Mr. Li Shanquan delivered a speech on the keynote session of CHINA MINING 2015
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| (Photo: Zhao Xinhao; Edit: Xu Xiaojing) |
| On the morning of October 21, 2015, the keynote session of CHINA MINING Congress and Expo 2015 was held at Tianjin Meijiang Convention and Exhibition Center, where industry leaders, renowned economists made speeches around the theme “New Normal, New Opportunities, New Development”. The picture above shows that Mr. Li Shanquan, Senior Vice President and Senior Fund Manager of Oppenheimer Funds in US, was giving a speech entitled “Long period of Mining Investment and Price Fluctuation of International Commodities; Opportunities and Challenges that Chinese Enterprise Will Face When Going Out”. |
Ladies and Gentlemen, Dear Friends,
Good Morning!
I want to express my gratitude to the organizer for giving me such an opportunity to share with you some of my experience of mining investment, while talk about my opinions on Chinese enterprises going out.
Today I want to talk about four contents, the first is the particularity and investment of mining industry, the second is the opportunities and challenges the Chinese mining companies faced when investing overseas, the third is a few specific suggestions on Chinese mining companies going out, all these are from my own investment experience; the last one, if time allowed, I want to talk about the prospects of the future market.
(PPT) The Particularity and Investment of Mining Industry
All people present here are experts, knowing clear about mining industry, that it boasts a characteristic of long-period. Long-period not only reflected in the long-period of the project itself, the long-period investment cycle, but mainly about the industry, its own law is also long-period. Why? It mainly caused by the limited resources. Because the resource is located in the upper reaches of the whole value chain. In other words, you are not be able to find the resources if you want to invest. It is the case in many countries. Another reason is that, even if you find the resources, it would cost at least three to five years from exploration to construction, then put into production and operation. Mining is a capital-intensive industry with large capital requirement and financing difficulty, for that it’s a long-period investment and involves the most extensive fields, including the relationships between regulations, real estate, environmental protection and government, and relationships with the communities, etc. While the mining industry is also the traditional industry, with slow technological progress, and the average R&D proportion of the industry is very low.
Then, it’s difficult for the mining production companies to be personalized, and the competition among enterprises is about the level of management apart form the quality of resources. Innovation is very difficult.
What’s more, the scale merit of mining companies is not obvious, the main purpose of the corporate merges being gaining resources.
The particularity of mining industry is also embodied in the pricing power of the mining products, which not only depend on a single producer or a single user, almost every producer accept the prices on the international market passively, there being little room for the price fluctuation. And the futures market basically enlarges the essential supply and demand, increasing the price fluctuation. The originally simple supply and demand has been magnified for several times or even ten odd times by the frequent futures trades, increasing the difficulty of predicting the prices of mining products, for that it’s very difficult for the investors to correctly predict the prices.
The side effects of Wall Street’s innovation. Because there are new products emerging constantly around the bulk commodities in Wall Street, making the price symbol increasingly deviates from the original supply and demand. For example, the price predicts made by traders in the major companies in Wall Street and economists on all kinds of goods have an increasing influence on prices, more and more valuing short-term and techniques. Certainly, there is a problem determined by interest relationship. For example, one year we had a meeting held at Goldman Sachs, an analyst from Goldman Sachs asked Richard, the CEO of FCX then about his opinion on the earnings of the next quarter. Richard’s answer was very interesting, he said, “I hold the fundamentally different view from yours. The reason is that what you are interested are the benefits of each quarter, because the accuracy of your prediction directly related to your year-end bonus. But as an entrepreneur, what I concerned more about is the prospect of my company in the next five to ten years. It can be seen that there are significant differences between the Wall Street and corporate in behaviors.
