Natural Resources Group Global Mining Finance: New Frontiers Conference. The Challenges of Operating in China. November Audit Tax Advisory

Transcription

1 Natural Resources Group Global Mining Finance: New Frontiers Conference The Challenges of Operating in China November 2013 Audit Tax Advisory

2 Contents Overview of Chinese Mining Industry Commodity Trends Foreign Investment in China s Mining Industry Regional and Provincial Context Features of the Minerals and Mining Industry What should investors be looking for? Potential issues arising Key factors for success Crowe Horwath International Services to Natural Resource Companies Global Experience in the Mining Sector Our China Desk Natural Resources Team Recent Transactions Principal contacts (UK and Asia Pacific) 2

3 Overview of the Chinese Mining Industry China is the world s leading producer of coal, gold and most rare earth minerals. However, the country has limited resources for certain commodities, such as high-quality metallurgical coal and nickel. The world s leading consumer of most mining products, particularly for commodities such as thermal coal, approximately 50% of global total, and iron ore, approximately 60% of global total. Industry transitioned from a semi-colonial structure, through a capitalist production and management phase and the introduction of advanced machinery to slow expansion post the founding of PRC and massive mineral exploration thereafter Unique scale: by 1997, 171 mineral resources, over 20,000 commercial mineral deposits, constructed 9,000 state owned mines, 300 sino-foreign joint ventures and. 180,000 township/collective self owned mines. Historically the industry has been fragmented with many companies operating in the same mining area. Consolidation has been encouraged in an effort to increase efficiency and to improve safety and environmental performance. 3

4 Summary of Chinese Mining Production Metric Tons Mine Output Source PwC Asia School of Mines 4

5 Commodity Trends Coal Coal consumption had increased to meet the high demand for industrial production and power generation. The primary source of energy more than 2/3 of China s electricity was produced by coal-fired plants. China s demand for coal will almost single-handedly propel the growth of coal to the dominant global fuel Woodmac. Despite coal production increases, growth in demand leave China as a net coal importer. Chinese thermal coal imports have continued to rise, as utilities turn to cheaper offshore supplies High costs and increased focus on environment and safety in 12,000 mines continue to exert pressure on the domestic coal costs, which has resulted in imported coal becoming more competitive. Approximately 2,000 small mines will be closed by end of 2013, aimed at annual output below 90,000 tons. No approval for mines with annual capacity less 300,000 tons. Mines with annual capacity of less than 900,000 tons and with a poor accident record will not be approved. Gold Chinese gold companies are actively looking at assets overseas. China new mined gold output is approximately 60% of the global total annual gold imports via Hong Kong expected to be 1,100 1,150 tonnes, producing total demand in China of 1,570 tonnes (Note: Imports not reported). 5

6 Commodity Trends (cont.) Nickel China has limited nickel resources. Nickel resources have been discovered in Zinjiang, Gansu, Hubei, Jilin, Sichuan and Yunnan. China uses nearly 50% of the world s nickel and supplies approximately 5% of the world s supply. Demand for nickel in 2014 is expected to rise above 2013 levels of 780,000 tonnes. Copper Owing to domestic smelter and refinery expansions, China s copper output has increased sharply, despite the constrained supply of copper concentrates on the world market. Domestic copper mines supply about 30% of the country s requirements for copper concentrates. Signs that Chinese manufacturers are cutting demand, falling stock in Shanghai. Seen as a barometer for Chinese growth (power cables to cars). Iron and Steel China accounts for over 50% of the world s pig iron production and over 40% of the world s crude steel production. Domestic iron ore production cannot meet domestic demand; thus, China depends on iron ore imports to fill the gap. Shrinking margins and tighter credit conditions but crude steel production still increasing to 2013 annualised 781 million mt/year (2012: 709). Inventories expected to rise, output to be stable, prices to fall in the short term. 6

7 Commodity Trends (cont.) Rare earths 17 metallic elements essential to iphones, wind turbines, electric cars, robotic assembly lines, guided missiles etc. Occur in low concentrations, but China has over 50% of known resources and a dominant market position and 2010 export quotas to conserve supplies and control price. China may stockpile rare earths in 2013 having set a production quota of 93,800 tonnes. Industry Association China to draft rules to stop illegal mining, reduce pollution and prevent price wars. WTO China s export restrictions on rare earths are incompatible with its rules Per China export quotas are needed to limit environmental damage of mining and processing, however domestic processing industry expanded in Inner Mongolia and Jiangxi. Higher prices have led to the development of mines in Australia, the US and Greenland. 7

