HSBC and emerging markets - China's global resource hunt

Published: 5 May 2008

China’s rapid industrialisation has created tremendous demand for fuel, steel and other mineral resources. Chinese mining companies raise their production targets every year and already, China has unseated South Africa as the world’s largest gold producer. Recognising that local sources alone cannot meet the nation’s needs, domestic producers have been looking to ensure their supplies by investing in mining companies and projects overseas. In 2006, a quarter of China’s outbound investments went to the mining sector.

Controlling ownership

Last year, HSBC acted as sole financial adviser to Monterrico Metals plc, a London-based resource development company, assisting in Monterrico’s acquisition by the Xiamen Zijin Tongguan Investment Development Co Ltd (the Zijin Consortium). Monterrico owns the Rio Blanco copper project in Peru, one of the largest copper deposits in the world, capable of supplying up to 191,000 tonnes of copper per year.

Monterrico will benefit from Zijin’s expertise in large-scale mine development and operation, as well as the consortium’s financial resources. The Zijin Consortium, meanwhile, expects the investment to help it meet its targeted 24.9 per cent increase in copper production this year. Zijin Mining also acquired three other projects in Peru and Tajikistan in 2007. The Monterrico deal was the first UK public offer by a Chinese corporate in the metals and mining sector. Following the successful negotiations, Zijin gained 89.9 per cent ownership of the company.

Monterrico appointed HSBC’s resources and energy group to provide strategic financial advice. HSBC relationship managers took Monterrico's executives to China, joining them up with the lead investors and helping the parties explore their investment options.

HSBC’s resources and energy  group was able to guide both sides through the intricacies of the cross-border deal. The team needed to put a solution in place so that all Chinese regulations and investor-related approvals could be met. For Chinese investors, outward investment is still a relatively new concept. HSBC's local teams are able to work with clients in China to help familiarise them with international market dynamics and investment processes.

Taming the resource-hungry image

The dragon is one of China’s most enduring national symbols. But as HSBC Group Chairman Stephen Green has noted, the mythical creature evokes differing emotions among Asians and Europeans. “The dragon is a symbol that perfectly captures the complexity and ambiguity of relations between the West and the East,” said Mr Green. This is as true in mythology as it is in the context of global capital mobility. “China’s appetite for foreign assets is giving rise to concerns overseas… public and political opinion is, at best, wary of China’s intentions if not downright hostile,” he observed.

“China may take comfort in the fact that its experience is by no means unique,” said Mr Green. Japanese companies that acquired international assets in the 1970s and 80s experienced similar reactions. But today, acquisitions by Japanese companies would rarely cause comment. “I fully hope and expect that in the next decade or so, as China continues on its chosen path of integration with the world economy, the overseas ambitions of Chinese firms will come to be judged on their business merit, rather than on political grounds,” said Mr Green.

Right now, the country’s priority sectors are the manufacturing, mining and IT industries. Part of the China package is the extension of financial assistance to favoured trading partners and governments.

Building bridges of bilateral opportunity

HSBC was the sole financial adviser to China Vision Resources Ltd on its USD800 million investment in UK-based Anglo American plc. The latter has an extensive pipeline of mining and natural resources projects spanning five continents. HSBC’s strong emerging markets position and roots in both the UK and China proved useful in bridging the 4,987-mile gap between Beijing and London to make the deal happen.

The transaction was the first large-scale direct equity investment involving Chinese capital in a London-listed global resource major. The HSBC resources and energy group helped China Vision to develop the sophisticated arrangements necessary for the all-cash investment. The deal underlined HSBC’s experience in the Chinese market, close relationship with regulatory authorities and extensive knowledge of the European mining industry. There were also differences in business culture that needed to be bridged, and HSBC was able to help find a middle ground between the two cultures.

In international transactions involving differing economic systems and contrasting cultures, HSBC has both the history and the global reach to help bridge the gap between markets.