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8/8/2019 Deloitte MINING English
http://slidepdf.com/reader/full/deloitte-mining-english 3/56Mining or Growth: A review o outbound Mining M&A activity rom China 3
Executive summary 4
Methodology 5
China M&A survey ndings 6
M&A Review 28An interview with Deloitte China'sMining sector Partner 28
Macroeconomic drivers o outboundMining M&A 31
Chinese outbound Mininginvestment case study - Australia 39
The regulatory environment: a lookat regulatory rulings on Chineseoutbound Mining acquisitions 40
Historical data 44
Deloitte principal contacts 53
End notes 54
Mining or Growth
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Executive summaryand methodology
Executive summary
Despite the global nancial crisis, Chineseacquirers have increasingly looked at oreign
Mining targets, with 2009 witnessing a record-
breaking number o transactions, with 33
announced deals worth US$9.2 billion, coming
to market, a marked increase on the 20 deals
seen in 2008. Looking ahead, this trend looksset to continue with a combined 73% o survey
respondents expecting dealmaking in the wider
Chinese Mining sector to increase over thecoming 12 months. More pertinently, 46% o
respondents expect outbound cross-border
activity to drive this increase.
While M&A is undertaken or a number odierent reasons, the need or Chinese companies
to secure supplies o commodities is undoubtedly
the principal driver o this recent wave o activity.
Indeed, 85% o respondents expect this to be
at least a signicant driver o outbound Miningsector deal fow over the next 12 months with
54% considering it the most important reason or
such transactions.
Furthermore, domestic demand or such resourcesis set to rise urther as China’s economic growth
story continues, reinorced by the act that 92%
o respondents consider the country’s economic
outlook to be either positive or very positive.One such respondent qualied this viewpoint by
saying: “There is huge internal demand within
China and this will drive economic growth going
orward.”
Looking at specic sub-sectors within the
Mining space, demand or iron ore is particularly
signicant with it rightly being considered as
one o the key building blocks o the Chinese
economy given the scale o the construction and
inrastructure projects currently being undertaken
there. Aside rom crude oil, iron ore is perhaps the
most important commodity in the world economy
and thereore, it is unsurprising that 69% o
respondents expect metal ore companies to see
the greatest levels o M&A investment in 2010.Although outbound M&A activity is predicted to
increase, the nature o these deals is set to alter
slightly in the coming months. Mining assets in
Australasia have traditionally been most actively
targeted by Chinese acquirers but this could
change with the largest proportion o respondents
(76%) naming Arica as the region expected
to witness the bulk o outbound activity going
orward. The proposed 'super tax' on Australian
Mining company prots, even in its recently
watered-down orm, is obviously a deterrent or
prospective investors, with 81% o respondents
believing that the legislation, slated to come into
law in 2012, will have a negative impact on the
level o Chinese investment in Australasia*.
It is o little surprise that 85% expect businesses
to look to target other regions, with Arica set to
be the main beneciary. Indeed, one respondent
points out that with Arican countries needing
help and inrastructure support, it is "easy to gain
access to their abundant resources by providing
them with help." Corporate valuations are also
playing a key role in this regard with valuationsproving to be robust in the traditional hotbeds
o activity, pushing investment to alternative
locations such as Arica and, to a lesser extent,
South America.
*Respondents answered survey beore revision to the proposed taxwere announced on 2 July 2010.
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Certainly, the outlook or Chinese outboundinvestment in the Mining niche remains positive,largely underpinned by the continued growtho the domestic economy. However, obstaclesto dealmaking remain, primarily in the orm omacroeconomic uncertainties and exchange rateconcerns, although this will likely be outweighedby the desire to secure inputs at attractive prices.China remains as cash-rich and resource-hungryas ever and these actors will continue to driveMining sector outbound activity over the rest o2010 and into 2011.
Methodology
Over the course o April and June 2010, Remark,the research and publications d ivision o TheMergermarket Group, canvassed the opinionso 26 mainland China-based Mining corporates.All respondents had experience o an M&Atransaction at some stage over the last ve years.They were asked to give their opinions on anumber o issues, including the key opportunitiesand challenges that businesses in the sector acein the current trading environment. All answerswere condential and results have been reportedin aggregate.
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China M&A survey ndings
30.8%
38.4%
15.4%
15.4%
US$15m-US$100m US$101m-US$500m
US$501m-US$1bn >US$1bn
Other XianShanghaiBeijing
38.5%
42.3%
11.5%
7.7%
What was your most recent annual revenuein US$m?
In which Chinese city are your headquartersbased?
Pre-qualiers/respondent inormation
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38.5%
46.2%
3.8%
< US$15m
US$101m-US$500m
US$15m-US$100m
US$501m-US$1bn
3.8%7.7%
>US$1bn
What was the deal size o your most recentM&A transaction?
6.210
12.5
60
12.5
20
50.0
1018.8
10
20
30
40
50
60
70
80
90
100
Cross-border
P e r c e n t a g e
o f r e s p o n d e n t s
Domestic
%
Divestment Joint venture
Majority stake acquisition
Strategic allianceMinority stake acquisition
Please describe the nature o your most recentM&A transaction
65.5%
3.8%
Very successful
Neutral
Successful
Unsuccessful
11.5%
19.2%
How would you rate the outcome o yourmost recent Mining M&A transaction?
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65.4%
Very positive Positive
7.7%
26.9%
Neutral
How would you rate China’s wider economicgrowth prospects over the next 12 months?
Deal drivers
Vast majority o respondents remain bullishon China’s economic growth prospects
The overwhelming majority o respondentsbelieve that China’s economic growth prospectsover the next 12 months will be positive, withover one quarter rating them as very positive.Just 7.7% o respondents give a neutralprognosis while no respondent thinks that theeconomic orecast is negative.
One o those surveyed who has a positiveoutlook on China’s economic growth prospectsgoes on to remark that “domestic demandwill drive economic growth looking orward,”while another notes that economic growth willcontinue unabated because o "major interestrom overseas investors."
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Close to three-quarters expect ChineseMining M&A to increase over 2010/2011…
A collective 73.1% o respondents expect tosee a rise in the level o Chinese Mining sectorM&A over the next 12 months, with a urther11.5% predicting that Chinese Mining M&Afows will remain the same. One such respondent
states that “Chinese miners want to expandthrough M&A as their demand or raw materialsis rising – there is huge resource competitionamong Chinese miners precisely because othis. Furthermore, the Chinese government isheavily supporting companies looking to acquireabroad.”
However, this optimism is countered by theact that some 15.4% o respondents believethat Mining M&A activity will decline over thestated period, with one respondent adding that"It's hard to say – the cost o M&A was low
during the nancial crisis. However, the globaleconomy is now recovering, meaning that theassociated cost o doing a deal is also rising.”Another respondent with similar views states that“Many companies have already invested heavilyin acquiring domestic and oreign mining assets.This, along with increasingly volatile internationalmarkets and reduced demand in nished metalproducts, means that Chinese miners’ M&Astrategies will be cautious and conservativelooking orward.” Yet another respondentsuggests that Chinese regulatory approval
or such transactions will prove to be a majorobstacle to Mining M&A activity.
…driven primarily by domestic andoutbound acquisitions o Mining assets
M&A activity in China’s Mining sector is mostlikely to ocus on either outbound or domesticacquisitions say some 88.5% o respondents,with close to hal o them (46.2%) suggestingthat the bulk o this projected deal fow will stemrom the purchase o oreign Mining businesses.
Increase greatly Increase
Decrease Decrease greatly
69.2%
11.5%
3.9% 3.9%
11.5%
Remain the same
What do you expect to happen to theoverall level o M&A activity in the ChineseMining sector over the next 12 months?
Inbound cross-border M&A
Outbound cross-border M&A Domestic M&A
46.2%
11.5%
42.3%
In terms o deal type, what do you expect todrive activity over this timerame?
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34.6
34.6
38.5
69.2
0 10 20 30 40 50 60 70
Coal-mining companies
Other miningsupport companies
Non-metallicore companies
Metallic ore companies
Percentage of respondents
%
(Respondents may have selected multiple answers)
In which particular sub-sector o the Chinese Mining sector do youexpect to witness the most M&A activity over the next 12 months?
Metal ore rms likely to dominate MiningM&A activity say bulk o respondents
Respondents are condent that Chinese M&Aactivity in the Mining sector will be ocusedon transactions within the metallic ore space,with some 69.2% believing that this particularsub-space will see the greatest amount o
M&A activity over the next 12 months. On theother hand, just 34.6% expect that coal-miningcompanies and other mining support rms willconduct the bulk o M&A acquisitions over theperiod.
“Recently, Chinese coal companies havebeen looking to add net raw inputs.”Survey respondent
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More than hal o respondents think thatthe most important driver o ChineseMining M&A will be the securing oresources supply networks…
A combined 84.5% o respondents rank thesecuring o resource inputs as at least a signicantdriver o Chinese Mining M&A activity over
2010/2011, with over hal o this proportion(53.8%), believing that this is the most signicantdriver infuencing Chinese Mining acquisitions.To this end, one respondent writes: “Acquiringresources is the most important aspect here, as itis the lieblood o any mining corporation. Otherdrivers are important, but are certainly not ascrucial as securing the fow o raw materials.”
