Chinese Overseas Mining Investment:
Part 1 of 4: Correcting Previous Mistakes
Despite the consistent support China has given its mineral resource companies as they have sought to expand abroad, there is growing recognition that Chinese mining investments in other countries have had a particularly high failure rate, even in countries with safer business practices. In 2013, media widely reported a statement by Wang Jiahua, Vice Chair of the China Mining Association, in which he estimated that 80% of Chinese mining investments overseas had failed since 2005. The reasons for this high failure rate are fairly well known, and include the steep learning curve that Chinese firms face in doing business abroad and such a volatile field, a confidence in government support that leads them to overpay for second-rate mining assets, and a poor track record of project management.
Nevertheless, as China embarks on its massive “One Belt, One Road” regional development program, an awareness of these general reasons is not enough to promote real reform in overseas investment practices. China’s nascent willingness to let certain companies fail in their investments is certainly a risk in the short-term, but will improve competitiveness and efficiency in the long run. Until now, at least one of the following three situations has typically led to failed Chinese investments abroad:
1) The land contained in the mining rights has no significant mineral deposits; this is a fairly common risk that can be caused by falsified initial reports or simply a lack of detailed exploration
2) Mineral deposits are found but local mining conditions make the project obviously unprofitable; this situation is caused by both avoidable and unavoidable risks such as communal opposition, environmental laws, and strict prospecting restrictions
3) Mineral deposits are found and significant mining activities are possible, however, changing economic or political conditions make the project non-viable; these non-technical reasons are separate from the demands of the mining itself and include: Environment evaluation reports; Major contract flaws; Economic deposits changed to non-economic; Price fluctuations; Resource nationalism; Financial and taxation policies; and Government confiscation
The common mistakes that Chinese companies make to fall into these situations can be broadly categorized as urgency-driven mistakes, often caused by the unfamiliar demands of the global mining industry; and cultural mistakes, or failures to account for the expectations of corporate behavior outside of China. Parts 2 and 3 of this series will go into these mistakes, shedding light on what Chinese companies need to improve to find success in international investment.
In Part 4, the larger issues of China’s trial by fire in the international mining investment market will be outlined, and recommendations for evaluating Chinese companies’ ability to adapt to the changing market will be given.