China Molybdenum on hunt for distressed mine assets

The post-2011 slide in commodity prices was meant to serve up a smorgasbord of acquisition opportunities for the world’s biggest resources companies.

And it has; it’s just that an aversion to debt while the commodities cycle finds its bottom means the likes of BHP Billiton, Rio Tinto and South32 have been sidestepping the opportunity to pick up quality assets from distressed sellers.

No such reluctance on the part of China, with its embrace of 20, 30 and 50-year planning on securing the supply of commodities unchanged by the current resources downturn. There has been no better example of that than the $US9 billion ($12bn) Shanghai and Hong Kong-listed China Molybdenum (CMOC).

It is owned 63 per cent by ­two large shareholders, Cathay Fortune, the private equity arm of Chinese billionaire Yu Yong, and the municipal-owned Luoyang Mining, named after the Henan province city which is home to CMOC’s molybdenum and tungsten (steel hardeners) operations.

Few if any companies have taken more advantage of the distressed asset sales in the resources space since 2011 than CMOC.

After acquiring the Northparkes copper/gold mine in NSW from Rio Tinto in December 2013 for $US800 million (the sale was part of Rio’s debt reduction program), CMOC has gone on to make another $US4.1bn in acquisitions from the likes of Freeport of the US, and the out-of-Africa Anglo American.

CMOC is not done yet, with Australia continuing to be on its radar. The international push is headed by CMOC International chief executive Kalidas Madhavpeddi.

Speaking to The Weekend Australian from the Northparkes mine site, the Phoenix-based Madhavpeddi — a former Phelps Dodge senior executive (the US copper group acquired by Freeport in 2007 for $US25bn) — said CMOC was still on the hunt.

“We continue to look at other acquisitions. The way we look at the world, there are times when you buy, and there are times when you sell,” Madhavpeddi says

“We are always interested in growing more in Australia. I think we just have to match up with the right quality of asset.’’

CMOC has a patient streak. It has been the group’s strategy since 2008 to acquire international assets in base and speciality metals, and the industrial minerals sector.

“We looked at a number of opportunities and our typical interest has been in tier-one, high-quality assets. They mostly have to be long lived, and be positioned well on the cost curve of whatever industry they are in,’’ Madhavpeddi says.

“Northparkes was our first publicly announced transaction (it acquired Rio’s 80 per cent interest, with Japan’s Sumitomo the ongoing partner with 20 per cent). We were involved in other processes before then, but for various reasons they did not work out.

“Northparkes was not a large asset from Rio’s perspective but for us it was a right-sized asset, in the right segment of the industry cost curve, and we recognised that it had a lot of potential. We have been successful since at Northparkes, setting production records, establishing a cost structure around US70c a pound — putting us in the lowest quartile of the industry cost curve.’’

Under CMOC’s leadership, Northparkes’ reserve base has been extended to 2042, and the plan is to eventually have a century of mining at the operation.

It is something Madhavpeddi is very confident about. In the wake of the success at Northparkes, CMOC recently agreed to acquire Freeport’s 56 per cent interest in the Tenke-Fungurume copper/cobalt mine in the Democratic Republic of the Congo for $US2.65bn, and Anglo American’s Brazilian niobium and phosphate business for $US1.5bn.

“And we will continue our pursuit of other assets internationally. Again, we are very patient long-term investors,” he says.

The acquisition of the Tenke-Fungurume stake was something of a homecoming for Madhavpeddi.

“I was at Phelps Dodge as head of merger and acquisitions when it acquired the asset from BHP. Then Phelps Dodge merged with Freeport, which actually built the mine,’’ Madhavpeddi says.

“We had kept our eye on the asset which was an extremely regretted sale by Freeport. But given their financial situation they decided to sell and we — among others — were invited to that process which we won.

“It is a similar story with the Anglo American deal. It was also a regret sale for them. We had talked to them in 2010 about these assets, and when they told us that they were looking at selling, we wanted to participate in the auction process.

“It was a pretty heavily competed auction process, with some of the industry giants involved, and we were the successful bidder on that transaction also.”

Financing for CMOC’s acquisitions is typically the raising of equity through its public listings, cash from the balance sheet, and its lines of credits, with large ­Chinese banks being more aggressive with their lending at this point of the cycle.

Unlike some of the acquisitive Chinese groups that are state-owned, CMOC makes its pitch to lenders — Chinese or otherwise — on the basis of the quality of the asset.

“Our experience with them is that they look at the quality of the asset, they look at its cost position — just the same, frankly, as any bank would,’’ Madhavpeddi says of the Chinese banks.

“We haven’t found any huge difference in the way that they look at assets. Their goal is to invest with companies that are growing in assets that are top-tier assets that can pay back on a very predictable basis.”

Not being one of China’s state-owned companies has its advantages in being able to move quickly when it comes to making acquisitions.

“We are very quick at decision making because it us and our board. In the case of SOEs, they may have a public vehicle but then they have a parent company somewhere that also has a board and a management team. So they may have much more layers than we do,’’ he says.

The Northparkes acquisition has served as a management template for CMOC’s more recent acquisitions.

“We typically look for the right quality assets with the right quality management team. What we do is match that up so that the management team can run the asset to the best of their ability in a pretty flat organisational structure,’’ Madhavpeddi says.

“It gives them the ability to maximise their potential, as well as the potential of the asset. So in the case of Northparkes, 100 per cent of the employees and management joined us.

“We expect similar outcomes with the Anglo American and Freeport deals.’’

Madhavpeddi believes CMOC has a “natural instinct’’ to be on top of social licence-to-operate issues in the countries in which it operates.

“There are a lot of learnings from Northparkes. Remember, it was our platform for our international growth. It was the first step out,” he says.

“There is a lot of innovation here. It is on the cutting edge of technology, with the underground operations fully automated. It is also very efficient in that it has a very small footprint in terms of the number of people and its focus on zero harm — something that is very close to our hearts.’’

 

Article by Barry Fitzgerald – Resources Editor, Melbourne © The Australian