Capital gives wings of mining development
—A record of the mining investment & finance and capital Market session
Source: www.mir.gov.cn Citation: www.gtzyb.com Date: November 2, 2015
With current sever situation, global mining giants experience the loss of 50% in their market value, and the preliminary exploration enterprises even face the value loss of more than 70% and only about 20% of previous value left. Main tasks faced by all enterprises are cost control, optimization on capital expenditure and the most pressing demand for financing. And Chengtun Mining Group Corporation has succeeded in transforming from a traditional mining enterprise into a compound one with mining financing, which has not only achieved more growth benefits but also provided the financial products and packages for other enterprises. Its financial business resolves the problem on self-development as well as comes into a new service increasing point.
Increasing Capital Pressure
“Looked from the financial statement in recent two years, it is found that a number of large mining enterprises are in high debt level and it is required to control the debt index of new high-tech enterprises and carry on a major reform on fund management. Currently, these enterprises are facing the major tasks of controlling capital and optimizing capital expenditure.” Mr. Wang Minghui, Head of Mining and Metals of Standard Bank, said so.
If performance of large mining enterprises is like so, then how about the preliminary exploration enterprises?
Mr. Wang Dongsheng, General Manager of Chinalco Resources Corporation, indicated that the mining industry has stepped into a tough time of “cold winter” with main performances in following aspects. First, there is a sever lack of confidence in current market, which leads to the sharp decline in commodity prices of metallic and mineral products. Second, mining enterprises experience an extensively loss in their market values including the large mining enterprises and the world-class mining giant such as Glencore. The preliminary exploration enterprises lost over 70% of value and about 20% of previous value left. And enterprises are extremely difficulty in financing.
Mr. Fan Zhaokang, CEO of BOCI Global Commodities (UK) Limited also considered that the greatest important need faced by all current enterprises was financing.
“The essence of mining industry is resource and capital.” Mr. Wang Jionghui, Assistant President of China Minmetals Corporation hit the point of essential connotation of mining industry with one comment. With current situation, what is the top priority for all mining enterprises? He considered that the first one is cash flow. The enterprises should own a cash flow and positive one is better during the downturn mining industry, which will enable them get through this “winter” in mining industry. Second is debt ratio. Remove the non-performing assets as far as possible, especially in the terrible situation of mining industry, and the shareholders and others have to clear their most assets. Third is cost. The core of the enterprise is to own the controllable cost. If the enterprise is greatly endowed with resource, it can continue to produce but also with a control on production and take this opportunity to focus on its internal strengths and cost control for benefits to make the cost reasonable. Although there is a narrow gap between our country and the overseas in resources evaluation, a still gap in production organization and management and a large gap in cost management and control.
“The price of mineral products continues to fall and changes also have taken place in demand structure with surplus productivity in iron ores and molybdenum minerals, which are actually the indication of mining industry under the New Normal.” Mr. Gao Xiang, President of China Beijing International Mining Exchange, indicated that investment and financing activities in mining industry under the New Normal is decreasing and the difficulty in financing is expanding. Taking two financing indexes of total amount and programs amount of Toronto Stock Exchange in Canada as an example, the total financing amount is decreased while the financing programs are increased in the corresponding period, which can be simply interpreted that each single financing amount is decreased with the reduction of total financing amount. The financing comes to greater segmentation, which actually shows that the enterprises in preliminary exploration has made a lot of small-scale financing in order to continued running and even the management layer of some enterprises in Toronto Growth Enterprise Market takes out money to make their enterprise continuously survived.
Moreover, “there are a number of great changes took place in our country. First, the state finance is mainly invested on non-profit basic constructions rather than common projects, which tightens commercial investment. Second, many enterprises suffered a great loss with their investment in the previous climax period of mining industry, quite a number of enterprises suddenly wanes their enthusiasm for mining investment, and various other factors lead to the sharp drop in domestic investment amount.” Mr. Wang Dongsheng said so.