Other important drivers include gaining marketshare and achieving economies o scale, with atotal o 38.4% o respondents each ranking themas at least signicant drivers o M&A within the
Chinese Mining sector.
What do you think will be the three most signicant drivers o M&A activity in the ChineseMining sector over the next 12 months?
0 10 20 30 40 50 60 70 80 90
To acquire know-how/technology
To benefit from new mining prospects
To acquire other intangible assets
To benefit from low corporate valuations
To achieve price bargaining power
To achieve economies of scale
To acquire a competitor/gain market share
To secure resources supply
%
53.8 26.9 3.8
Percentage of respondents
3.8 15.4 19.2
7.7 11.5 19.2
7.7 23.1
15.4 3.8 7.7
11.5 15.4
7.7 3.8 11.5
3.83.8 15.4
Most significant Very significant Significant
(Respondents may have selected multiple answers)
“Acquiring resources is the mostimportant driver o Chinese MiningM&A, as it is the lieblood o any
mining corporation. Other drivers areimportant, but are certainly not ascrucial as securing the fow o rawmaterials.”Survey respondent
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0 10 20 30 40 50 60%
26.9 15.4 15.4
Percentage of respondents
15.4 11.5 19.2
7.7 26.9 7.77.7
15.419.2 3.8
11.5 11.5 11.5
3.87.7 19.2
7.7 3.8 11.5
3.8 3.8Unwilling vendor/price dislocation
Bribery & corruption
Cost of leverage
Regulatory factors
Management culture
Environmental protection
Financial markets/macroeconomic instability
Exchange rate controls & currency convertibility
Most significant Very significant Significant
(Respondents may have selected multiple answers)
What do you believe will be the three most signicant obstacles toM&A activity in the Chinese Mining sector over the next 12 months?
…while exchange rate controls arehighlighted as the most signicant obstacleto Chinese Mining dealmaking
Some 57.7% o respondents indicate thatexchange rate controls and currency convertibilityis at least a signicant obstacle to ChineseMining sector dealmaking, with over one-quarter
suggesting that this issue alone is the mostsignicant hindrance to M&A. In addition,macroeconomic instability and interestingly –environmental protection – are also cited byrespondents as two relatively important concernsthat could negatively impact Mining deal fow.
In contrast, just 7.6% o respondents in total,consider that diering price expectationsbetween buyers and sellers are a signicantobstacle to dealmaking.
A small number o respondents note that otheractors also hinder deal fow, with one notingthat leveraging issues could restrict M&A activity.Elsewhere, another respondent comments that“China’s political landscape is a major obstacleor Mining businesses looking to transact.”
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Inbound Mining M&A most likely to stemrom North American rms say more thanone-third o respondents
36% o respondents suggest that the bulk oinbound M&A acquisitions o Chinese Miners willultimately stem rom North American companies,while, intriguingly, a urther 32% consider that
South American bidders will conduct the majorityo such M&A activity over the next 12 months.
O those respondents who cite that NorthAmerican businesses will conduct the majorityo inbound Mining transactions in China overthe next year, some 60% suggest that CanadianMining rms will be active in this regard. Similarly,all those respondents who believe that SouthAmerican concerns will conduct the bulk osuch deals go on to say that these bidders willultimately be Brazilian, with one respondentexplaining that this is primarily due to the
developing relationship between the Brazilian andChinese governments, as well as their respectiveprivate sectors.
Somewhat surprisingly, a sizable number orespondents who believe that European rmswill undertake the bulk o inbound acquisitionsgo on to highlight the likelihood o GermanIndustrial sector manuacturers looking to acquireand/or merge with their Chinese counterparts.One suggests that “Germany has a huge importdemand or raw materials and with inputs risingin price, German consumers o Mining inputs are
increasingly entering into joint ventures and/orstrategic alliances with the Chinese.” For instance,one such deal saw Siemens Energy move toacquire a majority stake in GIS Steel & AluminiumProducts, the Chinese aluminium oundry, andYangtze Delta Manuacturing, the Chinesemetalworking company, or an undisclosedconsideration in 2009.
0 5 10 15 20 25 30 35 40%
36
Percentage of respondents
(Respondents may have selected multiple answers)
32
28
24
16
16
12
4Central & Eastern Europe
(including Russia)
Middle East
Australasia
North Asia
Africa
Europe (other)
South America
North America
From which region(s) do you expect the bulk o inbound M&Aactivity in the Chinese Mining sector to stem over the next 12months?
“Germany has a huge import demand orraw materials and with inputs rising inprice, German consumers o Mininginputs are increasingly entering into
joint ventures and/or strategic allianceswith the Chinese.”
Survey respondent
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0 10 20 30 40 50 60 70 80%
76
Percentage of respondents
(Respondents may have selected multiple answers)
44
24
20
8
8
4
4Central & Eastern Europe
(including Russia)
Middle East
Europe (other)
North Asia
South America
North America
Australasia
Africa
In which region(s) do you expect the bulk o outbound Mining M&Aactivity to take place over the next 12 months?
More than three-quarters think that Aricais the most attractive destination orChinese outbound Mining acquisitions
Some 76% o respondents highlight Arica asthe most attractive region or outbound ChineseMining investments, with a number o themciting reasons to support their answers. “China
needs access to natural resources while Aricancountries need a lot o capital and inrastructuresupport. Thereore, it is very easy or Chinesebusinesses to gain access to the abundant naturalresources in Arican countries by providingthem with capital and inrastructure aid,” onerespondent quips, while another simply sums uptheir view by saying “Arican Miners are easier toacquire than their counterparts elsewhere.”
Mining acquisitions in Australia are also airlyappealing, with many respondents highlightingAustralia’s transparent regulatory policies,
large range o Mining sector targets and stablemacroeconomic environment, as potential M&Adrivers.
“The emergence o China as a capitalexporter has been particularly signicant
to miners – whether in South America,Australia or elsewhere, the miningcompanies Deloitte works withrecognize Chinese rms as key players inglobal M&A and project nance. Weexpect this trend to continue, i notintensiy, through 2010 as companies
seeking to develop projects look toChina or strategic partners.”
Karl Baker - M&A Mining Leader, Deloitte China
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Nearly two-thirds o respondents expectprivate equity dealmaking in the ChineseMining space to increase
A combined 65.4% o respondents believe thatprivate equity dealmaking in the Mining sectorwill rise over the next 12 months, while just11.5% consider that private equity interest in
the sector will decrease. The remaining 23.1%o respondents think that deal fows will stay thesame.
One respondent who alls into the latter categoryexplains that “private equity investors are stillcautious o investing in the Mining sector due tomarket uncertainty. At the same time, they also donot want to lose out on the opportunity to investin the sector due to its buoyant undamentals.”
Local private equity players likely to lead
any upcoming increase, say respondents
Interestingly, nearly two-thirds (64%) orespondents believe that any increase in privateequity dealmaking within the Chinese Miningspace will predominantly stem rom localnancial investors, with one respondent goingon to explain that “local private equity rmsunderstand the Chinese Mining market very welland they want to be able to ully exploit anyuture opportunities."
Increase significantly Increase slightly
Remain the same Decrease slightly
50.0%
15.4%11.5%
23.1%
What do you expect to happen to the levelo private equity activity in the ChineseMining sector over the next 12 months?
Foreign private equity firmsLocal private equity firms
64%
36%
Do you think over the next 12 months, themajority o this interest will stem rom localprivate equity groups or oreign nancialinvestors?
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In your opinion, what are the keyconsiderations or Chinese companieslooking to acquire oreign Mining assetsover the next 12 months?
The bulk o answers to this question ocused onthe underlying rationale behind such acquisitions,with the vast majority o respondents (close to
90%) suggesting that Chinese outbound Miningacquisitions are driven by the need to acquireMining inputs – especially sources o non-errousmetals and ores, which – as one respondentputs it – “Are airly rare in China.” Approximatelyone-third o respondents also mention thatoutbound acquisitions are also driven by theneed to utilize cheaper sources o labor abroad –presumably only in Arican and South Americanmarkets, however.
Respondents believe gold and copper priceslikely to rise the most over next 12 months
A combined 72% o respondents believe thatthe price o gold will increase over the next 12months, with 64% o them predicting a risein prices o less than 20%. At the same time,a collective 53.9% o respondents also thinkthat the price o copper and nickel will also rise,although their opinions dier on the degree inwhich this will occur – some 23.1% orecast thatcopper prices will rise by more than 20% while just 7.7% predict that nickel prices will do the
same.
8.0
64.0
28.0
23.1
30.8
38.5
7.6
7.7
46.2
42.3
3.8
3.9
50.0
34.6
11.5
24.0
72.0
4.0
23.1
69.2
7.7
3.9
34.6
61.5
P e r c e n t a g e o f r e s p o n d e n t s
( R e s
p o n d e n t s m a y h a v e s e l e c t e d m u l t i p l e a n s w e r s )
0
10
20
30
40
50
60
70
80
90
100
%
Othernon-metallic
ores
Rare earthmetals
Othermetallic
ores
CoalNickelCopperGold
Increase significantly (>20% increase) Increase slightly (<20% increase)
Remain the same Decrease slightly (<20% decrease)
What do you think will happen to the prices o the ollowing rawMining inputs over the next 12 months?