Further, we can see the following characteristics from the particularities of mining investment. The long-period characteristic of mining industry makes the investment decision-making extremely difficult, adding great difficulties to the assessment and analysis of projects not only for the enterprises but also investors like us. The changing cycle dislocation of investment and real supply and demand always results in the substantial waste of capital and social resources. When the contradiction of supply and demand is prominent and commodity prices are unreasonably high, investment always being most active. It was the proper time for people to brake, but people continued to invest inwards, promoting the further excess production capacity. While formation of production capacity from investment needs a few years, but this time increases the excess production capacity, and would exacerbate the loss as soon as the project put into operation. There’s a saying in Wall Street, “Sell at peak earning”, which is difficult to do otherwise. For enterprises, the most difficult time is often the best time to invest, for that the investment price becomes very low. But that period of time is the most difficult time, they are generally unable to invest, they can’t get money or financing to expand their production even if they observe good chance. So it will be greatly beneficial if the enterprises could anticipate the future period when the prices are high, and make some proper adjustments on their investment not for the overcapacity price tag, but to appropriately reduce the degree the crisis exacerbation or deepen. Actually, the problem also plagued the international mining industry. But there is no particular good solutions has been found yet, from the perspective of investors, businesses or government, they all want to reduce the dramatic fluctuations, but very difficult to do. Actually, the characteristic of long-period is to consider how to avoid the ups and downs of the industry under conditions of long cycle.
Can the goal be realized? Personally, I think the difficulty is not small. Because the mining companies are often more passive. Since in the most upstream of the resources, products are always controlled by others, which means in accordance with the standards, the investment should have gained proportionate return, but mining industry is not exactly like this. What are the reasons for the case that you may not be able to get some investment return? Because you have to find the resources, the limited resources determine the investment may not be able to find resources.
And the second issue I want to talk is about the opportunities and challenges faced by the Chinese enterprises when going out. Like other industries, it’s evitable for the mining enterprises to go global as a result of economic development. As China’s economic aggregate grows, the demand for resources has also increased constantly, the domestic resource contradiction will become increasingly prominent, and the quantity and quality of international resources should be said being far superior to domestic resources on related to many products. The domestic mining enterprises also boast a lot of advantages if going out. For example, domestic enterprises are very different from the ones twenty years ago. Firstly, on the capital advantage, the domestic enterprises are equal to the overseas enterprises. Meanwhile, from the aspects of technology and management, especially the support of government, we have conferences like CHINA MINING Congress and Expo, which is almost the only one that gets the largest support from the Chinese Government. We can see that the Chinese Government offers very large support for this aspect. Nowadays, some significant decisions, such as “Belt and Road Initiative” and “Silk Road Fund” and so on, all showing the large support the Chinese Government has given to Chinese enterprises for going out, which is second to none.
Besides, improvement of China’s international status also adds convenience to the overseas development of mining enterprises, which is a good condition for Chinese enterprises to go global.
Of course, Chinese enterprises would face a series of challenges, because the distribution of the world’s resources is not very balanced, and many places lack of resources, especially some countries with scarce resources, also acting as China’s competitors in the international market. Particularly, the major international mining companies has a long history of finding resources world-wide, with the main good mineral resources and easily mined ones having already been exploited, so Chinese enterprises also have many challenges to handle.
As a latecomer, Chinese enterprises will face constantly increasing difficulty of access to resources and price, because the layout has already been constructed. So we should take some proper policies or strategies to support Chinese enterprises successfully going out. So for the Chinese enterprises, especially the mining enterprises to develop overseas, there should be a process of learning and adaptation. We should carry out of scientific decision-making policy of proactive research, prudent investment and long-term perspective, reducing blindness, and try to less “tuition”. Investment on material objects are always the biggest waste, especially the mining investment, if the decision being wrong, there is very little chance to take back the already paid money.
Now, I’d like to give some specific suggestion on Chinese mining enterprises’ going out. Firstly, I think that scientific decisions is inseparable from necessary information. If we want to help Chinese mining enterprises to go out, we should first build or buy a global mining database, which is not the simple numbers, but with many other contents, including what contents? For example, it should include resource distribution, proven reserves, the size, grade, owner (organization or enterprise), transfer history of ownership of the reserve, regulations, environmental protection requirements, foreign investment approval procedures in the host country, and whether foreign mining enterprises have been in operation, which country are the mining enterprises belong, the exact size and operational life of them, etc. This is a very detailed database, which is beneficial for your more accurate decision and judge. Hence, it’s urgent to build the database. If you have difficulty in building one database, you can buy instead. As far as I know, there are many such databases internationally.
Secondly, based on the mastered databases, we should track the dynamic of the mining listed companies. The information in the capital market are changing every moment, reflecting the conditions of exploration, development, construction and operation of the mining companies. Meanwhile, it also reflects the political, economic and regulatory changes of the host country. These information provides a lot of clues for the enterprises to grasp the best merger and acquisition time, seeking for better resources. We should learn to effectively utilize the public information and track the listed enterprises of these resource classes around the world.