Financial Products Bring New Hope
Mr. Wang Wei, Head of Fixed Income Research of BOC International Holdings Limited, considered that “financing is not only the problem involving the enterprises’ self-development but also a new service increasing point for themselves. In the view of both national policy and the development of global capital market, the past 10 years, especially the past 5 years, has witnessed that the enterprises in China has greatly expand their financing room in capital market at home and abroad.”
Although the mining financing face great difficulties, “the support from financial industry is indispensable to the mining enterprises.” Mr. Cheng Manjiang, Chief Economist and General Manager of Research of BOC International Holdings Limited, considered that according to the future situation, mining industry may be not a commodity any more, nor a concept of a large commodity any longer. The majority of income of most enterprises probably comes from the trade and design of financial products. Without engaging in trade and design of financial products, running the mining industry will merely stay in substantial level and hard to rise from the current valley bottom. With the accelerating process of globalization, the mining industry, different from any other industry, is truly a global industry integrated with uniform price, products, trade rules and others, which all require the mining enterprises to rapidly improve their own management ability and financialization level.
In this aspect, Chengtun Mining Group Corporation Limited has taken a firm step with successful transformation, which not only resolves their own problems but also provides the financial products and packages for other enterprises. Mr. Zhang Jiangfegn, the Vice President, introduced that their enterprise achieved different results since choosing the way of designing and trading metallic and financial products. After the gradual implementation of designing and trading the financial products, Chengtun Mining Corporation has achieved the growth against the market with the stagnation in the mining industry. Based on original mining foundation, seven mines of Chengtun Mining Corporation still gain a growth of 50% in benefits with exploiting their potential in the situation of falling prices and market demand shortage. However, after introducing their financial products into the market, they actually bring the company a growth benefits of 200%. The high-level of Chengtun Mining Corporation realized that although there is a development room for a traditional enterprise running the mines, there is a larger development space when it turns to the design and trade of financial products and more infinite space for development, so to speak. In 2013, Chengtun Mining Corporation has further adjusted the design and trade of metallic and financial products.
“This enlightenment has its origins in our merger negation.” Zhang Jiangfeng explained. During the past merger and acquisition for various mines, Shengtun Mining Corporation often confronted the same problem that mutual parties held a large difference in prices. For example, the opposite party charged for 1 billion yuan while Chengtun Mining Corporation only offered 500 million. 99 negotiations ended up in failure with such 100 negotiations on merger and acquisition for mines. Unless there is regardless of cost, but many things cannot be done. Every mine expected to be merged wants to access to finances in various ways, and Chengtun Mining Corporation own a 20-year history in capital market with a strong power of financing which is also its strength. As a result, Chengtun Mining Corporation was inspired to take their capital advantage to work together with mines.
The large commodity trade currently faces the downturn, the price of mineral products experiences a sharp fall, and the state-own banks and commercial banks withdraw loans from the enterprises, which cause a tight financial budget for the enterprise. Zhang Jiangfeng said that facing such situation, Chengtun Mining Corporation upgraded and transformed the traditional mining enterprises and innovated the current seven financial products and services ranging from factoring business to finance lease, small-amount loan, P2P, gold lease and even auction. Chengtun Mining Corporation has expanded much more development space during the whole industry chain, and all enterprises on the industry chain started from mines excavation to smelting and then metal processing become the client of Chengtun Mining Corporation, which is unimaginable in the past.
He introduced that Chengtun Mining Corporation currently takes advantage of its capital strength to serve for the mines with finance lease in various ways including direct lease and leaseback. If some mines require the technological transformation, Chengtun Mining Corporation will directly invest them with equipment and the mining enterprises can use the equipment provided by Chengtun in the way of lease. Some mines are rich in mineral resources and good in production equipment but lack of funds, Chengtun Mining Corporation will firstly purchase the equipment of mines and then conduct the leaseback to the mines. In the way, the mines access to fund and both two methods stimulate the capital circulation for mines, which is a very effective way for the enterprise to go through the tough time and truly achieves a win-win result. A number of mining enterprises has experienced a very hard period after the banks withdrawing loans and the decline price of mineral products. However, with the equipment or capital investment of Chengtun Mining Corporation, they immediately motivate their business activities. Zhang Jiangfeng believed that there would be a long-term cooperation between Chengtun Mining Corporation and these mining enterprises in the future to shape a beneficial cycle.