Outbound M&A spotlight
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Very significantly
Not very significantly
Significantly
73.1%
11.5%15.4%
To what extent will the price o these inputsdetermine the level o outbound ChineseMining acquisitions over 2010?
Just less than 90% suggest thatinput prices play an important rolein determining the level o outboundacquisitions over 2010
A total o 88.5% o respondents consider thatMining input prices play a signicant role indetermining the level o outbound Mining
acquisitions over 2010, with 15.4% o thembelieving that price changes signicantlyimpact outbound Mining deal fow. One suchrespondent writes that “Rises in input pricescauses demand to all and lowers targetvaluations, which should positively impact thenumber o M&A transactions taking place.”
The bulk o respondents believe thatregulatory regimes impede outboundMining acquisitions
69.2% o respondents believe regulatory issuesare a signicant hindrance to acquisitive ChineseMiners looking to buy abroad, with respondentspointing the nger at a variety o regulators. Onerespondent believes that local regulators "Havedelayed previous transactions." Another suggeststhat North American and Australian regulatoryauthorities employ airly stringent antitrust policieswhile yet another goes on to state that this hasa knock-on impact on M&A regulatory situationsin other regions such as Arica. Finally onerespondent adopts a d ierent approach, stating
that more onerous environmental and qualitycontrol regulatory regimes abroad will increasinglyimpact on Chinese outbound Mining acquisitions.
Yes No
69.2%
30.8%
Do you believe regulatory issues are asignicant challenge to Chinese Miningcompanies looking to undertake dealsabroad?
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0 10 20 30 40 50 60 70 80 90%
Percentage of respondents
31.6 26.3
26.3 15.8
15.8 31.6
21.1 21.1
Most significant Very significant Significant
15.8
26.3
26.3
21.1Australian regulators
EU regulators
North American
regulators
Chinese regulators
(Respondents may have selected multiple answers)
How big an obstacle to outbound Mining deal fow do you considerthe ollowing national regulators to be?
Respondents rank their own regulator asthe most obstructive to outbound Miningdealmaking
Some 31.6% o respondents believe that themost signicant regulatory obstacle to anoutbound Mining acquisition stems rom Chineseregulatory authorities, while a combined 84.2%
believe that local authorities present at least asignicant obstacle to dealmaking. On the otherhand, just 63.3% o respondents in total suggestthat Australian regulators present a signicantobstacle to outbound deal fow – althoughone respondent goes on to say that the recentimposition o the Mineral Resources Rent tax,which will see Australian Mining businesses beinghit with a 30% tax on iron ore & coal prots,could alter this perception.
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0 10 20 30 40 50 60 %
Percentage of respondents(Respondents may have selected multiple answers)
57.7
26.9
19.2
11.5Commercial paper
IPO
Shares
Cash
How are Chinese Mining businesses looking to acquire abroad likelyto nance their purchases over the next 12 months?
Cash is king say over hal o respondents
57.7% o respondents suggest that Chinesemining businesses will use cash to pay or theiroverseas purchases over the next 12 months,while just over one-quarter say they will conductshare swaps in order to nance acquisitions.Just under one-in-ve believe that public listings
will be the method o choice when raising M&Awar chests, while only 11.5% think that ChineseMiners will use commercial paper to nance M&Abids.
“China’s emergence in global mining iswell documented and clear to see. Thequestion going orward will be whether
traditional sources o capital – such aspublic markets and bank-providedproject nance – will return and increasethe competition or assets. Regardless,the sophistication and speed with whichChinese rms have demonstrated willserve well to position them as a strategicpartner to any rm looking to sell ordevelop a major mining asset.”
Jeremy South – Deloitte Global Mining Leader, Financial Advisory Services
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Discounted cash fow theory is the nancialvaluation model o choice
Fully 60% o respondents state that they utilizedthe discounted cash fow model in order tovalue their target, while roughly one-in-tenrespondents utilized other alternative methodssuch as relative value/comparative pricing and
option pricing theories.
Target directly approached bidder Target approached bidder via advisor
Bidder directly approached target
26.9%19.2%
7.8%
26.9%
19.2%
Bidder approached target via advisor
Parties sourced on advisors’ recommendation
How was the target sourced?
8
4
8
12
60
0 10 20 30 40 50 7060 %
Percentage of respondents
(Respondents may have selected multiple answers)
Other
Market value
Option pricing
Relative value/
comparative pricing
Discounted cash flow
Which nancial valuation model was used to initially value thetarget?
Conducting a Chinese Mining M&Atransaction
More than hal o transactions sourced viaadvisors respondents note
A collective 53.8% o respondents state that they
sourced their target with the help o an externaladvisor, with 26.9% writing that they wereapproached by the target via an advisor andanother 19.2% noting that they had approachedtheir target via a third-party. The nal 7.8%note that they sourced their target based on anadvisor’s recommendation.
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Maximum level of due diligence
High level of due diligence
Reasonable level of due diligence
61.5%
15.4%23.1%
What level o due diligence was conductedon the target company?
Importance o due diligence not lost onrespondents
More than 80% o respondents commentthat their businesses conducted at least a highlevel o due diligence during their most recentacquisition, with 23.1% also mentioning thatthey had conducted the maximum level o due
diligence possible.
Policy-driven initiatives could be one reason whythis percentage is so high – one respondentexplains that “It is our strict policy to conduct avery thorough due diligence process beore anytransaction” while another writes that “We needto understand the nancial and legal implicationso any deal beore it is completed.”
Do-by-close
Sale & purchase agreement negotiation
Due diligence
34.6%
15.4%3.9%3.8%
15.4%
26.9%
Target selection Strategy & Planning
Financial modeling/valuation
At which point during the transactionwere post-deal integration measures rstdiscussed?
Over three-quarters o respondentsdiscussed post-deal integration issues priorto the onset o due d iligence…
76.9% o respondents note that during theirmost recent acquisition, post-deal integrationmeasures were discussed beore the onset odue diligence, while a urther 15.4% did soduring the process. As a result, ully 92.3% orespondents had discussed post-deal integration
issues beore the announcement o the bid.
One respondent believes that it is a naturalprocess to begin discussing post-mergerstrategies as early as possible, commenting that“I you are conducting M&A, you’re essentiallylooking to enhance your rm’s productivecapacity. Thereore, it’s reasonable to think aboutthe relevant post-deal issues during the strategyand planning stage.”
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During the strategy/planning phase of the transaction
During the due diligence phase
40%
8%
12%
40%
Before the deal announcement
Never
When did d iscussions relating to the impacto regulatory codes on the outcome o thetransaction rst begin?
…while discussions on potential regulatoryissues tend to take place beore or duringthe due diligence process
Similarly, 80% o respondents remark thatdiscussions pertaining to the impact o regulatoryedicts on M&A bids were undertaken eitherbeore or during the due diligence process, with
a urther 12% stating that these discussionstook place beore the announcement o anytransaction. As a result, only 8% write that theydid not discuss the implications o regulatoryregimes on a potential acquisition.
With the benet o hindsight, whatthree pieces o advice would you oerto a Chinese Mining company looking toundertake an outbound M&A transaction?
The top three pieces o advice respondents put
orward to potential acquirers were: 1) Neverunderestimate the impact o cultural dierencesbetween target and bidder companies; 2) Gathersucient inormation on a target’s structureand practices beore attempting to acquire it;3) Conduct the most thorough due diligenceprocess possible on the target.
One-in-ve respondents also mention thatpotential acquirers should use advisors wherepossible, while another 16% suggest that biddersshould look into the regulatory regimes o theirtarget company in order to quickly mitigate
any potential problems later on during theacquisition.
“Use local advisors to help judge thenancial condition o the target as well
as the legal implications.”
“The bidders should have a long termstrategy o how to integrate the targetcompany. HR should get involved asearly as possible so as to mitigate anynegative impact on the transaction,
including cultural dierences such aslanguage.”
Survey respondents
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A significant negative impactA slight negative impact
42.3%
15.4%19.2%
23.1%
A negative impactNo impact
What impact do you think the recentimposition o the resources super-prots taxon Australian mining companies will haveon Chinese Mining outbound aquisitions in Australia over the next 12 months?
More than our-out-o-ve believe that Australia's resources super-prots tax willhave a negative impact on Chinese Miningacquisitions*
80.8% o respondents suggest that the recentimposition o Australia's resources super-protstax (RSPT) in Australia will have a negative impact
on Chinese outbound Mining acquisitions oAustralian targets, with more than hal (57.7%)believing that the new tax will have at least anegative impact on deal fow.
One respondent who alls into this categorynotes that: “Smaller scale mining companieslooking or minor mining assets will drop theiracquisition plans”, while another notes that:“The Australian Government eels the RSPT willbenet their economy. But in due course, theywill realize that the country will suer in termso oreign investment with more than US$100
billion worth o projects as well as thousands o jobs, all being put at stake.”
