX. IMX will develop a new iron mine and the
raw ore will be delivered to China for processing.
Sha Steel Corp. purchased from British Stemcor Corp. the Savage
Ravier Mine under ABM, an Australian company. The annual output of
the mine is 2 million tons.
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·China Metallurgical Group works together with Cape Lambert.
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·China Metallurgical Group takes 70% share in Argentinean MSG Iron
Mine (3.5 m t/a).
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Wuhan Iron & Steel Corp. agreed with Centrex Metals Ltd to invest
$127 million to acquire 1 billion tons of iron resource..
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Hualing Group invested 5.3 billion yuan to take 16.48% share in FMG
and is authorized to purchase 10 m t of finished ore.
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Aluminum Corporation of China Limited invested US$14 billion in Jan.
2008 to take 12% share in Rio Tinto (Britain). It invested again
US$19.5 billion on Feb.21, 2009 on Rio Tinto, with $7.2 billion on Rio
Tinto bond. Now the company increases its share from 12% to 19%
in Rio Tinto (Britain), and takes 14.9% share in Rio Tinto (Australia).
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5.2 Steps to operate the overseas mining
Taking Australian mine as an example
5.2.1 Preparatory work and the procedure for production and
construction
Scoping
Study
Pre F. S
（估算精度30—
40%）
（概算精度20—
30%，相当于中
国可研）
Determine
What It
Could Be
Determine
What It
Should Be
Develop
Conceptis
Does it
make
sense?
F. S
Funding
（概算精度10—
15%，相当于中国
初步设计）
Determine
What It Will
Be
Implemantat
ion and
Startup
Operation
Close and
decommisso
ming
Deliver the
Project
Extract the
Value
Return to
the
Communty
Investor
Review
Case
Case
Case
Case
1
2
3
4
Construct
project
Is it
best?
Detal
Operat
project
Implement
Final Land
Use
Comission
Rehabilitation
Is it viable
（1）Scoping study
（2）Pre Flexibility Study
（3）Flexibility Study or Bank Flexibility Study
（4）Initial engineering, ordering large equipments, usually no
change after order taken.
（5）Detailed engineering
（6）Construction
（7）Production
（8）Mine closure
5.2.2 Applications for EPM, MDL and ML
Environmental assessment must be submitted for ML
Procedures and laws related to overseas mining (Western
Australia as an example)
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Three steps to mining in Australia：
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1. EPM；
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2. MDL；
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3. ML, apply with environmental assessment a requisite
Environmental assessment
Content of environmental assessment
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Flora
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Fauna
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Surface water
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Noise
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Ground water
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European and Aboriginal Cultural Heritage
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Air Quality
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Geochemical Characterization of mined materials
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Soil
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Pipeline Burst Consequences and Management
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Visual Amenity
Tenure
5.2.3 Project approval proceedings
Commonwealth of Australia
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Foreign Investment Review Board
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Export Licenses
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Environmental Approval
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Import Duty Concessions
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Tax Rulings
State Government of West Australia
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Mining Act
Environmental Approval
Heritage Approval
Construction Approval
Operating Licenses
Royalties
Water Extraction Licenses
Explosives and Dangerous goods Act
Municipal Government
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Road Permits
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Building Permits
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Sewerage Installation Approval
5.2.4 Australian Laws and regulations related
（1）Legislation
Laws relevant to mining in Australia
1. Legislation（based on English Laws）
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Land access
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Mineral rights
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Free hold
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Native title rights
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Multiple use rights
(grazing、water、mining)
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Nature conservation rights
（2）General Legislation
2. General Legislation
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Environment and Heritage
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Health and safety
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Employment
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Immigration
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Foreign Investment
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Taxation and royalties
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（3）Environmental Protection Act（Ep Act）
Note: there is a request of environmental
assessment for project and operating licenses.
DEC（Department of Environment and
Conservation）is the governmental body to take
operating license application, no construction
permitted before the license is issued.
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（4）Mining Act
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（5）Tenure
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Location
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Mining and land Tenure
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5.2.5 Codes and standards
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·Joint Ore Reserves Committee (JORC) Code of Mineral
Resources and Ore Reserves
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Occupational Safety and Health Act (OSHA)
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Mining Acts and Mining Planning
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Code of Building & Construction Authority (BCA)
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Code for Electric power engineering and installation
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Communication, instrument and control
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Code for mechanical engineering
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Code for civil engineering
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Design basis for processing item
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6．Risk hedge of overseas mining
6.1 Indicators for risk assessment
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6.2 Lessons needed to learn
Risk assessment is close connection with the measures taken for risk
hedge. By Going out and mining overseas, we experience success and
failure. The lessons should be summed up and learned as a guide for
future practice.
6.2.1 Risks of geologic resources
The geological resource reserve of foreign mines should be checked
conforming to the codes of UN and western countries for reserve
exploration. The relation between reserve, basic reserve and resource
reserve should be paid more attention as foreign mine operators are often
confused with them.
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Australia JROC code
Detailed check on the characteristics of mineral ore and ore beneficiablity
is a must to prevent some aftermath.
Luneng Group joint ventured with Cita state to develop Berezov iron mine
in Russia. The mine is an iron mine with 37—42% content of Fe before
sintering and 64% after, but the content of SiO2 is 8% high so no
customer buys the product. China Metallurgical Group M&A Argentinean
iron mine, and it is 1.5% content of P before refining and the refined ore
contains 0.45-0.5% of P, which also drives the customers off. These
lessons need to be learned.
