Chinese Overseas Mining Investment:
Part 2 of 4: Urgency-Driven Mistakes
The rapid growth of Chinese mining investment – which the Chinese government has already taken firm steps to control – has led to many investment decisions being made on incomplete or misinterpreted information. The following mistakes are commonly made by Chinese mining companies abroad:
1) Potential Over Viability
A potentially rich mine is a tantalizing target for investment in an increasingly competitive prospecting environment, however, the presence of large amounts of a valuable mineral is not enough to make a mine profitable. Chinese companies often make the mistake of focusing on mining potential in their investment decision-making and neglecting to fully consider exploration and prospection conditions. Local politics, labor conditions, infrastructure, and other factors can make the difference between boom and bust.
2) Mistaken Evaluations of Potential
When Chinese companies initially evaluate a mine’s potential, they too often consider the project in isolation, focusing on geological conditions such as strata structure and metamorphism rather than its location in an important metallogenic belt or the integration of the project into China’s wider economic needs. Some companies move too fast, and invest without confirming the presence of high-grade ores or amassing all the necessary information about a mining project. This greatly magnifies the potential for a failed project.
3) Bigger is Better?
Chinese companies typically will purchase mining rights to significantly larger areas than companies from other countries, in the hopes of capturing more potential for a major find. However, these big areas are expensive and eat away at the money available for exploration. Chinese companies often do not take into account the costs of registration abroad, and a large area with many mines means a great deal more red tape and the potential to be stuck with a large number of unproductive mines.
4) Finding the Perfect Project
Chinese companies are often pre-occupied with identifying the diamonds in the rough, the good projects that have been overlooked by others. However, a mine that seems ‘too good to be true” is often hiding significant drawbacks, and moving ahead without full awareness of a mine’s history and prospecting information is a recipe for a failed project. Some seemingly good mines are rendered unprofitable by legal issues or fraud, but many simply are not fully investigated for the timeliest information.The importance of due diligence cannot be overstated.
5) Neglecting Logistics
Companies investing in bulk mineral commodities are particularly vulnerable to having their projects rendered unprofitable by unforeseen transportation difficulties. As mining locations are increasingly remote and may be in rough terrain, the cost of building roads, harbors, and
other infrastructure has to be considered. Getting the minerals out of the earth is only the first step, after all.
The hope is that China’s economic realignment emphasizing sustainable and regional growth will lessen the pressure on companies to make these mistakes. Project owners and investors have real power to emphasize a slower, more methodical approach to project evaluation, but risks remain high. Previous success might have been the result of chance, and it is difficult to know how stringently Chinese companies are evaluating potential investments. Chinese companies that demonstrate success in cultural relations with their foreign hosts in ongoing projects, however, have a significantly higher chance of observing due diligence in the selection of their projects. They have shown foresight in their approach to a mining project as something ultimately profit-driven, rather than urgency-driven.
Check Part 3 for the common cultural mistakes that Chinese mining companies make abroad.