Silk Road Fund leverages mining enterprises “going global”
Source: www.mlr.gov.cn Citation: www.agkyb.com Date: October 27, 2015
The world economy was undergoing profound adjustment and its recovery lacked drive, which caused a downturn in mining investment. In the CHINA MINING Congress and Expo 2015, some professionals said that the global mining investment field had entered in a wait-and-see state. The downturn of price, rise of mining costs and slow growth of economy had affected the enterprises’ investment decisions in the field of mining.
Despite the fact that the pessimistic mood gained the upper hand during the conference, the different views from some owners of mining enterprises expressed that the next two or three years should be the best opportunity for mining investment. With the downturn of ore price, many overseas mining enterprises market value had shrunk dramatically. Due to the cash flow difficulties, they had to sell their assets at a discount. According to this situation, some nationals and local governments dominated by mining resources would launch more tax preferential policies in the trough.
From a logical angle, this view made sense. Of course, it would naturally recognize by many people in this industry. But the key question was, in the low tide of mining industry, the great scale restriction on mining enterprises financing. We all known that the present stage was a good time to overseas mining investment, but unfortunately, without enough money, perfect opportunities only equaled to helpless encounter. When ore prices strengthened again, pity for the loss of best chance was the only thing we can do.
Fortunately, it was given a new solution to the current dilemma at this conference. Mr. Si Xinbo, deputy general manager of the Silk Road Fund, said that they could provide better choices for Chinese enterprises’ overseas mining cooperation. This seemed to add a warm current to this winter of mining industry. There was no doubt that these words showed a promised future for the present Chinese enterprises.
Domestic and international influence factors for the rise and fall of the mining industry
"At present, the world economy is undergoing profound adjustment, the mining industry is facing many difficulties and challenges. Historical experience shows that the distribution, development and utilization of mining industry are closely related to the world economic pattern." Si Xinbo, deputy general manager of Silk Road Fund said. The development and changes in the international economic situation had an important impact on the rise and fall of the mining industry.
After the financial crisis in 2008, the global economic recovery had been slower than expected, and presented obvious regional differences. The first two quarters of this year, the United States, as the main driving force of global economic growth, its GDP growth rate reached over 3.7%, China had maintained a high growth rate of 7% in the first half. With the implementation of the European Central Bank bond-buying plan, investment plan and other factors, the euro zone gained more support from many countries besides Germany, France. Japan, India and Southeast Asian countries benefit from the decline of oil prices and capital costs, the growth of their economy was dramatic. The African region also attracted more foreign investment，the growth rate remained at more than 80%.
At the same time, some countries were still digesting the high debt, high unemployment and other follow-up impact of the crisis. Some countries also had to face a series of difficulties such as aging population, labor productivity growth slowed down and so on. The euro zone economy was still fragile. The economic growth of emerging markets including Asia, Latin America and the CIS countries fell significantly.
At present, the world economy was undergoing profound adjustment, its recovery lacked drive force, the influence of geopolitics and natural disaster was increasing, the there were a greater number of uncertainties at play. The potential growth factor and market risk were intertwined. This situation would make the global economy to maintain a deep adjustment of the slow growth for a period of time. The development of the global mining industry was also faced with the challenges of insufficient demand, financing obstacles and other challenges.
By the end of the first half of this year, China`s industrial added value continuously rebounded for 3 months. The whole society electricity consumption continued to rise in April, total retail sales of social consumer goods and new consumption maintained rapid growth, real estate sales improved significantly, the overall stability of employment and the income of urban and rural residents growth higher than the GDP growth rate.
"But at the same time, the domestic infrastructure construction is playing a weaker role on the steady growth of economy. Due to insufficient demand from international market, the performance of export is below expectations. The deflationary pressure can not be ignored." Si Xinbo said that downward pressure on China’s economy continued to mount, and we faced an array of interwoven difficulties and challenges.
Over the past ten years, the rapid growth of China and other emerging market economies injected a strong driving force into world economy, resulting the huge demand which had became the most important driving force for global mining boom. Si Xinbo said, under the current circumstance, China`s economy was in a critical period of changing its growth mode. The structure of its economy had been optimized, but the growth rate slowed down. The influence of China and other emerging market economies on global mining industry had been weakened.
He believed that new changes and challenges faced by global mining industry were due to the global and economic growth in the experience of the depth adjustment that the traditional momentum weakened and the new power had not been generated.
Mining investment should pay attention to “Four Major Trends"
"Although the global mining industry will continue in a period of downturn, some prospective trends have been shown in the depth of the adjustment." Si Xinbo said.