However, not all respondents ascribe to thisviewpoint. One o the ew respondents whobelieves that the RSPT will not impact deal fowsays “Even though the RSPT may be imposed,Chinese companies will still target Australianmining assets as their demand or raw materialsis so high.” Put another way, “It’s a question oresource demand versus supply. And consideringthe avorable M&A conditions in Australia ascompared to Arica and Europe, I think the tax
will not have any negative impact.”
* Respondents answered these questions prior to the revision othe proposed tax by Australian Prime Minister Julia Gillard on 2July 2010.
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Vast majority o respondents expectChinese bidders to look at alternativetargets
Some 85% o respondents believe that as a resulto the new tax, Chinese Miners will increasinglylook to acquire in alternative regions, with manysuggesting that in order to mitigate the negative
impact o the RSPT, Chinese bidders will lookto acquire in other regions like South America,Canada and Arica, where taxes are lower.
However, some respondents who do not agreewith this assessment go on to suggest thatacquisitive Chinese miners’ choice o targetwould not be aected by the imposition othe tax because o the strength o previousrelationships in Australia. “Many Chinese minershave sucient customers and clients in Australiaand may not be interested in cultivating newclients elsewhere” one writes, while another
states that “We already have our assets spreadover the country so moving to a dierent regionis not on the agenda now.”
Yes No
85%
15%
I you think this tax will have a negativeimpact, do you expect Chinese miners toincreasingly target businesses in otherregions?
Arica most likely region or alternativeacquisitions, say respondents
O those respondents who believe that ChineseMiners will look to acquire mining assets inalternative locations ollowing the imposition othe RSPT, more than hal (52.6%) suggest thatthey will look to buy in Arica, with 31.6% alsotargeting South American businesses.
One respondent who alls into this particularcategory explains that his rm will now look toinvest in Argentina and Brazil, mainly because othe good relationships between these countriesand China, as well as the act that they bothhave an abundance o natural resources, suchas iron ore, which Chinese Miners are urgentlyseeking out.
New Zealand
North America
Asia (Other)
South East Asia
South America
Africa
10.5
15.8
15.8
31.6
21.1
0 10 20 30 40 50 60 %
Percentage of respondents
(Respondents may have selected multiple answers)
52.6
I so, in which regions in particular?
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An interview with Deloitte China's Mining
sector Partner
Karl Baker, Mining sector M&A Partner at
Deloitte China, expects to see a growing
trend o outbound M&A investments
stemming rom China over 2010. Going
orward, Chinese rms are likely to make
urther Arican and South AmericanMining plays as well as in historially-more
prominent Australia and Canada, primarily
driven by the need to secure supplies o
inputs at attractive prices.
Outbound M&A review
From the beginning o 2005 until the end o H1
2010, Chinese acquisitions o oreign Mining
assets have totalled some 91 deals, worth a total
o US$31.9 billion.17 such deals have come to the
market in the rst six months o 2010 alone withBaker suggesting that one o the drivers o this
recent surge in activity is simply due to the lawso supply and demand. “Chinese miners are being
driven to undertake acquisitions abroad primarily
to secure mining inputs at attractive prices,” he
said, continuing to explain that “While there is
currently talk about a residential property bubble
emerging in China, demand or raw materials is
not likely to all as there are continuing signicant
construction projects taking place across the
country.” Furthermore, as the wider economy
continues to grow, Chinese appetite or energyinputs will increase urther, leading to a rise in the
number o acquisitions o coal – and increasingly,
uranium – assets.
At the same time, Baker asserts that Chinese
Miners are using M&A as a method to urther
enhance strategic relationships with their global
Mining counterparts, one such example being
Chinalco’s US$14 billion acquisition, along
with the US rm Alcoa, o a 12% stake in Rio
Tinto, the Anglo-Australian Miner, back in early
2008. “Chinese Miners will continue to search
or attractive overseas opportunities, targetingmutually-benecial strategic relationships,
especially when they are able to prot rom
technological transers, the adoption o
managerial best practices, advantageous
pricing policies, and the increased likelihood o
subsequent joint ventures," he said.
However, Baker admits that making Mining
investments abroad isn’t always successul,
citing the ailed attempt by Chinalco to purchase
minority stakes in assets rom Rio Tinto or a
proposed US$11.8 billion back in 2009. The
Mining giant was close to tying up a stake sale
with Chinalco in order to reduce the level o
debt on its balance sheet to manageable levels
but backed out o the deal at the eleventh hour
ollowing a rapid bounce back in commodity
prices as the global economic recovery got
underway.
Mining M&A deal size
Transaction values o outbound Miningacquisitions rom China have allen in recent
times with no deals in the rst quarter o 2010
exceeding US$500 million, compared to our such
deals coming to market over 2009. Discussing
this trend, Baker says the decline has been
accompanied by a corresponding drop in the
size o equity stake acquisitions with alternative
deal structurings also being used. However, while
average deal sizes have certainly allen, oreign
Mining targets are not getting cheaper in absolute
terms.
In addition, Baker explains that “Chinese bidders
are starting to nd that political and regulatory
hurdles rom abroad are somewhat lessened i
they take a smaller equity stake in the target.”
Indeed, while local acquirers have lowered their
M&A expectations and are increasingly brokering
minority stake deals, they are still oten looking
to obtain operational interest in certain specic
Mining projects. In addition, Baker says that
local lending practices are becoming much more
thorough as the economy rebounds, meaning that
Chinese miners – whether they are state-ownedenterprises (SOEs) or private businesses – are now
acing tougher checks and balances as they look
to nance their acquisitions.
M&A Review
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Country splits
Historically, Chinese Mining acquisitions havetended to ocus on making acquisitions across thewider Asia-Pacic region, with purchases o NorthAmerican and European assets accounting orthe minority o deal fow. However, Baker assertsthat these relationships have developed over time
and while the level o acquisitions undertaken inAsia has remained broadly constant, the numbero deals involving North American and EuropeanMining assets has increased.
Nevertheless, the global economic recovery hasseen Mining companies in Canada and Australia
return to health relatively quickly, along withvaluations. As a result, Chinese acquirers arebeginning to increasingly look at Mining assetsin alternative investment areas such as Arica andSouth America where corporate valuations arelower. Wuhan Iron and Steel’s bid or a 21.5%
stake in MMX Mineracao e Metalicos, the BrazilianMining company, or a total o US$400 million,announced back in November 2009, and theUS$244 million oer or a 12.5% stake in AricanMinerals, the UK-based mineral exploration anddevelopment company with an interest in Arica,by China Railway Materials, announced in January2010, are both good examples o this incipienttrend.
Looking orward
While Baker remains bullish on Mining M&Aprospects abroad over 2010 and beyond, hedoes admit that there are challenges that Chinesecompanies will have to overcome in order tosuccessully complete a transaction. Among theseremains the sometimes unpredictable nature o
regulatory bodies on both the buy- and sell-sideo a transaction.
“Chinese acquirers would do well to rememberthat domestic regulators are simply examining aproposed outbound transaction to ensure thatit supports the wider economic policies o the
Chinese government – as well as ensuring thatthe bidder can actually complete the transaction,”he said, going on to explain that “Despite a lot opublicity concerning rejected M&A bids, oreign
regulatory regimes are in act broadly supportive
o Chinese investments into their jurisdictions.”
He went on to cite the recent successul
acquisition o a 70% stake in Energy Metals,
the Australian rm engaged in the exploration
and development o uranium projects, by China
Uranium Development, or US$63 million, as
a good example o the transparency o theAustralian regulatory authorities. Signicantly,
the deal was approved in its original orm despite
obvious security concerns surrounding the export
o uranium to China.
Baker also remains airly optimistic on the
implications o the recently-revised resources
tax, explaining that "Under the new Minerals
Resource Rent Tax (MRRT), which replaces the
previously-announced Resource Super Prots
Tax (RSPT), the new tax regime will apply to the
mining o iron ore and coal in Australia but not
other commodities as would have been the caseunder the RSPT. The MRRT, which will be levied
at 30% and will be introduced on 1 July 2012,
will mean that Chinese companies interested
in buying Australian Mining assets will have to
re-evaluate the impact o the proposed tax on
uture protability as well as the overall viability
o existing and proposed investment projects.
However, with the tax now only applying to
iron ore and coal assets at a reduced rate, and
continuing strong demand rom Chinese rms
or iron ore and coal inputs over the oreseeable
uture, the potential impact o the MRRT onChinese outbound Mining acquisitions in
Australia has arguably been greatly reduced."
Baker ends on a positive note, highlighting
the growing maturity o Chinese bidders when
conducting M&A overseas, ranking it as a major
area in which Chinese miners have improved o
late. “Previously, some local Mining businesses
tended not to prioritize deal execution and post-
merger integration procedures. Now, they are
starting to see the value o preparation and to
this end, are beginning to hire external advisors
to help them through the process.“ Indeed, oneo the keys to M&A success remains thorough
planning and preparation. “Fail to prepare,
prepare to ail,” concludes Baker.