Thirdly, the qualified enterprises should establish their own technology team, conducting focused tracking on the related mining projects in the interested countries and regions. If conditions permit, we should find opportunities to conduct field investigation on these projects, establishing the first-hand information databases after study and upgrade these databases timely.
Honestly, I have participated in many global mining congresses and many times in CHINA MINING, it’s very gratifying that it has developed to today’s scale. But compared to the conferences on other fields, the present Chinese faces or Chinese enterprises are very few and limited, unlike international conferences on other industrial manufacturing field of industries as Internet, more Chinese people and enterprises could be seen than in CHINA MINING. We hope that Chinese mining enterprises should try their best to find opportunities to go out, starting from participating in the conferences, to contacting with your competitors or your potential acquisition targets. Because there are a large number of international companies present in such conferences, I hope we can see more and more Chinese enterprises and Chinese faces.
Fourthly, for the interested listed companies, Chinese companies should try to hold minority of shares, in order to learn more details of the project. In order to prevent premature exposure of the targets, sole share holding should be avoided. For example, you can hold shares of 5 or more companies, each no more than 5%, so that you can advance or retreat as you like. On the one hand, you can constantly increase the share of ownership, until merger; on the other, you can choose a good price to sell all these shares, which is a passive investment, but you can not only train the team but also get considerable returns. It’s also the basic practice of many large foreign companies. Some of the large companies I invested also practice like this. Take a simple example, the exploration companies. The risk of geological prospecting enterprises is relatively large, many big companies don’t want to abandon the small companies or try to focus on small businesses, not knowing which company would get major discovery in drilling. Generally speaking, there is a team in the large company specializes in researching these companies to appropriately hold shares of these small companies. For example, if you invest 5%, about millions of dollars to hold their shares, if they once drilled successfully, your share is of great value, and you can continue to append the share, which laying solid foundation for the subsequent acquisition. So many large international mining enterprises are basically practicing like this.
Of course, the recent industry is downturn, the share of investment is relatively small, because many big mining enterprises are facing difficulties. The financial statements are not good, sales of assets are primary, while the ones buying assets are relatively less.
The fifth specific suggestion is that, in many cases you don’t need to hold the shares, but what is the biggest problem leads to our detours? The problem is that we always want to hold the shares. In fact, holding and controlling resources are different in many cases, it’s very important to learn joint venture and cooperation in the access to resources. Even though many mature companies, project cooperation among them are very wide, whether to control the management right is according to the specific situation. And if you could cooperate with a powerful manager, even if without the control, only the passive investment will be beneficial.
Now I want to take Zijin Mining Group Co., Ltd. as an example. We can observe from its recent cooperation with several major international companies overseas that they has changed the method they used to take, but not holding the shares instead. For example, they have invested a Canadian company recently, both of which hold certain shares and manage together. Including the recent cooperation with the gold production company, I have talked about this issue with the company’s chairman. At that time, he said that he want to cooperate with the Chinese companies because he has Chinese background. In my office, I told him, if he wanted to cooperate with Chinese enterprises, the way of selling the whole company to Chinese company was not adoptable, especially what he sold was generally not good resources. The core resources and assets of large companies would not be sold, such as the largest project he said in South American, with billions of dollars having been invested there, and which now encountered with many difficulties, and mining being very difficult. If he want to sell this mine, whether Chinese enterprises have the ability to purchase? From the perspective of capital, our Chinese enterprises can purchase the mine, but it’s very difficult to pragmatically manage it well. I had visited that place, so I told him that he’d better cooperate with Chinese companies with sincere and gain some achievement. Now the financial report is not good, you can make joint efforts with Chinese company to rejuvenate that mine, instead of sitting by and doing nothing after selling the mine. Because you had take decades to manage the mine but failed, I think the possibility that Chinese company would success is relatively low, which would severely damage your credit in Chinese enterprises’ mind. Because it’s equal to leave a mess to China, so I suggested that taking the joint venture as a better approach. The good news is that, Zijin Ming basically adopted the method of joint venture cooperation, which I think is adoptable.
