Miners digging deep for a new global strategy

Warning sign

"It is a warning sign that Chinese miners had conflicts with local workers and governments in Zambia and Ghana," said Chang. "Some large mining projects in foreign countries don't offer enough transparency and Chinese companies usually lack communication skills, which could cause misunderstanding."

In addition to different policies and laws, foreign countries often place great importance on environmental protection and community development, factors that also have to be considered by companies during actual operations abroad.

"The biggest problem with overseas investment is blindness," said Chang. In some cases, the investment "goes against common sense and it will end in failure", or it's outside the investing company's area of expertise. One example he cited was that of a Chinese construction company that invested in a copper mine in Afghanistan.

"At a time when China's overseas mining investment is slowing and many large mining companies face unexpected cost increases and a bleak profit outlook, it's irrational and risky for inexperienced, non-mining companies to invest in overseas mining projects," said Wang Jiahua, CMA executive vice-president. He said that these companies should learn from the failures of specialists in the sector.

Private capital boom

According to Wang, up to 80 percent of overseas mining investments have failed.

"I hope they can be well prepared in terms of research and risk assessment of overseas mining markets before they take action," said Wang.

As many countries with abundant mineral resources move to restrict investment by China's State-owned enterprises, private-sector Chinese companies are gradually becoming the majority of overseas mining investors.

In the first three quarters, private-sector investment in the overseas mining sector reached $1.92 billion with 73 projects, while investment by China's SOEs stood at $1.22 billion with 30 projects, according to the association.

"China's private capital has become an important force in the international mining market," said Wang Yanguo, vice-chairman of the China International Chamber of Commerce for the Private Sector.

Last year, the top 500 Chinese private companies invested $16 billion in 730 overseas projects, accounting for one-fifth of China's total outward foreign direct investment, according to Wang.

"Private investment in the mining sector occurs in many forms, which has reduced the potential risks," he said.

Global private-sector investment is increasing and becoming a major competitor with China's SOEs in the international mining markets, said Mike Elliott, leader of the global mining and metals sector with consulting firm Ernst & Young.

Great expectations

Although China's overseas mining investment has slowed, the nation will remain one of the biggest buyers in global markets because of its growing demand.

According to E&Y, China was still the biggest buyer of mining and metals assets globally for the first nine months, accounting for 8 percent of all deals by value.

However, unlike the downturn of 2009 — when Chinese buyers dominated mining and metals M&A — there's increasing private capital interest in the sector, which makes it more difficult for Chinese investors, said Elliott.

Further, deal risks are growing, so Chinese buyers have to be more creative in structuring their deal assets and evaluating their risks.

Chang said that financial institutions and funds are set to play a bigger role in mining M&A.

Plus, after experiencing failures in overseas mining projects, Chinese companies will use more sophisticated investment strategies, he said.

Outbound mining investment services will mature as well, offering better information to prospective Chinese investors.

As for specific types of mines, Chang forecast that interest in precious metals such as gold and platinum will increase, while investment in iron and potash will wane.