MAC: Mines and Communities

China in domestic cleft stick, while foreign acquisitions boom

Published by MAC on 2008-07-14
Source: Reuters, Interfax

China coal mine clampdown contributes to power crisis

Despite the reversal of a policy to close thousands of small coal mines for
safety reasons, China's local officials and small miners reluctant to comply
because of fatal accident penalties.

Rujun Shen, Reuters

11th July 2008

SHANGHAI - China's drive to reopen thousands of small coal mines is failing, deepening the
country's worst power crisis in years as local officials still fear Beijing's wrath if they suffer high-profile disasters.

Weeks after the central government urged miners to reopen the mines, effectively
reversing a years-old policy of shutting them in order to improve safety in the
world's deadliest coal industry, local officials are proving reluctant. And
Beijing's freeze on coal prices has lowered the incentive for miners.

The failure to boost domestic coal supplies spells trouble for coal-fired
electricity generators who produce four-fifths of China's power, and could add
to a this summer's emerging power crisis, which has already forced aluminium
smelters to cut output by up to a tenth and could stoke demand for oil.

"Local government officials are more concerned about personal interest. They are
afraid of the punishment a mine accident could bring to them," said Li Chaolin,
a coal analyst at an industry body based in Beijing.

They are right to be concerned. Six government officials in the Luliang region
of Shanxi were sacked after a blast at a small mine, approved to re-open just a
month earlier, killed 34 in June, the state-run Xinhua news agency reported.

China has been pushing forward a safety campaign for three years, shutting down
the kind of small, inefficient, and often dangerous mines that provided 38
percent of its coal last year.

Around nine-tenths of China's coal mines are classified as small, but they are
eight times more deadly per tonne of coal produced than the larger mines.

From 1995 to early 2008, the number of coal mines in China had fallen around 80
percent to about 16,000. Over the same period the death toll is down 40 percent
to 3,786 in 2007, according to the State Administration of Coal Mine Safety.

Beijing's goal is to reduce the number of small mines to under 10,000 by 2010,
and to eliminate them by 2015.

But in late May, when coal stocks in the country's key power plants had fallen
to critical levels and summer power shortages loomed, China's premier Wen Jiabao
called for an increase in coal output, while the country's cabinet asked local
governments to speed up approvals for restarting small coal mines.

Some have returned to production in Shanxi, China's top coal producing province,
but many are still closed or performing maintenance, traders and analysts said.

And in late June, the Shanxi provincial government ordered local governments to
shut down illegal coal mines, highlighting the conflicting signals that have
kept officials cautious.

"How can local officials re-open small mines? They want to keep their jobs,"
said a trader based in Shanxi, who declined to be named.


Beijing last month froze the price miners are paid for thermal coal until the
end of the year as it seeks to cap power prices, knocking shares of listed coal
firms such as China Coal Energy Co and China Shenhua Energy
Co lower.

But this has had the perverse effect of discouraging mine production and making
coal exports more attractive, while not doing anything to cut losses at power
generators as the order does not cover prices further down the distribution

In two years China's power generators have received just a 4.7 percent increase
in the state-set prices they can charge, not enough to offset the soaring price
of coal, which until June's freeze had been freed to float with the market.

For a graphic of Chinese producer prices for coal and power since the start of
2007, click on:

Asian benchmark thermal coal prices have trebled in just a year to record highs,
while domestic supplies remain tight, so local prices should keep rising.

"Miners understand if they don't dig out all the coal now, they can sell later
for a better price. Natural resources will only get more precious," said Lin
Boqiang, director of the China Center for Energy Economics Research at Xiamen


The impact of the coal shortage is already being felt.

There have been record power shortfalls in Shanxi Province, where the government
had to ration power supplies, hurting energy-intensive plants such as aluminium

China's top aluminium 20 smelters, including Aluminium Corp of China Ltd
(Chalco), will cut production by up to 10 percent to reduce
power consumption.

Other industrial provinces, such as Shandong in the north and Guangdong in the
south, have forecast deep power deficits.

Henan, another big aluminium producing province and one of the nation's most
populous, has started to restrict power to industrial users in eight regions and
cities, while Shaanxi province on Thursday said it had begun to ration power
supplies as power plants ran short of coal.

Some of the power shortfall can be met by diesel generators, and in fact during
the last major power crisis in 2004 China's diesel demand surged by 15 percent,
helping oil prices' first ascent above $50 a barrel.

The ultimate solution though would be to allow markets to set power tariffs, but
Beijing would be reluctant to make such a move when inflation is already near a
12-year high.