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6.2.2 Risks of ore processing and minerals logistics
The fine particle of ore distributed in Western Australia projects
makes CITIC Pacific’s SINO project a hard one, as the iron
concentrate is eligible only when it is milled to 28 microns. For
China Metallurgical Group’s Cape Lambert project, the ore is needed
to be milled to 22 microns, which increasing the difficulty to the ore
dressing.
Tonghua Iron &Steel Corp. invested to take 9.9% share in IMX, who
yearly transports 2-3 million tons of raw ore to Bayuquan Port in
Yingkou, China for ore dressing. Tangshan Xingye Group works
together with WPR to develop Pecoliar Knob mine, but the Port
Wheelarra is now not allowed by One Settl, the port authority, so
the ore has to be transferred to Port Darwin in North Australia by
railroad 2,159km long. With rejection by local Aboriginal on
construction of a passing station, this project has to be abandoned.
Tonghua Iron &Steel Corp. has built a 3 m t/a ore dressing plant in
Yingkou, China, but has to leave it unused. So when going overseas
for mining, the investors should guarantee the logistics to prevent
any potential risks.
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6.2.3 Risks of project approvals
Overseas mining usually needs to get approvals from
Chinese and local governments. Some good projects often
lose marketing chance due to delayed approval or rentseeking of power on purpose that are not under the control
of investors.
Too many and complicated formalities take investors long
time for mining approval in China. One big state-owned
enterprise based in Shanghai failed its bidding for a foreign
company because it needed to get approves from StateOwned Assets Supervision and Administration Commission,
Ministry of Commerce and National Development & Reform
Commission before the bidding time.
M&A of foreign company by bidding is a popular
international practice, and some of Chinese laws or
regulations are not in consistent with it, which limits the
proceeding of overseas mining. Approval system is
suggested to be simplified.
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6.2.4 Risks of labor relation system
Labor relation systems in some countries are different from that of
China. China’s investors should realize that local employees have strong
consciousness to protect their rights, and high demand for welfare
benefits, which the investors especially those invest exclusively should
take necessary measures to deal with. Contract Mining is popular in
Western Australia as a risk hedge related to labor relation.
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The labor issue that Shougang Group suffered in its Marcona Peru iron
mine is worthy of other’s concern.
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6.2.5 Risks out of the different law systems

Overseas mining must conform to law systems of China and foreign
countries that the resources are in. The difference between law systems
needs to be paid special attention because some foreign enterprises
often added hidden conditions or even legal defect in agreements so
that China’s enterprises will be at a disadvantage.
For example: Shougang Group’s purchase of Marcona iron mine is
successful generally, but some legal defects still make troubles today.
It is worthy to point out that China’s regulations on listed company
might different from that of other countries. For example, OPA
(Regulations of Acquisition Public offerings and Acquisition of Values
through Exclusion) is Peru’s regulation for the acquisition of listed
mining companies in Peru, and it is different from China’s. A try to
understand and guide the listed company’s operation using China’s
regulation will likely violate Peru’s and might even lead to termination of
contract.
7．An modern, green and digitalized role model for the 21st century
---CITIC SINO Iron Mine。
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Role Model of open pit—CITIC Palma Iron Mine
（1） Location
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100km south-west from Karratha， Pilbara, Australia,
（2） Iron resource reserve
This mine is a huge BIF ore bed with a thickness of 750m, a
length of 36 km，and a depth of 300m, mainly formed by
magnetite. The resource reserve is shown as follow:
Category
Resource
reserve
Million ton
Content of
magnetite
%
TFe
Measured
263
22.4
32.1
Indicated
1168
22.68
31.7
Inferred
661
24.52
31.4
Total
2092
23.29
31.6
3）Mining methods
（
Open pit mining, annual output of 80 m t raw ore, 80 m t waste rock, total
excavation of 160 m t. Rotary drill, 22-45 m3 Hydraulic shovel, 190-360t
conventional truck. World-Known Terex, Leibher, Hitach, Komasto, and
Caterpolla competed for mining.
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Terex’s planning therein: two RH4000 mining hydraulic shovels (45m3), one
RH3400 hydraulic mining shovel (30m3), ten Mt6300 haul truck (360t), five
MT4400 conventional truck (250 t).
（4）Dressing plant
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80 m t/a raw ore dressing, 27.6 m t/a iron concentrate output, raw ore TFe
31.6%, iron concentrate is Fe67% in grade, pellet ore TFe 65%.
Dressing techniques: Sole Magnetic Separation (not Magnetic Suspension
Separation) is applied, characterized as: four 60X89 semi-portable gyratory
crushers for primary crushing. The whole dressing is in 6 progressions. With
Large-sized equipments are applied for ore grinding, more than 10 m t of ore
is processed in one progression. A Φ40×33 auto grinding mill （28,000 kw
Gearless
Ringmotor ） but not a High-Pressure Grinding Roller is used.
Φ26×44.5 ball mills for ball milling. MP1000 rock crusher is also in used.
Fe67% of iron concentrate is produced after rough magnetic separation,
magnetic
separation
of
this
fine
particle
mineral.
（5）Engineering projects for the mine
Include 80 m t/a open pit, 27.6 m t/a dressing plant, 6 m t/a pelletizing plant,
130GL/day seawater desalting plant, 450 trillion w power plant and port
construction.
Total investment is more than USD4 billion and production in 2010. Considering
it as a single stope, this mine is the biggest open pit mine in the world. It will
be a role model for the 21st century with its modern, green and digitized
features.