Firstly, the downturn in the global mining industry would last, yet there was no sign of improvement. The slowdown in global economic growth, coupled with oil prices dropping to 5-year low, and triggered the commodity prices decline in a row. All of these reasons pushed global mining industry fell to the most severe situation since financial crisis. It was considered that it would continue to fall in the next two years.
According to SNL data monitoring, metal price index fell to 103 points in June from 107 points in March this year. The number of global exploration projects fell to 380 in the first quarter of this year from 418 in the fourth quarter in 2014, and continuously fell to 363 in the second quarter of this year. The global mining activity index PAI reached 44.3 in June this year, near the lowest point of 40.2 during the past 3 years.
"The growth of global mineral resource consumption has slowed significantly." Si Xinbo believed that the supply of mineral raw materials and processed products transformed from insufficient to excess. There was a common price crisis faced by mineral products, mining assets and mining companies. In the short term, without a clear turning point, the downturn would last for a period of time in the whole global mining industry.
Secondly, the expansion of the mineral geological exploration transformed from the traditional mining countries to the developing countries and regions, which possessed abundant mining resources. Mineral exploration was a process of continuous exploration and discovery. Combined with the overall downturn in the development of mining industry and cost pressures, the attraction of Canada, Australia and other traditional mining countries had significantly reduced in the proportion of global mining investment. The hot spots of mineral exploration and mining investment gradually transformed to the Latin America, Africa and other places.
For instance, in 2014, Canada became the first choice for world`s ten largest mineral exploration enterprises. At the same time, the exploration of deep sea, high altitude and polar mineral was becoming more and more popular. Under this circumstance, higher requirements were put forward to the better cooperation of the capital, technology, equipment and the whole industry chain.
"Expanding the scope of mineral exploration provides the basis and confidence for the recovery of the global mining industry." Si Xinbo said, with the global economic situation gradually improved and the integration and upgrading of the mining industry, the overall performance of the global mining industry should be improved in the next two to three years,
Thirdly, the mining area of social responsibility and environmental protection standards were increasingly stringent which heightened the technical threshold and cost pressures of mining investment cooperation. Traditional mining operations often accompanied by environmental problems. While with the change and adjustment of the global economic growth mode, the demand of changing the quality and efficiency of mineral resources development and utilization was continuously increasing.
"This means that the threshold of investment in the mining industry will be higher and the cost will increase at the same time. This situation will promote the global mining industry to develop to a new stage, which based on the mechanism for selecting the superior and eliminating the inferior. Return on investment and efficiency will be the first criterion." Si Xinbo said that in the field of investment, large multinational banks and investment institutions gradually focused on their social responsibility and environmental protection. Necessary attention should be paid on the future development of international mining development. The relevant investment cooperation also should attach importance to fulfill their social responsibility and take action on environmental protection in the framework of income and risk analysis.
Fourthly, the industrial downturn accompanied by the loose regulation, which prompted the mergence and reorganization more active in international mining areas.
"Severe market situation brings more pressure on the mining industry, but also provides more demands and opportunities for integrated restructuring." Si Xinbo said the large international mining companies preferred to use asset acquisition and restructuring to optimize the capital structure, improve the quality of operations and reduce operational risks.
SNL statistics showed that in the first quarter of this year, there were 23 deals of the global mining mergers and acquisitions and the number of second quarter is 35. The total sum of first quarter of the global mining mergers and acquisitions related to metal resources is $2.93 billion and in second quarter increased 2 times, the total sum over 6.5 billion dollars.
"In order to contain the economic downturn and improve their mining industry’s competitiveness, some mining countries take measures to amend the law, adjust taxes, speed up approval and other measures to improve their investment environment, showing a new trend of loose regulation in the mining industry." Si Xinbo believed that the change of market environment and policy background created new opportunities and space for optimizing the allocation of mining resources and investment cooperation.
Experts explain the "Silk Road Fund" functions
China`s Silk Road Fund was the adaptation of global and China`s economic growth mode transformation trend. It was dedicated to the common development, mutual benefit and win-win of all countries along the “Belt and Road initiative”.
"The situation of global economy is still not optimistic; the pressure of recession is still existing in many industries including mining. Countries need to strengthen coordination and cooperation in the fields of trade, investment and finance to be able to ride out the storm and seek common development. As an important part of economic globalization, there is no exception for China. " Si Xinbo said.
Silk Road Fund was established under the background of China’s the “Belt and Road” initiative, and the trend of global and China`s economic growth mode transformation and cooperation pattern upgrade. Si Xinbo said that the Silk Road Fund was willing to provide many better selections for Chinese enterprises overseas mining cooperation.