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Macroeconomic drivers o outboundMining M&A
Mainland China itsel is in a unique positionas one o the world’s largest producers andconsumers o minerals globally, granting it theability to dramatically aect international metalsmarkets. While Hong Kong, or its part, remains
the headquarters or many rms in the Miningspace that source and supply metals to the largerChinese market, the core mining operations omany o these rms are in mainland China and asa result, domestic macroeconomic developmentsremain the key driver o outbound Mining M&Arom the wider region.
On the back o rapid industrial development inrecent decades, China’s need or raw materialshas skyrocketed with the country emergingas one o the largest consumers o sot andhard commodities globally. In 2009, Chinese
economic activity increased by 6.6% in real terms,a respectable level but still the slowest rate oexpansion since 1990. Clearly, such high rates oexpansion have required massive investment intothe natural resources space to secure supply linesand to sustain economic growth. Given that Chinahas run a high current account surplus in recentyears, boosting its gross domestic savings, it isrelatively well-placed to buy abroad.
In this regard, Chinese appetite or industrialmetals is particularly signicant. It is driven byseveral actors including a construction boom
in residential housing and expanding publicinrastructure projects in the Transportation andUtilities sectors. Moreover, China also requiresmanuacturing inputs or the production o goodsor both the local and international markets. In thecase o gross xed investment into housing andinrastructure development, scal stimulus andan accommodative monetary policy have spurredactivity, so much so in act, that credible ears oeconomic overheating persist.
0.0
2.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2015f2011f2010f20092008200720062005200420032002
c h a n g
e ( % )
Real GDP growth
0.0
2.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2015f2011f2010f20092008200720062005200420032002
% o
f G D P
Current account surplus
Source: IMF, World Economic Outlook (April 2010)
: orecast
Source: IMF, World Economic Outlook (April 2010)
: orecast
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Total value o China's Industrials sector
Total value o China's Construction sector
Meanwhile, industrial policy, particularly rom late2008 onward, has also boosted demand or rawmaterial metals. Specically, in the early stageso the global nancial crisis the governmentset out to boost productivity and eciencyin ten o China’s largest industries, many owhich are dependent on raw material metalsinputs, with the aim o making these sectorsmore competitive in the global marketplace.Examples o specic industries include, amongothers, automobile manuacturing, iron andsteel production, equipment manuacturing,nonerrous metals production and shipbuilding.
While China enjoys vast mineral wealth and athriving domestic Mining sector – leading theworld in the production o aluminium, coal, gold,iron and steel, lead and tin amongst numerousother minerals – the country remains heavilyreliant on imports rom overseas markets to
satisy its industrial metals requirements. Indeed,some industry players believe the domesticMining sector remains ragmented and inecientin the production o a number o strategically-important mineral resources.
The Chinese authorities have undertaken anumber o steps to boost production andmeet domestic demand such as increasingstate investment into geological exploration;encouraging oreign investment into theexploration and extraction o select minerals;using import and export quotas, taris and duties
to balance domestic supply and demand orselect minerals; and nally, actively encouragingMining sector consolidation in the domesticmarket through M&A.
¥ 1 0 0 m
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
20092008200720062005
Source: National Bureau o Statistics o China, http://www.stats.gov.cn
¥ 1
0 0 m
0
5,000
10,000
15,000
20,000
25,000
20092008200720062005
Source: National Bureau o Statistics o China, http://www.stats.gov.cn
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ItemVolume
(10,000 tons)
% change,
year on yearValue US$100 million
% change,
year on year
Iron ore 62,778 41.6 501 -17.4
Crude oil 20,379 13.9 893 -31
Coal 12,583 211.9 106 201.3
Soybean 4,255 13.7 188 -13.9
Petroleum products rened 3,696 -5.4 170 -43.7
Plastics in primary orms 2,381 34.5 348 2.2
Rolled steel 1,763 14.3 195 -16.9
Paper pulp 1,368 43.7 68 2.1
Edible vegetable oil 816 8.4 59 -30.1
Aluminium oxide 514 12.1 13 -26.6
Copper and copper alloys 429 62.7 226 18
Cereals and cereal four 315 104.6 9 22.7
Primary commodity imports, 2009
In particular, M&A in the domestic industrywill help to cut excess capacity, decreasecompetitive pressures on domestic players andbuild economies o scale, thereby enhancingthe merged entities' bargaining power vis-à-vis suppliers. The government has also encouragedcross-sector M&A between rms specializing in theMining and Energy sectors, or example, as wellas tie-ups between rms specialized in dierentMining niches in order to create synergies.
Domestic consolidation has given rise to a handulo large domestic companies in the Miningspace – so-called national champions – withthe scale and nancial resources to source M&Atransactions internationally. Clearly, securingstrategically-important minerals through outboundacquisitions is a key driver o Chinese outboundM&A activity, as is the desire to exercise greatercontrol over global supply, demand and pricemovements in unorgiving global markets.
Rapidly expanding output capacity and ever-morecompetitive rms will give Chinese Mining giantsthe ability and the incentive to consolidate theirposition in the global Mining sector. In this regard,the aim is not simply to satisy domestic demandbut also to tap into growing global demand andbenet rom rising unit prices and higher prots inthe recovering global economy.
However, there are also the added benets ogaining access to oreign expertise and technologythat make outbound M&A attractive. M&A maygrant Chinese acquirers access to not only themost innovative technology, but also the bestsupply and risk management methods employedby international competitors.
Source: National Bureau o Statistics o China, http://www.stats.gov.cn
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Review o select minerals
Iron ore¹
China imported around one-hal o the iron oreand pig iron produced globally in 2008 accordingto the United States Geological Survey (USGS),a US scientic body, and in 2009, the volumeo iron ore imports rose by a remarkable 41.6%year-on-year. While China is one o the world’slargest producers o iron ore, many industrialrms preer higher grade iron ore rom overseasas the product rom China has a generally loweriron content.
The top three suppliers o iron ore globally areAustralia’s BHP Billiton and Rio Tinto as well asBrazil’s Vale. Vale and BHP introduced a newpricing scheme in H1 2010, breaking romthe annual pricing contracts or shorter-termagreements and winning big mark ups on iron
ore sales agreements. Rio Tinto is reportedlyconsidering adopting the pricing scheme.The change has elicited consternation romsteelmakers and countries heavily dependent oniron ore imports, such as China. Indeed, in Aprilthe Chinese government reportedly moved toexamine whether the three global Mining rmsmay be monopolizing the global supply o ironore. Such developments will surely underpin aneven stronger drive by Chinese rms to secureiron ore supplies in the uture, with outboundM&A undoubtedly being the principal route toachieving this aim.
Mining production (million metric tons)
Countries 2008 2009
China 824 900
Brazil 355 380
Australia 342 370
India 220 260
Russia 100 85
Ukraine 73 56
South Arica 49 53
Iran 32 33
Canada 31 27
United States 54 26
Kazakhstan 23 21
Sweden 24 18
Venezuela 21 16
Mexico 12 12Mauritania 11 11
Other countries 47 47
World total (rounded) 2,220 2,300
Global production and reserves o usable ore
Reserves (million metric tons)
Countries Usable ore Iron content
Russia 25,000 14,000
Australia 20,000 13,000
Ukraine 30,000 9,000
Brazil 16,000 8,900
China 22,000 7,200
India 7,000 4,500
Kazakhstan 8,300 3,300
Venezuela 4,000 2,400
Sweden 3,500 2,200
United States 6,900 2,100
Iran 2,500 1,400
Canada 1,700 1,100
South Arica 1,000 650
Mauritania 700 400
Mexico 700 400
Other countries 11,000 6,200
World total (rounded) 160,000 77,000
Source: US Geological Survey, Mineral Commodity Summaries (January 2010).
Note¹: Data or 2009 are estimates; Figures or all countries other than China are based on crude ore,
rather than usable ore.
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Coal¹
China, the world’s largest producer o coal, isheavily dependent on the mineral uel to reelectricity generators which play a pivotal role inmeeting its domestic energy needs. According tothe USGS, around two-thirds o China’s electricitygeneration derives rom coal-red plants, with
domestic power generation absorbing aroundone-hal o China’s coal production.
Beore the onset o the global nancial crisis in2008, Chinese demand or coal was incrediblyrobust with supply shortages reported inGuizhou, Henan, Jiangxi and Qinghai provincesaccording to the USGS. However, this problemeased in the wake o the global nancial crisisas economic growth in the global and domesticeconomy slowed.
Not surprisingly, coal is the third-largest import
by volume into China ater iron ore and crude oil.In 2009, the import bill or overseas purchaseso coal rose by over 200% to 125.8 million tons,worth a collective US$10.6 billion. And withnewly installed coal-red power-generationstreams now coming online, the country willremain heavily dependent on coal productionand imports to satiate domestic consumptionneeds, which could continue to drive overseasacquisitions o rival coal Mining rms andstrategic coal assets.
