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China's mining sector holds more opportunities for locals, slim pickings for foreign investors
Investment in China's mining sector has never been an easy business, and recently, more prospects have dried up for foreign investors following legislation changes and the development of a capital market. It seems the tide is changing and Chinese companies in the sector are beginning to come into their own, spurred on by a rapidly developing economy.
This time last year, there was much optimism about the future of foreign investment in China's mining sector. A few early birds were already feasting on juicy joint-venture worms, while many more were preparing to swoop as anticipation of more watertight legislation on prospecting and mining rights grew.
However, China's developing capital market has diminished the need for foreign investment as Chinese companies become savvier about raising their own equity. While global markets are entering a downturn period, China's economy still remains robust, with excess liquidity being poured into domestic stock markets.
Over the last 30 years, China has developed as a commodity market economy with private or state-owned companies, which has led to direct mining taking precedence over in-depth exploration, Xu Hanjing, executive director of Sino Gold Ltd., said in a presentation he gave at the Antaike-organized Nonferrous Metals Mining Forum 2008, held in Nanning on Thursday.
Xu said that while this method generates daily profits, it is limited in scale and wastes resources, not even managing a resource utilization rate of 30 percent.
But over the next 20 years, China will become a capital market economy with publicly-listed companies, which will guarantee capital for in-depth exploration and improve the resource utilization rate to as much as 70 percent, Xu said.
In this light, Chinese companies will depend less on foreign investors for equity. Xu gave the example of Australian-listed Sino Gold as a Chinese company making good use of capital markets. Sino Gold has increased its annual gold reserves by over 1 million ounces (about 30 tons) each year since its listing in 2002. It has also carried out about 90 kilometers of drilling and run up annual exploration costs of about RMB 100 million ($14.31 million), without returning a profit. It has been able to do this as its listed value and equity capital have increased with each new resource discovery, Xu said.
A mature mining market depends on public companies, Xu said. Such a shift will coincide with government and company interests over long-term supply and revenue. This model would also allow ownership to be distributed to the public, who may be negatively affected by mining activities. Moreover, it will also increase transparency in the country and help strengthen property rights, market regulation and environmental protection.
In addition, recently released sweeping regulations by China's central government limiting foreign investment in a range of industries, of which the mining sector is one, are beginning to take effect.
This has resulted in relatively slim pickings for foreign companies looking to get involved in China's mining sector.
While China asserts foreign companies that can introduce high-technology and aid Chinese companies in increasing efficiency and cutting emissions are still welcome, newcomers may have a tough time making headway. "You won't see many new foreign mining projects in the next five years," Wernher Stapelberg, chief representative of South African-based mining group Exxaro, said.
The regulations for foreign investors were released by the National Development and Reform Commission (NDRC) on Nov. 7, 2007, and took effect on Dec. 1. The guidelines state that foreign investors should be encouraged in the recycling and renewable energy sectors, and specifically in technological developments in ore tailing utilization and ecological recovery of mine sites. However, foreign investors are prohibited from exploring and mining molybdenum, tungsten, tin, antimony, rare earth metals, fluorite and radioactive ore resources in China, and are restricted from developing precious metals mines. They are also prohibited from holding controlling stakes in mining operations.
The guidelines supersede those issued in 2004, under which foreign investment and ownership was encouraged in copper, lead, zinc and bauxite mines in western China, which boast abundant undeveloped metal resources.
However, persistence on the part of foreign companies wishing to invest
could still pay off, according to some.
In reality, if a foreign company is willing to spend the time and effort persuading Chinese companies that they are looking for a long-term "win-win situation" instead of a fast buck, then there will be more interest and Chinese companies may even come to you, said Harry Mustard, chairman and senior geologist from Blackwatch Resources China Ltd., a subsidiary of Indochina Minerals Ltd.
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