China's R7.7bn SA mining splurge confounds

China's R7.7bn SA mining splurge confounds

[miningmx.com] – PROPOSALS by Chinese investors to buy marginal South African precious metal assets totalling R7.7bn raises the question as to whether the flurry in business activity signals the bottom of the commodities cycle, or if the approaches are merely coincidental, or just plain wrong-headed?

“The Chinese are very astute investors. Although they do have some difficulty operating in Western economies, it’s still fair to say that they are very commercial,” said Neal Froneman, CEO of Sibanye Gold.

Froneman knows a thing or two about Chinese investment. He sold Gold One International to a Chinese consortium ahead of the combination of some of its assets with Sibanye Gold which was demerged from Gold Fields. As a result, about 20% of Sibanye’s share register consists of Asian investors.

The question about the intentions of Chinese investors comes after a series of announcements by Chinese companies in October and November that they were investing in South African mining.

The first this year was a bid by a consortium led by China National Arts & Crafts Corporation for the Blue Ridge mine of Aquarius Platinum for about $37m (R405m). The transaction was eventually scuttled – much to the annoyance of Aquarius – after the South African government failed to approve the proposed transaction, allegedly because its empowerment credentials didn’t add up.

The other four proposals are still in the pipes.

Three of them are rival takeover bids of a $148m (R1.6bn) and a $150m (R1.64bn) and another $150m for Johannesburg’s Central Rand Gold (CRG). The suitors are a Hong Kong-registered businesses called Hiria Group, Beijing Ankong Investment and Shengbang Jiabo Consulting. Somewhat eccentrically, the parent companies of some of these Chinese businesses have diverse, non-mining interests ranging from yacht hire to chemicals and even media.

The third is the somewhat heftier $225m (R2.46bn) offer by Hebei Zhongbo for Eastern Platinum, a Johannesburg and Toronto-listed platinum mining company that put its eastern and western bushveld properties into mothballs in 2012 and 2013 as the platinum price dived.

What’s interesting is that none of these assets could be described as a dripping roast while the identity of the bidders is strange to Western eyes: the notion of an arts and crafts led consortium makes one think of crayons and glue rather than backacters and graders.

Paul Smith, COO of Wesizwe Platinum, a R1.3bn company in which China’s Jinchuan Group has a 45% stake, believes the bids for Eastern Platinum and Central Rand Gold are misjudged investments.

“I find them astonishing and astounding. I can’t understand why these companies are buying these assets. They are really buying liabilities,” said Smith who added that while Jinchuan Group had knowledge of the bidders, it would be a mistake to think there was “a higher order” logic to the offers.

“I suppose there’s a flavour in them that this is the very bottom of the market. So if people really believe that it’s the bottom of the cycle, and the prices for commodities [such as platinum] recover really agressively, it could be a good buy,” he said.

Ilja Graulich who works at Madini Minerals, a private equity company that is currently investing and helping to manage assets in Africa, said the first wave of Chinese investment was fairly undiscriminating, such as the 2011, $580m bid by Hing Wing International for Taung Gold, an exploration business that is yet to progress.

“The Chinese have never been scared about entering South Africa,” said Graulich. “What has changed, however, is that they are learning to walk away from assets,” he added. His former company, Elemental Minerals, which was developing potash in the Central African Republic, saw an offer from China’s Dingyi Group fail earlier this year.

Froneman said the important perspective about Chinese investment in South Africa is that it’s not time-bound by the same deadlines as Western companies. “In general, they have a longer time-frame in respect of commodities.

“Disruptions don’t phase them and they have a completey different view of political risk,” he said adding that South Africa’s participation in the BRICS alliance was starting to bear fruit in these mining investments. “They are bankrolling some South African deposits as a means of getting in Africa,” he said.

A potential investment by China in the South African steel industry – which has limped along at best over the last five years - is another example of the speculative nature of Chinese investment.

State-owned Hebei Iron and Steel said on September 12 that it had signed a deal to take a 51% stake in a venture with the Industrial Development Corporation and the China-Africa Development Fund to build its biggest overseas steel mill.

It’s an approach that has David Brown, CEO of Coal of Africa, particularly interested.

CoAL recently sold additional shares to Beijing Haohua Energy (BHE) a state-owned Chinese company as part of its strategy to finance its projects and clean up the balance sheet.

“There would be a synergistic benefit of Hebei using our coking coal that serves the greater good for the Chinese,” said Brown. BHE already has about 24% of the company.

Investments by CAD, which has its regional headquarters in Johannesburg’s Sandton, are the ones that seem to stick in South Africa. “An investment by CAD is a major stamp of approval,” said Graulich.

This article first appeared in Finweek.

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