Global production o pig iron and steel¹
Pig iron (million metric tons)
Countries 2008 2009
China 471 540
Japan 86 61
Russia 48 40
South Korea 31 26
Ukraine 31 25
Brazil 35 22
United States 34 18
Germany 29 17
France 12 7
United Kingdom 11 7
Italy 11 5
Other countries 133 96
World total (rounded) 932 860
Raw steel (million metric tons)
Countries 2008 2009
China 500 550
Japan 119 79
United States 92 56
Russia 69 55
South Korea 53 47
Germany 46 29
Ukraine 37 28
Brazil 34 24
Italy 30 18
France 18 12
United Kingdom 14 9
Other countries 318 226
World total (rounded) 1,330 1,100
Source: US Geological Survey, Mineral Commodity Summaries (January 2010).
Note¹: Data or 2009 are estimates.
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Aluminium¹
It is also notable that the Chinese Mining sectorhas witnessed an increase in the country’saluminium output capacity in recent years,largely thanks to rising investment in the space.Indeed, in 2009 alone, the year-on-year rise incapacity climbed 27% to 19 billion tons. The
country imported some 5.1 million tons o theraw ingredient or aluminium, known as aluminaor aluminium oxide, worth US$1.3 billion in 2009to support aluminium production, representing avolume increase o 12.1% year-on-year.
Production (million metric tons)
Countries 2008 2009
China 13,200 13,000
Russia 3,800 3,300
Canada 3,120 3,000
Australia 1,970 1,970
United States 2,658 1,710
India 1,310 1,600
Brazil 1,660 1,550
Norway 1,360 1,200
UAE, Dubai 910 950
Bahrain 865 870
South Arica 811 800
Iceland 787 790
Venezuela 610 550
Germany 550 520Mozambique 536 500
Other countries 4,850 4,600
World total (rounded) 39,000 36,900
Global production and capacity o aluminium
Capacity at year-end (million metric tons)
Countries 2008 2009
China 15,000 19,000
Russia 4,400 5,150
United States 3,620 3,500
Canada 3,120 3,090
India 1,800 2,000
Australia 1,970 1,970
Brazil 1,700 1,700
Norway 1,360 1,230
UAE, Dubai 950 950
South Arica 900 900
Bahrain 880 880
Iceland 790 790
Venezuela 625 625
Germany 620 620
Mozambique 570 570
Other countries 6,260 6,920
World total (rounded) 44,600 49,900
Source: US Geological Survey, Mineral Commodity Summaries (January 2010).
Note¹: Data or 2009 are estimates.
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Copper¹
Copper is an important alloy used in theconstruction industry and is a key input in themanuacture o electric and electronic goods.As such, it has remained a metal o strategicimportance or China in recent years. Accordingto the USGS, copper consumption in China has
grown by an average o around 10% a yearin recent times with around hal o the totaldestined or the power sector.
While China has seen copper output grow at aairly measured pace in contrast to some otherindustrial metals (it rose by just 1% annuallyin 2009 to 960 million tons), the country isstill heavily dependent on imports to satisyits copper needs with the volume o oreignpurchases o copper and copper alloys rising bynearly two thirds in 2009 to 4.3 million tons.And even as China increases its smelting capacity
or copper, its relatively small share o globalcopper reserves – estimated at 6% in 2009 –suggest that the country will continue to beheavily dependent on overseas imports rom theAmericas, Central & Eastern Europe and othermarkets in the Asia-Pacic region.
Copper
Mine production (million metric tons)
Countries 2008 2009
Chile 5,330 5,320
Peru 1,270 1,260
United States 1,310 1,190
China 950 960
Indonesia 651 950
Australia 886 900
Russia 750 750
Zambia 546 655
Canada 607 520
Poland 430 440
Kazakhstan 420 410
Mexico 247 250
Other countries 2,030 2,180
World total (rounded) 15,400 15,800
12%
4%
4%
4%
3%
1%
Chile
Peru
Mexico
United States
Indonesia
13%
7%6%
6%
6%
5%
29%
China
Poland
Australia
Russia
Zambia
Kazakhstan
Canada
Other countries
Global copper reserves, 2009
Source: US Geological Survey, Mineral Commodity Summaries (January 2010).
Note¹: Data or 2009 are estimates.
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Chinese outbound Mining investment case
study - Australia
China’s appetite or Australian Mining assets
is seemingly insatiable. Since the beginning o
2006, Chinese companies have undertaken 27
outbound M&A deals in this space, with an
aggregate disclosed value o US$6.6 billion. In
terms o overall outbound M&A, the Australianmarket leads the way with a signicant 46%
share o deal volume and 23% by value.
Given the cash-rich nature o many Chinese rms
operating in and around the Mining sector, it is
somewhat unsurprising that a number o notable
large-cap outbound transactions have been
announced in Australia in recent times. Indeed,
mergermarket data shows that three US$500
million+ deals have come to the market since the
rst quarter o 2006.
The largest and most high-prole transactionwas announced in August 2009 and saw
Yanzhou Coal Mining acquire Felix Resources,
the Australian coal producer, or US$2.6 billion.
Yanzhou were able to complete the transaction
at a 14% discount to Felix Resources' share
price one day prior to the deal announcement.
However, Yanzhou were unable to secure
control o Felix Resources' South Australian Coal
Corporation, which was ultimately spun o by
the target and listed on the ASX.
Elsewhere, deals that have so ar been brokered
in 2010 have generally allen rmly in and aroundthe mid-market space. The largest such deal was
valued at US$46 million and saw the Yunnan Tin
Group, the Chinese manuacturer and producer
o tin, acquire a 50% stake in Bluestone Mines
Tasmania, the Australian mining company rom
Metals X, the Australian company engaged in
exploration and mining, to orm a 50:50 joint
venture.
Despite the recent lack o large-cap activity, deal
volumes have held up remarkably well since the
onset o the global nancial crisis in the autumn
o 2008. The total number o transactionsannounced each year has steadily increased
in recent times, peaking with 33 announced
deals in 2009, a signicant 65% increase on
2008 numbers. Notably, the purchasing power
o Chinese rms has remained intact and many
would-be acquirers remain capable o conducting
a mega-deal i a situation makes strategic sense.
The above-mentioned statistics clearly show that
Chinese investment in Australian Mining assetsis signicant. In terms o the key drivers o this
activity, the underlying issue is the desire to
secure mining inputs at attractive and reasonable
prices. Such inputs are literally the building blocks
o China’s booming economy and are needed
due to the vast number o domestic construction
and inrastructure projects that continue to be
undertaken. Indeed, iron ore is a vital commodity
in this regard given that it is the main ingredient
in steel – vast amounts o which are used to
build, or example, skyscrapers and automobiles.
Despite this, it is still surprising and remarkable
that China’s imports o iron ore accounted or
around 75% o global iron ore trading in 2009,
according to Xin Guobin, an ocial with the
Ministry o Industry and Inormation Technology.
Looking ahead, the need or iron ore should
mean that China will continue to invest in the
Mining sector, particularly in Australia. The
primary driver o such activity will continue to be
the need to increase access to the commodity
although there are also several secondary
benets such as technology transers and theadoption o best practice operational techniques.
While Australia will no doubt remain a key
market, there are several obstacles to M&A.
Regulatory hurdles persist and while the Foreign
Investment Review Board (FIRB) welcomes
oreign investors, preerably in collaboration with
domestic rms, the regulator recently stated that
it has a clear preerence or oreign investment
in larger Australian companies to be capped at
15% with a 50% cap in early-stage companies.
Such regulatory attitudes to cross-border Chinese
Mining investments are discussed in detail in thenext chapter however.
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Perhaps more signicantly, the Australiangovernment recently announced plans to levy atax on “super prots” rom resource companies,currently dened as prots above the 10-yearAustralian government bond rate. However,
the recent replacement o Kevin Rudd withJulia Gillard as Prime Minister has resulted in a
more conciliatory tone being adopted by thegovernment o late.
Industry gures have said that the tax, initiallyslated to come in to eect in 2012, will curtailinvestment in the sector and limit employmentopportunities. A reduction in the overallprotability o the Australian Mining sector is
obviously a concern or current and prospectiveChinese investors although M&A activity willlikely continue as long as the demand or mineralresources remains robust. This is set to be thecase with the current Mining surge likely to last
or an extended period given the huge potentialo economies such as China itsel and, to a lesserextent, India.
The regulatory environment: a look at
regulatory rulings on Chinese outboundMining acquisitions
Chinese Mining companies suddenly burstonto the global M&A scene in 2008 and 2009ollowing a series o high-prole acquisitions.A number o such deals have attracted the
attention o regional regulatory bodies and whilea large proportion o transactions have beenapproved, there have been several high-prole
examples o deals being blocked on regulatorygrounds. Remarkably, an Australian senatorwent so ar as to run television advertisementsopposing one such transaction, arguing thatanother sovereign nation should not be able toown a domestic sovereign asset.
Such widespread scaremongering must,however, be placed into the wider context. Sincethe beginning o 2005, Chinese miners have
undertaken 63 acquisitions o oreign assets,spending a cumulative US$31 billion in theprocess. O these, just three transactions worth
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US$2.6 billion ultimately lapsed due to regulatory
issues - surprisingly, all o them being bids or
Australian assets.