The last suggestion, Chinese enterprises going out is a long-term strategy not a short-term matter, there being a structure issue and state of companies going out to be considered. In my opinion, private enterprises and mixed ownership have advantages overseas. I’m not saying that state-owned enterprises are not adoptable, they are endowed with advantages of large scale, capital, technology and management, but we should see there being some weakness in state-owned enterprises, such as the decision-making procedures is not fast and easy to be duped by their competitors. Chinese enterprises should try ways of mixed ownership, joint bids and cooperation acquisitions, etc. in the future, which is same as the overseas situation, we can bid one thing with two or three companies when we are not powerful enough. After getting one project, we should consider how to organize one united team to successfully operate it. Just as the overseas mining, including some enterprises I own, there are much more companies use this kind of method, in order to converge their advantages together to successfully finish the project. So they need joint venture cooperation, which is called the mixed ownership. It’s very convenient for state-owned enterprises to undertake China-aid foreign projects overseas, but mining projects are interests-oriented, sometimes your competitors would take advantage of your background as a state-owned company. For example, some time ago, when conducting energy mergers and acquisitions, your competitors could allege that you were playing the politics card as a state-owned company, so you would miss the good projects. Because as a state-owned company, related with national interests, which is political rhetoric and can completely kill your opportunity. Hence, sometimes mixed ownership or private enterprises are not necessarily without advantages, but with possible advantages instead.
Finally I want to talk about the market conditions in the future. Although until present, the market has been in a downtrend channel for a period of time, but the overall long-term upward trend has not changed. I will show you one picture later. And the limited resources in the world has not changes, as the reality of there being less and less available and easily accessible resources has not changed. Not matter how science and technology progress and develop, the fact that most of the basic resources must come from the mining industry would not change. Then, as mankind has increasing requirements on environmental protection, which will make mining costs gradually increase. It’s inevitable of cost-driven price rises, meaning that the price-rising trend of mining industry is basically difficult to change.
You can see this picture from a company specialized in resource research, about the research for a long period from 1720 to 2015, which basically showing the commodity changing trend. We can see that the basic trend is upward, and the decline in recent years is generally in the upstream channel in terms of the upwards channel. So we can’t say that mining industry has no future just in accordance with the immediate downturn, which is not accurate, in the long history, you will find that is just the specific embody of a long circle. In a long-term view, it’s a relatively good investment opportunity to invest in mining industry, because you can purchase assets with high quality with less price in the downturn period.
And I would take gold as another example, because I have sold gold for many years, so I’d like to share you with this issue. Actually there are many factors influence the price of gold, so as a special commodity, gold boasts different property from other bulk commodities. Firstly, from the view of supply and demand contradictions, it’s a gambling of many factors. From the aspect of supply, such as production, recovery, recycling and manufacturers’ hedging would all influence the supply of gold. From the aspect of demand, it’s just the same, if the monetary authority—the Central Bank buy a lot of gold, the ordinary investors would invest gold in more financial goods for hedging. As for jewelry and decorative decoration, it’s increasingly difficult to predict the demand side of gold product property for the multi-factors. Although many economists and merchants predicted the future trend of gold in the market, but during my engagement in the gold investment in the past twenty years, I think there’s rare people could make accurate forecast.
For example, when the gold price was at the lowest level falling to 252 dollars/ ounces, if people were told that gold would rise to 1900 dollars/ounces, they would think that you were talking nonsense, almost impossible. But actually, after some years, the price of gold rose to 1900 dollars/ ounces, and at that time or when it rose to 1800 dollars/ ounces, someone told me gold price would rise to 5000 dollars/ ounces, or even ten thousand dollars/ ounces, it has been proven to be nonsense. But it’s difficult to forecast accurately. Apart from the multi-factors and complex factors influence gold price, there is another reason affect the difficulty of prediction, for that actually each prediction is a dynamic gambling game, in which people can’t determine which force prevail easily, and this would directly influence your forecast result. For example, some people said that people buy gold because they are afraid. But many factors would cause fear, such as inflation deflation, wars, the collapse of the monetary system and so on, all of these could make people afraid. Meanwhile, there are many factors and policies would change the moods of fear, make people not be afraid in one moment. Some time ago, one important reason for gold price rising to such a high level is the continuous depreciation of dollars. People believed that the crisis of United States was very severe, then the whole world monetary system would go wrong, so the gold price rose to 1900 dollars/ ounces. It was a significant factor, but now the economy of US has became normal, which means the result of gambling is that through the policy adjustment, US has made people less afraid of the result of the collapse of the system. So the price of gold has fallen to the present situation from 1900 dollars.