8 Foreign Investments in China s Mining Industry Sectors in Which Foreign Investment is Encouraged Prospecting, exploitation and utlisation of coal-bed gas Prospecting, exploitation and benefication of iron ores and manganese ores Development and application of new technologies for improving the utilisation of tailings and comprehensive utilisation of recovery technology of the mine ecology. Prospecting and exploitation of unconventional natural gas resources such as shale gas and submarine natural gas hydrate Sectors in Which Foreign Investment is Restricted Exploring and mining of special scarce coals exploration Exploring and mining of barite Exploring and mining of precious metals (gold, silver, platinum families) and precious non-metals such as diamond Inorganic salts production with high resource consumption and serious environmental pollution using outdated technologies Sectors in Which Foreign Investment is Prohibited Exploring and mining of tungsten, molybdenum, tin, antimony, fluorite Exploring, mining and dressing of radioactive mineral products Exploring, mining and dressing of rare earth metal 8

9 Regional and Provincial Context More than one China 4 Municipalities, 23 Provinces, 5 Autonomous Regions, 2 SAR, with area of 9,706,961 km 2 and estimated population of 1.35bn. Beijing and Shanghai are well known but also highly competitive markets 270 cities in China with a population of over 1 million, 93 cities with over 5 million, 8 cities with over 10million. A 2010 UKTI report identifies 35 attractive regional cities. Boston Consulting Group (2010) look at emerging markets at the City level, look beyond the Mega Cities Regional opportunities include: Hangzhou, Suzhou - life sciences, infrastructure, ICT, financial and professional services, environment and climate change, advanced engineering Dalian, Qingdao, Ningbo - advanced engineering, financial and professional services, food manufacturing Tianjin - new energy, environmental protection, financial services, healthcare, service outsourcing Dongguan - telecommunication equipment, manufacturing, climate change, nuclear power Most populous provinces are Guandong (95m); Henan (94m); Shandong (94m) Highest GDP (US$ 000) per capita, Shanghai (23); Beijing (21) ; Tianjin (19); Jiangsuau (14) and Inner Mongolia (13) Over 300 widely dispersed cities and town are based on mineral mining in provinces such as Heilongjiang, Sichuan, Inner Mongolia, Gansu, Henan and Qinghai. 9

10 Features of the Minerals and Mining Industry Significant uncertainties in exploration activities Long lead times between exploration and production Measurement uncertainty significant expenditure on exploration does not necessarily equal significant revenues from production Consequent significant uncertainty in valuations Complex risk and revenue sharing arrangements Sharing of economic benefits variety of business and financing structures Scale of capital investment Pattern of cash flows Non-renewable reserves Environmental uncertainties Regulatory uncertainties 10

11 Features of the Minerals and Mining Industry Risk management over a mine life: Acquire title 1 12 months Exploration 1 6 years Feasibility 3 12 months Construction 6 24 months Operation 3 20 years Geological risk should decrease over time as resources are defined and proved, financial risk can increase over time as financial requirement and investment increases and political and commodity price exposures increase. Financing requirements and options change throughout! 11

12 What Should Investors be Looking For? Regulatory approvals in place at all levels (city, province, national) Defendable rights over real and intellectual property Robust and reliable accounting and management information system Capital restructuring or reorganisation A strong and complete management team ideally with succession planning Common goals between owners and managers International Financial Reporting Standards or local equivalent International Auditing Standards compliance Tax visibility backwards and forwards Experienced and objective advisers 12

13 Potential Issues Arising The importance of: First adviser advantage/disadvantage Previous external exposure Commercial issues may include: Use and ownership of rights over tangible/intangible assets Reliance on the patronage of founders, lenders and others Quantifying and evaluating related party transactions and independence Impact of market changes, government controls and policy changes Positive and supportive relationship with city and provincial regulators and funders Alternative and perhaps non-sustainable business models, cash is king Building and retaining personal chemistry and trust Health and safety compliance Logistical costs and approvals 13

14 Key Factors for Success Relationship and Trust: The key element is to build and maintain trust with the vendor shareholders, funders and regulators Regional factors: Business practices and opportunities differ between regions. There is more than one China Timetable: Be prepared for a long process of identification, assessment, negotiation and due diligence Information: Must be objective, complete, relevant and timely Realistic valuation: Ensure common goals and clear exit strategy, do not over value Strategy: Investment or acquisition is the start of the process not the end Communication: Maintain close contact throughout and after a transaction Business development expectations: Ensure these are realistic and shared by the entire team Financial: Control working capital, monitor budget variances, establish and maintain strong corporate governance Flexibility: Expect the unexpected Advice: Work with experienced independent and trusted advisers Language: A barrier, but not a bar to progress 14

15 Crowe Horwath International Global professional services alliance with more than 100 independent firms Services provided include: audit and assurance, taxation, accountancy, corporate finance, consultancy, financial planning Our corporate finance services include pre-ipo planning, reporting accountant services, due diligence, M&A, company disposals, raising finance and MBO s Based on integrated and high quality service delivery and common core values 640 offices in over 100 different countries, annual revenues of $2.8 billion and approximately 28,000 professional staff Ranked No. 5 by size in Asia Pacific and No. 6 in Greater China 32 offices throughout China including Beijing, Shanghai, and Hong Kong and strong coverage in South East Asia and Asia Pacific including Singapore, Malaysia, Jakarta, Indonesia and Australia. In the UK Crowe Clark Whitehill originated in 1843 and operates with a strong international client base 15