Moreover, the bulk o the overall valuation gure
is due to one deal – the Q1 2009 US$2.5 billion
bid or OZ Minerals by China Minmetals – which
was ultimately restructured and successully
completed. As a result, aborted cross-border
Mining acquisitions undertaken by Chinese
bidders comprised less than 5% o total activity
in volume terms, making the press coverage and
perceived tough stance o regulators somewhat
disproportionate to actual deal rejection gures.
In act, the annual reports o the Foreign
Investment Review Board (FIRB), the Australian
regulator responsible or inbound investments,
shows that just 0.1% o the total number o
takeover applications received were rejected
between 2008 and 2009, down rom 1.4%in the 2003-2004 period. While such gures
point towards the FIRB adopting an increasingly
lenient approach towards inbound investment in
Australia, it may also be refective o the act that
Chinese rms are developing a more nuanced
approach to outbound investment and M&A
more generally.
Casting an eye over historical regulatory activity,
the most prominent case was undoubtedly the
aorementioned OZ Minerals transaction. In
February 2009, China Minmetals, the metalssupplier, made a US$2.4 billion oer or
complete control o Mining rm OZ Minerals.
As part o the deal, Minmetals committed to
repaying all o OZ Minerals’ outstanding debt,
which amounted to around US$845 million at
the time.
The deal was delayed by the FIRB and nearly
ell apart as lenders, who had already accepted
a short-term moratorium on OZ Minerals’ debt
repayments, began to get impatient. Eventually,
the FIRB released a statement in March 2009saying that it had rejected the original oer on the
grounds o national security.
“Under the Foreign Acquisitions andTakeovers Act 1975, all oreigninvestment applications are examinedagainst Australia's national interest. Animportant part o this assessment iswhether proposals conorm withAustralia's national security interests, inline with the principles that apply tooreign government-related investments.It is not unusual or governments torestrict access to sensitive areas onnational security grounds. (Thereore)the Government has determined thatMinmetals' proposal or Oz Minerals
cannot be approved i it includesProminent Hill.”FIRB Press Release No. 29, 2009
0.0
0.2
1.6
1.4
1.2
1.0
0.8
0.6
0.4
2008-20092007-20082006-20072005-20062004-20052003-2004
1.4%
1.3%
0.7%
0.6%
0.2%
0.1%
% o
f d e a l s r e j e c t
e d
Proportion o FIRB deal rejections to total regulatory applications
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In response to this development, China Minmetalssubmitted a revised US$1.4 billion oer whichexcluded the acquisition o the politically sensitiveProminent Hill Copper Mine, an asset close toWoomera Test Range, a strategic national assetgiven that it is described as the western world’slargest deence systems testing and evaluationrange. The revised oer also did not include otherAsian assets, including OZ Minerals’ MartabeMines in Indonesia as well as several otherexploration assets in Cambodia and Thailand. Therevised bid received FIRB approval just nine daysater it was rst announced, with the Treasurerstipulating some urther conditions, the main onesbeing that:
1) China Minmetals would continue to operatethe mines as a separate commercial businessto its core operations, and would retain OZMinerals’ headquarters in Australia.
2) Price OZ Minerals’ o-take on arms-lengthterms with reerence to internationalobservable benchmarks and global marketpractices.
3) China Minmetals maintain or increaseproduction and employment at OZ Minerals’other mines.
China Minmetals agreed to adhere to theserevised conditions and the deal was subsequentlyconsummated. More than one year on since thetransaction was completed, OZ Mineral’s share
price has consistently remained above the averagemonthly price o AU$0.88 per share at the time othe deal, suggesting that the transaction has so arbeen value-accretive to shareholders.
Elsewhere, China Nonerrous Metal Mining’s(CNMC) US$215 million bid to acquire a 51.66%stake in Australia’s Lynas Corporation, the rareearth metals miner, also suered the sameate as Minmetal’s initial oer. However, in thisinstance, it is thought that the FIRB rejected thedeal on antitrust grounds. According to the WallStreet Journal, Chinese rare earth miners account
or more than 95% o global rare earth metals
production and state-owned CNMC’s bid to take
control o Lynas was widely seen as an attempt
to reinorce the country’s monopoly over the
production o such metals. In this regard, it is
particularly notable that Lynas controls the world’s
richest rare earth metals deposit near Laverton,
Western Australia.
CNMC’s oer quickly aroused the suspiciono the FIRB, who had previously proved to
be accommodating towards the purchase o
Australian rare earth metals miners. Indeed, just
a ew months earlier, the board had approved
the US$15 million acquisition o a 25% stake
in Araura Resources, by the East China Mineral
Exploration & Development Bureau, without
conditions.
Ater an initial review, the FIRB announced
that it would approve the acquisition o Lynas
i CNMC reduced its proposed stake holding
to under 50%, ensuring that its directors did
not make up hal o more o Lynas’s board and
provided independent marketing o Lynas’ rare
earth products. The subsequent response rom
CNMC was unequivocal. Within one day o the
announcement, the rm had pulled its oer or
Lynas, presumably as it elt that the deal terms
were too onerous, and has subsequently not
made any urther inroads into Australia.
The third and nal instance o a regulator
ultimately shooting down an outbound Chinese
Mining acquisition was seen in May 2008 whenSinosteel attempted to acquire Murchison Metals
or US$1.2 billion. The company had previously
bought out Australia’s Midwest Corporation just
two months earlier, and used it as an acquisition
vehicle to bid or Murchison, an iron ore
miner. The deal was reerred to the FIRB, who
lengthened its review period o the transaction to
three months rom the customary 30 days. This
was enough to prompt Sinosteel to reduce its
oer to a 49.9% stake, a move which was viewed
avorably by the FIRB with the revised oer being
approved.
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Lessons learnt
Undoubtedly, a number o important lessons havebeen learnt in these deals. When Chinese rmsare looking to broker an overseas cross-borderacquisition, a number o actors must be keenlyconsidered. These include:
1) Engage regulators at the earliest possibleinstance. On many occasions, regulatorsare the last party to be consulted about apossible acquisition, invariably delaying thedeal timetable and increasing the likelihood oailure. This was especially prevalent during theCNMC/Lynas deal.
2) Ensure that any bid is rst and oremost, acommercial transaction. Many regulators,the FIRB included, are happy to see oreignentities take control o local assets as longas they are in the national interest – hence
the FIRB’s insistence that China Minmetalsderives no pricing advantage o OZ Minerals’o-take post-acquisition – a measure thatwould ensure a level playing eld or all marketparticipants.
3) Have a back-up plan. Forward-thinking goesa long way when applying or regulatoryapproval as any advisor on the OZ Minerals/ China Minmetals will tell you. Individualsworking on this particular deal would haverecognized the likelihood o initial regulatoryproblems and, given the urgency o the tie-up,
conjured up some alternative scenarios, whichultimately proved very timely indeed.