The large commodity trade faces a bad situation on the whole during the economic downturn. If more efforts are taken into the design and trade of financial products, the mining enterprise will embrace a better future, which also conforms to the topic of CHINA MINING Congress and Expo in this year—New Normal, New Opportunities and New Development. On this point, Wang Wei considered that the enterprises can choose financial products for themselves according to their own needs.
Seize the Opportunity of Low Financing Cost
The recent price of mineral products is relatively steady, and the industry widely considered that the price in the future will rise up but merely not sure when it would happen, and the future of mining industry is still promising. Although the mining industry stays in an extremely difficult stage, there also contains opportunities. Mr. Wang Jiahua, Vice Standing President of China Mining Association, took Zijin Mining Group Corporation as an example and said that “although some enterprises which has previously gone abroad are ‘once bitten, twice shy’, it is not for all. Zijin Mining Group Corporation shot attempts twice in this year and merged two important projects in the international market.”
He regarded that the 18th National Congress of the Communist Party of China has defined the direction to establish a multi-level financial market. Risk exploration capital market actually exists in the global and it is very necessary. China will surely establish our own risk exploration capital market. Although Canada, Australia and the UK own a mature risk exploration capital market, China cannot blindly copy or mechanically imitate them. We should, based on our state facts, learn from the advanced foreign competitors including Australian JORC Standard and Canadian 43101 Standard to build up our own risk exploration capital market focusing on the core of risk control and the construction of credit system to enable the fraud behavior in system construction detested everywhere like rats crossing the street.
Meanwhile, he indicated that risk exploration market would bring three major changes into China, firstly the achievement of global resource allocation, secondly the improvement of internationalization level and thirdly the formation of social diversified investment. In the past, the investments mainly happened within the mining industry, which led to investment shortage in some way. And now the introduction of “Internet+”, especially with the establishment of risk exploration capital market, will exploit a new market for new modes including internet crowd-funding. A powerful mining industry requires diversified investments in the society rather than the merely investment within the industry.
With regard to capital and finance, Wang Wei said that the mining industry was actually linked with capital market. Just as the mining industry was at a valley bottom, the financing cost is low in the view of current situation and the enterprises should seize the opportunity of low financing cost to further expand their own share in the global market with the very low asset price. Currently, purchase some assets with low price, fewer competitors and relatively low cost, and this moment is a good chance to enter into the market, especially for the resource-based industry.
Mr. Wang Dongsheng, General Manager of Chinalco Resources Corporation, proposed an advice of seizing the investment opportunity in the current market. In his opinion, the short-term depression and the middle-term optimism offered a great chance for the enterprises in China, which is an opportunity to enlarge and strengthen China mining industry in the world. The period is more depressed, the more important to transform and develop. Just as the developed countries invested on China in the early period of reform and opening up, they attached great importance to the emerging markets and countries as well as the investment development of potential countries and markets.
At the same time, he reminded that investment require to learn the regular rules and pay attention to relevant issues. The mining industry features with long period, large investment, high risk and high return, which has been shared in common. After many years of practice, a large amount investment generally is short in period and often lies on the middle and late exploration project. Generally speaking, the middle and late exploration project and the early development project feature with high likelihood of success, low risk and high return. The investment on commercial exploration has to select the type of ore, area, investment phase and cooperative enterprise, and the popular ore with good liquidity is the best.
He specially pointed out that controlling risk must focus on the investment opportunities of two kinds of projects. One is the high-quality project with middle and late exploration periods and the other is merging the project of converting the exploration right into mining right to construct mines with low-cost investment. If the investors want to make benefits in the way of investment, these two kinds of projects are most possible to produce values. Thus, great concentration should be taken on these two kinds of projects. The key point among them is to lower the prospecting risk and select the high-quality enterprises with good projects as the premise. (Liu Aiying)
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