16 Global Reach Crowe Horwath International Crowe Horwath International statistics * Member Firms & Business Associates 171 Countries 114 Cities 599 Partners 3,335 Partners & Staff 29,329 Revenue US$3.08bn *as at December th largest global network of independent audit and advisory services firms in the world International Accounting Bulletin (IAB) 16

17 Crowe Horwath International Asia Pacific ranking (in US$ million) 17

18 Services to Natural Resource Companies Statutory audits Reporting accountants Royalty audits Financial due diligence IFRS conversions Management accounts Internal audit Audit & assurance Tax International tax structuring Tax due diligence Statutory compliance Transfer pricing reviews EIS & VCT assurance International mobility Advisory Immigration Relocation support International payroll International Social Security Employer & employee tax compliance Forensic investigations Business plans Financial modelling Valuations Exit planning 18

19 Global Experience in the Mining Sector Rambler Metals & Mining Anglesey Mining Oxus Gold Sovereign Mines of Africa CIC Mining Andiamo Exploration Condor Gold Stellar Diamonds Solomon Gold African Copper Serabi Gold Copperbelt Minerals Kalahari Minerals Universal Coal Tantalus Rare Earths Firestone Diamonds Vatukoula Gold Mines 19

20 Our China Desk Wide experience in advising clients in China and Asia Pacific region ( the Region ) Strong understanding of financial and commercial issues which often arisen in the Region Involved in many UK capital markets transactions for businesses operating in the Region Strong language skills (Mandarin and Cantonese speakers within the team) Provide support and advice to international companies trading in and with Chinese and Asia Pacific businesses Assist local companies operating in the Region who are seeking finance on the international markets or who are considering overseas acquisitions, investments or joint ventures. 20

21 Our China Desk - Services Outbound activities include: Advising UK and international companies making acquisitions or entering into trading relationships, joint ventures or strategic alliances in China or Asia Pacific. Provide support and advice to financial institutions making private equity investments or providing debt finance to businesses operating in the Region. Providing technical, tax, accounting and financial advice on the implications of cross-border trading. Inbound activities include: Assisting companies operating in China or Asia Pacific seeking investments, acquisitions or trading alliances outside the Region, particularly in the UK and Europe. Assisting companies operating in the Region to raise money on the London capital markets. 21

22 Natural Resources Team Stephen Bullock Partner, Head of Natural Resources Tel: + 44 (0) Mobile: +44 (0) stephen.bullock@crowecw.co.uk Paul Blythe Director, Corporate Finance Tel: +44 (0) Mobile: +44 (0) paul.blythe@crowecw.co.uk Laurence Field Partner, Tax Tel: + 44 (0) Mobile: +44 (0) laurence.field@crowecw.co.uk Robin Stevens Partner, Corporate Finance Tel: +44 (0) Mobile: +44 (0) robin.stevens@crowecw.co.uk Leo Malkin Partner, Audit Tel: + 44 (0) Mobile: +44 (0) leo.malkin@crowecw.co.uk Matthew Stallabrass Partner, Audit Tel: + 44 (0) Mobile: +44 (0) matthew.stallabrass@crowecw.co.uk Lee Hamilton - Director, International Mobility Tel: +44 (0) Mobile: +44 (0) lee.hamilton@crowecw.co.uk 22

23 Our Team Members Capital Markets Track Record Includes

24 Recent Transactions "For our admission to the London Stock Exchange, we were keen to appoint a reporting accountant that was efficient and proactive. The team at Crowe Clark Whitehill met all of our expectations and we would certainly recommend them to other companies seeking admission to London's capital markets." John Roddison Non-Executive Director Xplorer Plc 24

25 Principal Contacts Capital Markets (UK & Asia Pacific) London Stephen Bullock Direct line: +44 (0) Robin Stevens Direct line: +44 (0) Peter Varley Direct line: +44 (0) Paul Blythe Direct line: +44 (0) Erin Yin Direct line: +44 (0) Chulanga Jayawardana Direct line: +44 (0) Mitesh Patelia Direct line: +44 (0) Leonor Lee Direct line: +44 (0) Bangkok Sathien Vongnan Auckland Martin Richardson Beijing Yang Chew Ooi Hong Kong Delores Teh Singapore Ta Kuang Hui Kuala Lumpur Kien Hoe Onn Ho Chi Minh Vu Lam Jakarta Munir Ali Seoul Kwang Ro Lee Sydney Andrew Fressl Manila Ramon Garcia Phnom Penh Poon Yew Hoe Yangon Htu Htu Aung 25

26 London Office Contact Details Crowe Clark Whitehill LLP Chartered Accountants St Bride s House 10 Salisbury Square London EC4Y 8EH UK Tel: +44 (0) Fax: +44 (0) Authorised and regulated by the Financial Conduct Authority 26