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Historical data
Top 10 Chinese outbound Mining deals: Q1 2006 - H1 2010
AnnouncedDate
Status Target Company TargetCountry
Bidder Company Seller Company SellerCountry
Deal Value(US$m)
Feb-08 C Rio Tinto plc(12% stake)
UnitedKingdom
Alcoa Inc; AluminumCorporation o China(Chinalco)
14,000
Aug-09 C Felix Resources
Ltd
Australia Yanzhou Coal Mining
Company Ltd
2,568
Jul-09 C Teck ResourcesLtd (17.2% stake)
Canada Fullbloom InvestmentCorporation
1,508
Apr-09 C OZ Minerals(certain assetsexcludingProminent Hill andMartabe)
Australia China MinmetalsNon-Ferrous Metals Co Ltd
OZ Minerals Ltd Australia 1,386
Mar-08 C MidwestCorporation Ltd(80.31% stake)
Australia Sinosteel Corporation 879
Nov-06 C Anglo Americanplc (1.01% stake)
UnitedKingdom
China Vision Resources E Oppenheimer & Son South Arica 812
Jun-07 C Peru Copper Inc Canada Aluminum Corporation oChina (Chinalco)
779
Mar-06 C AshapuraMinechem Ltd(Alumina plantin Kutch) (50%stake)
India Qingtongxia AluminiumGroup Company Ltd
Sichuan AostarAluminum Co Ltd
China 651
Aug-07 P Bellavista HoldingGroup Ltd (60%stake)
Chile China Elegance ResourcesLtd
Ceasers DevelopmentLtd
Hong Kong 600
Dec-09 C CorrienteResources Inc
Canada CRCC-Tongguan InvestmentCo., Ltd
549
C = Completed; P = Pending
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AnnouncedDate
Status Target Company TargetCountry
Bidder Company Seller Company SellerCountry
Deal Value(US$m)
Aug-09 C Felix Resources Ltd Australia Yanzhou Coal MiningCompany Ltd
2,568
Jul-09 C Teck Resources Ltd (17.2%stake)
Canada Fullbloom InvestmentCorporation
1,508
Apr-09 C OZ Minerals (certain assetsexcluding Prominent Hill andMartabe)
Australia China MinmetalsNon-Ferrous MetalsCo Ltd
OZ Minerals Ltd Australia 1,386
Dec-09 C Corriente Resources Inc Canada CRCC-TongguanInvestment Co., Ltd
549
Feb-09 C Fortescue Metals Group Ltd(9.07% stake)
Australia Hunan Valin Iron &Steel Group Co Ltd
Harbinger CapitalPartners MasterFund I Ltd;Harbinger CapitalPartners SpecialSituations Fund, LP
USA 408
Nov-09 P MMX Mineracao e Metalicos
SA (21.52% stake)
Brazil Wuhan Iron and Steel
Company Ltd
400
Apr-10 P Sul Americana de Metais SA Brazil Honbridge HoldingsLtd
Lit MiningCooperatie U.A.;Votorantim NovosNegocios Ltda
Brazil 390
Feb-09 C Fortescue Metals Group Ltd(7.42% stake)
Australia Hunan Valin Iron &Steel Group Co Ltd
363
Mar-10 P Spring Vast Ltd Russia FinTronics HoldingCompany Ltd
Trufe RichHoldings Ltd
British VirginIslands
300
Oct-09 C Guney Krom (50% stake);Kop Krom (50% stake);Krom Maden (50% stake)
Turkey Taiyuan Iron & SteelGroup Company Ltd
CVK GroupCorporation
Turkey 300
Top 10 outbound M&A Chinese Mining deals, Q1 2009 - H1 2010
C = Completed; P = Pending
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AnnouncedDate
Status Target Company Target Country Bidder Company Seller Company SellerCountry
Deal Value(US$m)
Jul-09 C Teck Resources Ltd(17.2% stake)
Canada FullbloomInvestmentCorporation
1,508
Jun-07 C Peru Copper Inc Canada AluminumCorporation oChina (Chinalco)
779
Dec-09 C Corriente ResourcesInc
Canada CRCC-TongguanInvestment Co., Ltd
549
Dec-07 C Northern Peru CopperCorp
Canada Northern PeruAcquisition Co
411
Mar-09 C ConsolidatedThompson Iron MinesLtd (19.9% stake)
Canada Wuhan Iron andSteel Company Ltd
240
Top ve outbound Chinese Mining acquisitions o North American targets, Q1 2006 - H1 2010
Top ve outbound Chinese Mining acquisitions o Asia-Pacic targets, Q1 2006 - H1 2010
C = Completed; P = Pending
C = Completed; P = Pending
AnnouncedDate
Status Target Company Target Country Bidder Company Seller Company SellerCountry
Deal Value(US$m)
Aug-09 C Felix Resources Ltd Australia Yanzhou CoalMining Company Ltd
2,568
Apr-09 C OZ Minerals (certainassets excludingProminent Hill andMartabe)
Australia China MinmetalsNon-Ferrous MetalsCo Ltd
OZ Minerals Ltd Australia 1,386
Mar-08 C Midwest CorporationLtd (80.31% stake)
Australia SinosteelCorporation
879
Mar-06 C Ashapura MinechemLtd (Alumina plant inKutch) (50% stake)
India QingtongxiaAluminium GroupCompany Ltd
Sichuan AostarAluminum Co Ltd
China 651
Feb-09 C Fortescue MetalsGroup Ltd (9.07%stake)
Australia Hunan Valin Iron &Steel Group Co Ltd
Harbinger CapitalPartners MasterFund I Ltd;Harbinger CapitalPartners SpecialSituations Fund, LP
USA 408
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AnnouncedDate
Status Target Company Target Country Bidder Company Seller Company SellerCountry
Deal Value(US$m)
Feb-08 C Rio Tinto plc (12%stake)
United Kingdom Alcoa Inc; AluminumCorporation oChina (Chinalco)
14,000
Nov-06 C Anglo American plc
(1.01% stake)
United Kingdom China Vision
Resources
E Oppenheimer &
Son
South Arica 812
Oct-09 C Guney Krom (50%stake); Kop Krom(50% stake); KromMaden (50% stake)
Turkey Taiyuan Iron & SteelGroup Company Ltd
CVK GroupCorporation
Turkey 300
Mar-10 P Spring Vast Ltd Russia FinTronics HoldingCompany Ltd
Trufe RichHoldings Ltd
British VirginIslands
300
Nov-08 C Langeld EnterprisesLtd (90% stake)
Cyprus GrandvestInternational Ltd
Cordia Global Ltd Cyprus 253
Top ve outbound Chinese Mining acquisitions o European targets, Q1 2006 - H1 2010
AnnouncedDate
Status Target Company Target Country Bidder Company Seller Company SellerCountry
Deal Value(US$m)
Aug-07 P Bellavista HoldingGroup Ltd (60% stake)
Chile China EleganceResources Ltd
CeasersDevelopment Ltd
Hong Kong 600
Nov-09 P MMX Mineracao eMetalicos SA (21.52%stake)
Brazil Wuhan Iron andSteel Company Ltd
400
Apr-10 P Sul Americana deMetais SA
Brazil Honbridge HoldingsLtd
Lit MiningCooperatie U.A.;Votorantim Novos
Negocios Ltda
Brazil 390
Sep-07 C Zimasco ConsolidatedEnterprises Ltd (92%stake)
Zimbabwe Sinosteel TradingCompany
292
Nov-06 C Samancor Chrome(chrome mine andmetallurgical plant)(50% stake)
South Arica SinosteelCorporation
Samancor ChromeLtd
South Arica 200
Top ve outbound Chinese Mining acquisitions o other global targets, Q1 2006 - H1 2010
C = Completed; P = Pending
C = Completed; P = Pending
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N u m b e r o f d
e a l s
V a l u e o f d e a l s ( U S $ b n )
0
5
10
15
20
25
30
35
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
6
4
15
7
2009
6
5
2008
1
8
3
4
4
2007
3
1
4
2006
11
6
H1 2010
Q2 Q4Q3Q1 Value (US$bn)
3
33
20
8
16
14
Chinese outbound Mining M&A trends
5
0
10
15
20
25
30
35
12
3
2
2006
2
6
2
2
2
2007
N u m b e r o f d e a l s
22
7
6
12
2008
1
8
10
5
4
4
2009
Not disclosed<US$15mUS$15m-US$100m
>US$500m US$251m-US$500m
5
2
H1 2010
2
8
US$101m-US$250m
Deal size split by volume
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10
0
20
30
40
50
60
70
80
90
100
38
25
25
2006
43
14
15
14
2007
P e r c e n t a g e
o f d e
a l s
39
12 14 11
33
11
6
2008
32
16
13
13
2009
%
29
H1 2010
12
47
Total
38
2617
12 11
10
24
<US$15mUS$15m-US$100m>US$500m US$251m-US$500m US$101m-US$250m
Deal size split by volume
5
0
10
15
20
25
30
35
1
5
2
2006
7
2
3
2
2007
N u m b e r
o f d e a l s
12
4
22
2008
20
8
22
2009
Asia-PacificNorth AmericaRest of world Europe
13
H1 2010
9
4
Target geography split by volume
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10
0
20
30
40
50
60
70
80
90
100
P e r c e n t a g e
o f d e a l s
13
25
2006
62
14
14
22
2007
50
60
20
10
10
2008
%
25
6
6
2009
63
18
H1 2010
53
23
6
Total
58
11
11
20
Asia-PacificNorth AmericaRest of world Europe
2.0
0
4.0
6.0
8.0
10.0
12.0
16.0
14.0
2006 2007
V a l u e
o f d e a l s
( U S $ b n )
2009
Asia-Pacific North America
Rest of worldEurope
2008 H1 2010
Target geography split by volume
Target geography split by value
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38
11
2006
51
44
8
35
2007
13 93
87
2008
1
29
3
5
2009
63
?
H1 2010
25
21
33
21
Total
27
7
51
15
Asia-PacificNorth AmericaRest of world Europe
10
0
20
30
40
50
60
70
80
90
100
P e r c e n t a g e
o f d e a l s
%
Target geography split by value
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Deloitte principalcontacts
Lawrence ChiaPartner, Financial Advisory ServicesNational leader o Financial Advisory ServicesBeijing, ChinaTel: + 86 (10) 8520 7758Email: lawchia@deloitte.com.cn
Paul SiuPartner, AuditNational Mining LeaderShanghai, ChinaTel: + 86 (21) 6141 1960Email: pausiu@deloitte.com.cn
Jeremy SouthPartner, Financial Advisory ServicesGlobal FAS Mining LeaderVancouver, CanadaTel: +1 604 640 3042
Email: jsouth@deloitte.ca
Charles YeungPartner, AuditNational Leader o Energy & ResourcesHong Kong, ChinaTel: + 852 2852 5601Email: chayeung@deloitte.com.hk
Karl BakerPartner, M&A Transaction ServicesM&A Mining LeaderBeijing, ChinaTel: + 86 (10) 8520 7789Email: karbaker@deloitte.com.cn
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Publisher:Naveet McMahonnaveet.mcmahon@mergermarket.com
Analysts:Douglas RobinsonMatthew AlbertTom Coughlan
Editor:Catherine Ford
Production:Anna Hendersonanna.henderson@mergermarket.comJoyce Wong joyce.wong@mergermarket.com
Managing Director:Erik Wickmanerik.wickman@mergermarket.com
End notes
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In China, services are provided by Deloitte Touche Tohmatsu and Deloitte Touche Tohmatsu CPA Limited and their subsidiaries and
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