Mining investment: rational and irrational Game
Source: www.chinamining.org.cn Citation: www.chinamining.org.cn Date: Nov.11, 2013
The mining market was experiencing a pain; it seemed to be the consensus in this year China Mining.
“I can tell you how serious the market is right now; even don`t have to put on a pile of data.” Zeng Nianqing, founder and chief executive of keystone associate Inc. jokingly said to the audience in the forum of Policies & Financing “Two years ago, I attended China Mining and gave the speech in the forum related to mining investment .There was no empty seat at that time, but now the attendance is less and less.”
Indeed, the reporter also noticed that there was no guest in the last two rows of the conference room, which was completely different from the last year conference. In the field of communication, the reporter also learned that many of the participants arrived with hesitation and confusion, hoped to know the context of development of mining market by listening the speeches given by the experts.
In recent years, affected by the sluggish growth of world economic, global mining development became slowly; mining commodity prices, trading and investment indexes appeared different degree of shocks and contractions. Many mining investors’ enthusiasm seems to be cooling from the state of "crazy".
According to the introduction from Yu Yi, the vice President of the CCCMC, in recent years, the foreign mining investment from Chinese enterprises appeared obvious fluctuations. According to the record from this chamber of commerce, in 2010 they received 173 projects with the total investment of $15.1 billion; Peaked in 2011, a total of 289 projects, the total investment of $19.6 billion; Fell in 2012 to 166 projects, the total investment of $7.6 billion. Since September, 2013, there were 99 recorded overseas investment projects in this chamber of commerce with total investment of $3.287 billion, the quantity of projects in the whole year can reach about 140, investment of about $5 billion. Compared with last year, project quantity and amount fell by 15% and 15% respectively.
According to the Chinese mining association, the first three quarters of this year, they accepted 103 overseas mining investment from Chinese enterprises, down by 8.0% year on year; the agreed investment of $3.136 billion, down by 10.9% year on year.
Impulsive investments become less and wait-and-see atmosphere is brewing. In a sense, the attenuation of data had been increased to some extent, which explained the investors get more rational. In this continuous downturn market, it seems that the opportunities are coming.
Irrational Market
No market can be prosperous forever. Under the influence of many factors, it conformed to the objective economic laws that the market was supposed to appear some frequent fluctuations.
"For the mining capital market, we can find in nearly 10 years mining index of Growth Enterprise Market in Toronto stock exchange that the volatility is especially obvious in nearly 10 years." Zeng Nianqing also said, because “Toronto mining Market “is the world`s largest mining capital market, its development trend can most directly reflect the development direction of global mining market.
According to Zeng Nianqing, in Toronto, from 2002 to 2008, mining capital market had experienced a boom, a lot of capital poured into the mining market, which provides a huge economic support to the development of many mining companies and primary explorations. At the same time, the new “super cycle” of global mining was coming.
In 2002, the world economy sustained depressed, but Chinese economy still maintained a high growth trend at that time. Especially after the accession to the WTO, the Chinese economy integrated into the world economy fast. With the development of a wide range of industrialization and urbanization, the demand for resource products in our country rose all the way up. The rapid development of the global resources industry was promoted drastically in the process of import and export of minerals. We had to say that "China factor" is the important part in this mining "super cycle".
Until 2008, because of the global financial crisis, a lot of capital quickly evacuated from the mining market because the range of investment was wide,
the amount of investment is large and the investment risk is high. Toronto mining market was baptized in the financial crisis in 2008. Since then, many mining companies and primary explorations operated worse and worse. The market value of some enterprises even lost more than half after one night. In fact, this was the opportunity for the Chinese enterprises to expand their market overseas. He gave an example: using the form of private placement ,Sinotech Minerals Exploration Co., Ltd.(Hong Kong)---- the wholly owned subsidiary of Sinotech which was affiliate of China non-ferrous metals resources geological survey successful purchased 40% stake of Canada Canaco Resources In. which listing in the securities market of Toronto , with the price of c $0.05 per share and totally cost is less than $3 million; And then, in March 2011,they external transfer 8 million shares with the c $5.4 per share, not only successfully cashed c $43 million, but also kept itself being the largest shareholder of this c $1 billion value company with 20% of the company shares.
"Chinese enterprise created a myth of mining mergers and acquisitions within two years." Zeng Nianqing said, "Because of the financial crisis, the value of the foreign listed primary explorations undervalued grossly, this is the reason why Chinese enterprises can succeed. And it is also a typical example.”
Mining capital market has experienced a short-lived rebound for about two years after the 2008 financial crisis. Since early 2011, it seemed to enter a long downlink channel. From this trend, we can find that the falling point is nearly reaching the low position in 2008. However, is the timing of the “bottom-feeding “in mining industry really coming? In such an irrational market, what and where is the investors’ opportunity?
