Private Chinese mining companies have played an increasing role in international mining investment, although Chinese overseas exploration budgets have fallen, in line with the global trend. Past experience has caused more emphasis to be placed on acquiring good assets and focusing on maintaining low costs and a healthy return on investment.

For the purposes of this article, S&P Global Market Intelligence has defined Chinese-owned companies as in part 1: those headquartered in China and Hong Kong, and their foreign subsidiaries.

Exploration trend reflects M&A focus

Chinese companies' combined overseas exploration budgets in the five major regions — Africa, Australia, Latin America, North America and Pacific/Southeast Asia — declined to $101 million in 2020 from $267 million in 2011. The downturn in exploration activity follows the global trend.

Most of Chinese companies' decline in exploration spending was in Canada, Southeast Asia and Australia. In 2011, these three regions accounted for 22.5% of China's total exploration budget, including domestic spend. In 2020, the three regions' total share dropped to 5.6% as budgets declined.

Excluding 2020, which was affected by the COVID-19 pandemic, annual Chinese budgets directed to exploration in Africa over the past decade have been constant at an average of $75.5 million. Africa accounted for 12.3% of Chinese companies' total exploration budget in 2020, up from 8.1% in 2011. Latin America's share increased from 2% to 6.4% over the same period.

The changes in China's exploration spending reflect shifts in its general overseas strategy, with more companies preferring to invest in regions where they have had past success, rather than pursuing dominant ownership and potentially large resources, and meeting demand for metals required for China's industrial upgrade.

Companies have learned from investment mistakes

Chinese-owned overseas iron ore mines are in the upper half of the global cost curve, similar to domestic iron ore mines. Before 2010, Chinese iron and steel companies acquired mostly magnetite assets, whereas in Australia, most low-cost iron ore mines are hematite direct shipping ore operations. Huge steelmaking demand and experience operating domestic magnetite mines have prompted Chinese companies to invest abroad. Mine costs at Citic Ltd.'s Sino-Iron mine in Australia have been high since the operation began — in 2013 and 2014, normalized cost and freight-based all-in sustaining costs were over $100 per dry metric tonne. Chinese domestic magnetite requires a two-stage milling process, while ore at Sino-Iron requires a three- to four-stage circuit, which leads to higher processing costs. The ballooning operating costs resulted from a lack of preliminary study, which forced CITIC to invest more than anticipated in project development.

Chinalco's Simandou Blocks 3 & 4 joint venture in Guinea, another iron ore project still in development, could have better results. Guinea's status as a developing nation could present significant obstacles to the development of the project, but with a 66% Fe grade, the project remains attractive. China produced over 1 billion tonnes of crude steel in 2020, and as demand for imported iron ores will continue, geographical diversification away from Australia could be seen as an advantage.

Of the 88 Chinese-owned copper assets abroad, 18 are owned by China Nonferrous Mining Corp. Ltd., and 17 of these are in the Central African Copper Belt. China Nonferrous has invested in multiple small projects with a deal value below $100 million, such as Baluba and Muliashi North in Zambia. These initial, tentative investments have helped with understanding the mining environment in Africa. Chambishi, also in Zambia and one of China Nonferrous' earliest overseas projects, acquired in 1998, is one of Africa's highest-cost copper mines. Muliashi North, acquired in 2009, is one of the lower-cost mines. China Nonferrous' experience in Africa has prompted more Chinese enterprises, including both state-owned and private entities, to invest in the region. Copper is one of China's most desired commodities, and our data shows that Chinese copper assets in Africa have been lower cost than the global average over the past decade.

Mining investment under the Belt and Road initiative has been mostly funded by state-owned enterprises, but participation by the private sector has grown steadily. Companies were likely encouraged by a simplified approval procedure for foreign transactions valued below $1 billion that was issued by the China National Development and Reform Commission in 2014.

The charge has been led by Zijin Mining Group Co. Ltd., which has been growing its overseas footprint in the last decade. It currently has the most foreign mining assets of any Chinese company, with 46 in total. Zijin expanded rapidly, having completed 21 M&A deals since 2010, with seven deals in the past two years. The company has mainly focused on gold projects, with 27 of its assets abroad being primary gold mines. In 2020, Zijin acquired Aurora in Guyana and Buritica in Colombia via its Gold Mountains (HK) International Mining Co. Ltd. subsidiary. The deals will push Zijin's overseas gold production ahead of its domestic output in 2021 and will account for 52.7% of its total gold production for the next five years.

Zijin is also one of the first Chinese miners to expand into Europe, where Chinese companies own 25 assets. With the acquisition of Bor Basin and Timok, Zijin has acquired 11 projects in Serbia. These investments are aligned with the Chinese government's Balkans Silk Road blueprint, which is a section of the Belt and Road initiative. As of 2020, the company's overseas mining resources have exceeded those of its domestic operations. Zijin's positive experience in frontier locations is likely to boost confidence among other Chinese companies planning to invest abroad.

Return on investment, short lead times key for new investments

Chinese miners have moved to develop mines in low-cost regions, and they continue to work in countries where they have a successful investment track record. China is engaged in 52 primary copper projects in Africa and Europe, which account for 60% of its foreign project total. China's 45 primary gold assets, distributed in Central Asia, Europe and Australia, amount to 67% of its foreign gold mines.

The growing investment by private miners suggests that China's overseas mining strategy has shifted from an emphasis on control, mineral reserve size and large-scale capacity to acquiring assets with a focus on maintaining low costs and a healthy return on investment.