Another factor is that the gold futures market has magnified the gold supply and demand. Financial innovations make the speculation and investment behavior of gold closely interwoven, such as the foundation of GLD attracted a large amount of gold, perhaps hundreds of tons were in that field. In the past, it’s very difficult to invest in futures or even just open an account, and to buy gold futures for the ordinary people. But after the foundation of GLD, the ordinary investment could purchase gold just as the trading of stocks, thus, this product attracted a lot of gold in that field. Meanwhile, various market-trade products like ETF are increasing worldwide, these products continued to arbitrage, resulting in the increasing investment of gold in the demanding fields. Thus, the prediction of gold became more difficult.
In fact, there are many most basic factors influence gold, I would talk about them simply. For example, from the perspective of the Central Bank, we can see the Chinese factors from this table, such as China’s gold reserves, ranking first in the world as foreign exchange reserves. We have many dollars, but gold occupies a very low proportion in the total gold reserves, so compared to foreign exchange reserves, the gold proportion is very low. In fact, if China changes slightly in this regard, it will directly affect the price of gold.
Observing more carefully, we can find from the short-term analysis that, because China is actively preparing join the SDR, and Special Drawing Right of MF has driven the transparency of the Central Bank. In the past, the Central Bank rarely disclosed the gold reserves. I remembered the Central Bank hasn’t disclose how much gold held by them for 5 years, which rose sharply by more than 600 tons 5 years later, from then, in order to increase transparency, it disclosed the reserves every month. Estimated in accordance with the data published, the gold reserves increased by 19 tons in July 2015, and by 16 tons in August, by 15 tons in September, so it has reached about 1,709 tons now. But we don’t know whether it would buy gold in October or the amount. The trend is worthy of attention, but I don’t know whether it continue to purchase in the future. Some people said that they had bought a lot, but it may be much less if disclosed.
There are many other factors affecting gold, you can find that people take various methods to compare gold with other metals. For example, compare gold’s price trend and correlation among other precious metals, or compare the relationship between gold and silver, or relationship between gold price and cooper and oil, including the relationship with producer price index, etc. But what I want to emphasis is this figure. Actually, gold’s monetary attributes is its most significant property, which is very interesting in the field of gold investment, if further analyze the monetary attribute of gold, you can find from the figure that, gold price is calculated via different currencies. If you put aside other factors, observe the gold price through currencies in each country, the investment opportunities would suddenly offer you a lot of clues. If you often read the change of gold price with the standard of US dollars, then you start to measure by Australia dollars, you would find that invest the gold producers in Australia can get better stock performance. Why? Because the Australian dollars is devalued, but the US dollars is in an appreciation trend, so his final products sold in the international market would gain US dollars, while the domestic cost is measured by Australian dollars. So you can see that the profit margin expanded rapidly. Although the resource quality may not be second to none, but the profit potential of Australian companies increased a great deal.
Canada is of the same situation, for that the devaluation of Canadian dollar induced the profit margins of Canadian enterprises producing gold increased rapidly. So from the aspect of profit, investing the gold producing enterprises in Canada is relatively a good choice. And there are another problem, the currency attribute of gold forces you to measure the price of gold via the currency of different countries, which might offer you a clue to judge the appropriateness of one place for investment. Sometimes we pay higher attention to these things.
All above is what I want to share with you, if there are other problems, we can talk about it in private. Thank you all!
About CHINA MINING
Since first held in 1999, the scope and influence of CHINA MINING has grown rapidly year by year. As a global mining summit forum and exhibition, CHINA MINING Congress and Expo has become one of the world’s top mining events, and one of the world’s largest mining exploration, development and trading platforms, covering all aspects of the whole mining industry chain, including geological survey, exploration and development, mining rights trading, mining investment and financing, smelting and processing, mining techniques and equipment, mining services, etc. playing an active promotion role in creating exchange opportunities and enhancing mutual cooperation between domestic and foreign mining enterprises.
CHINA MINING Congress and Expo 2015 will be held at Meijiang Convention and Exhibition Center in Tianjin on October 20th-23rd, 2015. We invite you to join the event and to celebrate the 17th anniversary of CHINA MINING with us. For more information about CHINA MINING 2015, please visit: www.chinaminingtj.org.