Rational investors
Some experts believed that the unbalanced and uncoordinated supply and demand in mineral resources will exist for a long time, and the industry characteristics and development laws of mineral resources will also determine the relatively stable development of mining market in a certain period of time. After having experienced a rapid growth, in the downturn international mining market, mining investment overseas have entered the period that risk and contradictions concentrated outbreak. Various projects faced different problems.
Therefore, in the background of structural adjustment and technical innovation of the entire mining industry, it is necessary that investors should remain fully rational and prudent. In the forum of "policy and the financial", Wang Jiahua, the Executive Vice Chairman of China Mining Association warned the Chinese enterprises especially the non-mining enterprises that in the prosperous mining period, many Chinese mining companies and geological exploration units went out, but they all failed. So the non-mining enterprises should be more rational in the overseas investment of the mining industry. Bravery may also evolve for ignorance. Therefore you must be rational after learning their painful experiences.
We have learned that the Chinese enterprises do not familiar with overseas business environment and the rules of the game, having inadequate understanding of the national conditions and culture of the recipient countries, not having the ability to invest and operate the overseas projects even they do not know how to make adjustments, so they all faced the plight of "not acclimatized "in the overseas mining investment.
Some experts believe that a few mining investments from Chinese enterprises are speculative and followed blindly. The exploration ratio of small and medium-sized Mineral Mountain is too high. The nonstandard and low level of mining development is likely to cause a serious rebound abroad. However, the attention of the community development and information transparency of many large projects is insufficient, which may easily cause misunderstandings and conflicts with local communities; even cause the losses of property.
Zhang Shuguang, the Director of UlanBator Branch of Beijing Longan Law Firm said that, for example, 95% of the failure investment in Mongolia are cause by lack of effective legal due diligence to their partners. "Many investments in Mongolia from Chinese enterprises are not specificity. Most of the enterprises got some information of the project through a variety of informal channels, such as from their friends and other informal social channels. And then introduced through intermediaries, they hastily signed the contract within a month or two. "
Mr. Zhang said that "risk tend to occur before the agreement was signed," a detailed comprehensive due diligence, can help enterprise found the targeted investment risk in the first place and make preparation to avoid, transfer and deal with the investment risk.
As rational investors, in addition to make sufficient due diligence, it was particularly important that they should choose the appropriate investment prudently and flexibly. Some experts said in the forum that in the way of international operation, Chinese mining companies have no absolute advantage in capital to make absolute holding in some project. Therefore, when purchasing the listed primary exploration companies abroad, the talent and technology advantages can become a pry bar to get the biggest profits.
The game of the wise
There is a "Mr. Market" theory which is thought-provoking in the investment world. The general idea of this theory was: The investors cannot decide their investment behaviors just according to the movement of the market “mood”, which will let the market, lead you around by the nose. The real smart investors won`t be too much dependent on the change of market data, the only thing they should do was following the basic rules of the market in the proper time --- to buy low and sell high.
Warren Buffett has a very famous investment philosophy: be fearful when others are greedy, and be greedy when others are fearful. This is considered by many investors as a classic. For many mining investors, shall we be "greedy" or "fear" at this stage?
Luan Zheng Ming, the chief partner of Beijing Rainmaker Law Firm considered: the price of many mining projects was obvious low, so it was a good time for the investors to buy these projects. According to his introduction, there are 389 listed companies with the market value of less than $1 million in the Toronto stock exchange, accounting for 24% of all listed companies. “Two sets of real estate in Beijing can exchange a few good mining projects in Toronto”. He also cited the example that an already proven nearly 60 tons of gold resources project only priced in c $10 million. “For more projects, their market value had shrunk to about 10% of the peak value now."
"Now, the values of mining stocks are still falling. No one wants to buy and also only a few people concerned about it. But we should pay attention on them .” Zeng Nianqing also said that the deepening adjustment of mining industry may continue for a period of time. If investors invest at this time, it is likely to bear the risk of the continuous dip of the mining market. However, the future returns will be considerable after the adjustment.
It was not hard to find that many investment experts were still optimistic about the booming of mining market. But at this moment, it seems not so much of the timing of the overseas investment found by the capital market "trackers", it was better to see it as the smart investors’ game between the irrational market and rational investment. It was difficult to define Today`s mining market was “favorite" or "abandoned" in the capital markets. Perhaps in the background of downturn economy, this new stage is just the real “paradise of adventurers".
Facing the sincere investment from numerous mining ministers, do you feel that the body was not moved but the heart already far? (Zhou Tao) (Translated by TLRHVC)
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