First, positioning of the Silk Road Fund
On November 8, 2014, President Xi Jinping delivered a key speech at a dialogue meeting on strengthening connectivity partnership and announced that China will commit 40 billion U.S. dollars to establish a Silk Road Fund, which was to finance connectivity programs in countries along the "Belt and Road". The new Silk Road Fund would be used to provide investment and financing support to carry out infrastructure, resources, industrial cooperation, financial cooperation and other projects related to connectivity for countries along the "Belt and Road". According to Xi, the goal of the new Silk Road Fund was to "break the bottleneck in Asian connectivity by building a financing platform."
Therefore, the Silk Road Fund had the following features:
Firstly, Silk Road Fund, which was to finance connectivity programs in countries along the “Belt and Road” initiative. It was aiming at promoting a more equitable and balanced model of partnership, achieving mutual benefit and win-win with other countries, providing financial support and financing platform for cooperation in a wide range of related areas and laying a solid foundation for long-term and stable development of world economy. Secondly, instead of pursuing short-term profit, it was a long-term development and investment funds. In particular, it was willing to provide financial support to the long investment cycle projects, which based on the facility, energy resources, industry and financial cooperation. Thirdly, it was mainly based on the equity investment, supporting enterprises to transform from the EPC based project contract to the identity of the shareholders to conduct the depth participation of the project, through strengthening the control of the project and improving business management to achieve real international business. Fourthly, it could be flexible to provide credit for the formation of financial support, which was conductive to the enterprise in accordance with the characteristics of the project and the transaction structure to properly arrange the optimal financing institution. Fifthly, instead of being an aid or policy funds, it was commercialized management based on market operation. Following the market rules and requirements and maintaining sustainable, it could bear its historical mission preferably.
Second, investment philosophy of Silk Road Fund
a). The Silk Road Fund’s investment operation was based on cooperative principle of developing dialogue and planning with other countries at the same time. The “Belt and Road” initiative followed the concept of peaceful cooperation, openness and tolerance, mutual learning and mutual construction. Silk Road Fund would be used to provide investment and financing support to carry out infrastructure, resources, industrial cooperation, financial cooperation and other projects related to connectivity for countries along the "Belt and Road", through cooperation to achieve common prosperity.
b). Silk Road Fund’s investment operation also insisted on the efficiency principle of pursuing long-term reasonable investment return. Built as a joint-stock company, Silk Road Fund’s related operation must be in the pursuit of long-term and reasonable return on investment, which was responsible for the investor and the foundation of equal cooperation and win-win basis with other market subjects.
c). At the same time, Silk Road Fund’s operation also adhered to the principle ofcomplementary advantages and win-win cooperation to other financial institutions at home and abroad. Silk Road Fund followedboth of Chinaand receiving country’s law and regulation, complying with the international rules of the market and the international financial order, paying attention to the green environmental protection and sustainable development, respecting other domestic and foreign financial institutions business to offer more richer choices for enterprises and projects in diversified investment and financing ways. In the blueprint for jointly promoting the healthy and stable development of the global economy, the Silk Road Fund and other domestic and foreign financial institutions had built a partnership based on complementary advantages, cooperation and win-win basis.
d). Silk Road Fund’s investment operation also insisted on the principle of providing equal opportunities to every investor. Silk Road Fund was an open and inclusive institution, welcoming both of domestic and foreign investors to participate in the project. After operating for a period of time, it also considered to open more opportunities to investor, or cooperate on a sub fund level with whether multilateral institutions or various types of industrial investment and investment institutions. Silk Road Fund would open the mind to find suitable opportunities for cooperation, and with these institutions work together for contributing to the development and prosperity of the region and to the world.
Thirdly, the investment direction of Silk Road Fund
With the purpose of jointly building business and share ideas, Silk Road Fund mainly provided support to carry out infrastructure, resources, industrial cooperation, financial cooperation and other projects related to connectivity for countries along the "Belt and Road". Si Xinbo said that except above countries, other countries and regions as long as suitable for Silk Road Fund investment projects could also be considered to provide investment and financing support. Geographic location was not considered as strict restrictions.
Si Xinbo said, the Silk Road Fund would continue to support enterprises with strength to cooperate with each other, focusing on sharing the experience, high technology and advanced production capacity of China`s industrialization and modernization, promoting the common development and prosperity of the relevant countries.
At the present stage, Silk Road Fund focused on the investment in infrastructure industries including transportation infrastructure and public facilities; energy and resources industry including oil and gas, new energy and mining development; production capacity and technical cooperation industry including large complete sets of equipment, industrial base and introduction of high technology, and financial industry cooperation for overseas mergers and acquisitions of financial and services to Chinese enterprises to go global.
Silk Road Fund escorts mining overseas expansion
“Silk Road Fund is a ship, which has set sail in the sea of “the Belt and Road” initiative; Silk Road Fund is a bond which is committed to promote the organic combination of industry and capital. Under the premise of mutual benefit and win-win, Silk Road Fund also is a good partner to jointly promote international investment and cooperation in mining industry. ”Si Xinbo said.
Firstly, the fund could play a unique role in focusing on investment of “the Belt and Road” initiative. Silk Road Fund was a special investment and financing mechanism established by China to support “the Belt and Road initiative”, focusing on providing investment and other projects related to connectivity for countries along the "Belt and Road initiative". With short decision-making chain and effective decision-making, it would conform to the trend of the global mining industry’s development; promote Chinese enterprises and countries along the route to carry out more in-depth and diversified investment and cooperation.
Secondly, the Silk Road Fund could play a role in enhancing mutual trust and investment leverage. Mining industry was typical capital-intensive industry. With high investment in geological prospecting, mining, production, processing and other aspects of the mining industry, transaction amount of mining trade and investment ranked on the top of the international trade statistics.
“Silk Road Fund as a state-backed professional investors, with a high level of credit and financial strength, was able to provide necessary capital support to mining development, mergers and acquisitions for the enterprises or projects, increase credit, promote the maturity of project, achieve financing conditions and promote the project to implement as soon as possible." Si Xinbo said, for the capital operation of mining enterprises’ mergers and acquisitions, the Silk Road Fund could play a role of the professional financial investors and become a reliable business partner.
Thirdly, Silk Road Fund could make effort to dampen economic cyclical changes and stabilize the market. The supply chain and investment environment of international mining had a very strong correlation with the economic situation of every country. With its own characteristics, investment in mining needed large amount of money, long investment cycle. And it was difficult to steer and benefit. The cyclical fluctuation in the industry was the main problem faced by investors.
“Compared to the general investment institutions, Silk Road Fund as a mid-to-long-term investment fund, its investment period attaches great importance to the long-term reasonable return and longer than usual mode. Therefore, the Silk Road Fund can across the development of the industry cycle, have higher tolerance on short-term financial volatility. It can help enterprises to deal with periodic pulse of the market ups and downs and achieve long-term and stable development. " Si Xinbo said this was the rarest financial investors to the mining industry.
Fourthly, the Silk Road Fund could play a synergistic role in a variety of investment tools for flexible combination. "Mining production and investment is usually accompanied by a more complex transaction structure. The design of investment and financing model are the two issues of crucial importance of the project`s success or failure." Si Xinbo introduced that Silk Road Fund’s main pattern of investment was equity investment. Meanwhile, it also provided all types of investment loans, debt, mezzanine capital, sub-funds and other patterns of investment. It was one of those rare investment institutions could take all types of investment tool to carry out capital investment. It would try its best to meet demands from every party to better cooperation between mining enterprises and projects investment and financing. For the purpose of achieving maximum benefits, Silk Road Fund designed plans in targeted ways and build the most reasonable structure of cooperation.
Fifthly, the Silk Road Fund also had an effect on improving the efficiency and adding value. In practice, some countries or international organizations would promote the development and utilization of mineral resources in the way of capital investment. But most of this investment was policy oriented, with the essence of assistance, it often difficult to achieve long-term sustainable.
Si Xinbo said, on the basis of complying and cooperating with every country’s development planning, Silk Road Fund adhered to market-oriented operation. The professional investment team established by Silk Road Fund had the ability to participate in mining cooperation, both as investors with high credit and financial advisor with professional quality. It helped enterprises to accurately grasp the direction of development, effectively reflect to the market signal, improve corporate governance, optimize the investment and financing plan, promote enterprises’ combination of macro development strategy and micro market efficiency, and increase the long-term value.
Sixthly, the Silk Road Fund could play a leading role in capital and industry. Mining economic development as the basic resources of economic development, with numerous upstream and downstream industries, it had long industrial chain. Silk Road Fund could play an exemplary role by virtue of its many advantages, including mid-to-long-term equity investment mode severed as main invest mode, vast areas and more flexible forms of investment.
Si Xinbo said Silk Road Fund would continuously make effort to lead and catalyze social capital and international capital to invest in mining areas under the background of the “Belt and Road”initiative. It also could help relevant enterprises to develop from the mining areas further to the upstream and downstream of the whole industry chain. Silk Road Fund would commit to find more potential and valuable investment opportunities to achieve accumulation effect of “1 plus 1 greater than 2”. (Li Ping)
About CHINA MINING
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