"If the power tariff is opened up, all problems will be solved, but its possible
impact on the economy is a question," said Lin of Xiamen University. ($1=6.860
Yuan) (Editing by Michael Urquhart)

China puts new environmental requirements on fund-seeking companies

Chinese companies in 14 targeted industries will need to meet new environmental protection requirements before they apply to list or raise funds through domestic stock markets under a new policy announced by the Ministry of Environmental Protection on July 7.

The policy covers the steel, thermal power, cement, aluminum, coal, metallurgy, building material, mining, chemical, petrochemical, light industry, textile, leather making and pharmaceutical industries. Companies operating within these industries will need to pass an environmental protection assessment before the can apply to execute an initial public offering or raise funds through other stock market activities, the ministry said.

"The policy is intended to expedite the restructuring of energy intensive and highly polluting industries, guiding those industries to upgrade technologies in order to improve pollution control," analyst Mao Zuhong, with United Securities, told Interfax.

In addition, the ministry said companies in the listed industries are not allowed to invest proceeds from fund raising activities in projects of the types being targeted by the government for elimination, such as out-dated, inefficient or highly polluting metal smelting or power generation facilities.

Mao said the new policy will also help curb capacity expansion in such energy intensive industries.

Many Chinese companies are currently under pressure from a fund shortage, brought about by tight central government monetary policies.

source: Interfax China Metals and Mining, 11 July 2008

Sinosteel wins control over Midwest

Sinosteel Corp., one of China's largest iron ore traders, increased its shareholdings in Midwest Corp. Ltd. from 47.14 percent to 50.97 percent on July 10, gaining control over the Western Australian iron ore miner, the Australian Stock Exchange announced July 11. The 50.97 percent stake in Midwest held by Sinosteel means that more than half of the Australian miner's shareholders accepted the AUD 6.38 ($6.13) per share cash offer.

Murchison Metals Ltd., Sinosteel's rival bidder in the Midwest takeover, withdrew its share-swap proposal this week and said it will not sell its 10 percent stake in Midwest to Sinosteel.

The acquisition is the largest overseas metals takeover by a Chinese company so far.

Upon Sinosteel's request, Midwest appointed three new board directors on July 11, including Cheng Sijun, director of Sinosteel Ocean Capital Pty Ltd., Sinosteel's subsidiary in Australia, Wu Hongbin, vice general manager of Sinosteel Mining Co. Ltd., a subsidiary of Sinosteel specializing in the development of mineral resources and Ian McCubbin, Australian commercial and resources lawyer and partner of Deacons, a major Australian law firm.

China's growing demand for iron ore, the oligopoly iron ore market, and the proposed Rio Tinto takeover by its Australian counterpart BHP Billiton, have prompted Chinese companies to hasten overseas iron ore resource acquisitions.

However, the Australian government has become more concerned over the moves of Chinese companies, and said it would more carefully scrutinize foreign investment cases in Australia.

Shoudu Iron and Steel Group's agreement to buy up to a 19.9 percent stake in Australian iron ore miner Prosperity Resources Ltd. fell through as a result of not obtaining the necessary Foreign Investment Review Board (FIRB) approval by June 30, 2008.

Interfax China Metals and Mining, 11/7/08

CMEC to develop Belinga iron ore deposit in Gabon

China National Machinery and Equipment Import and Export Corp. (CMEC) recently inked an agreement in the Republic of Gabon to develop the country's Belinga iron ore deposit, according to a CMEC announcement released on July 7.

Under the agreement, a Chinese consortium lead by CMEC, with financial support from the Export-Import Bank of China, will establish a joint venture with Gabonese partners to construct and operate a 30 million-ton per annum iron ore mining facility, as well related infrastructure.

Infrastructure will consist of two railway lines stretching approximately 500 kilometers in total, a deep-water port and a hydropower dam, which along with the mining facility, will require total investment of approximately EUR 450 million ($706.63 million).

The mining facility is expected to commence production by 2010, and CMEC has pledged to offtake the entire iron ore output from the joint venture, state-run Shanghai Securities News reported July 8.

CMEC defeated competitor Vale, the Brazilian iron ore miner, in a June 2006 auction for the mining rights to the Belinga iron ore deposit, which boasts an estimated 1 billion tons of iron ore reserves at a grade of 64 percent.

CMEC, a subsidiary of the state-owned China National Machinery Industry Corporation (Sinomach), specializes in overseas engineering contracting as well as in the import and export of machinery.

Sinomach recently revealed its intention to construct a 125,000-ton aluminum smelter in the southern Caribbean Republic of Trinidad and Tobago, to utilize the country's abundant natural gas resources, Interfax reported previously.

CMEC officials decline to comment on the project when contacted by Interfax.

Interfax China Mining and Metals, 11 July 2008

Chinese company enters MOU for nickel plant in the Philippines

Jiangxi Rare Earth and Rare Metals Tungsten Group Co. Ltd. has entered into a memorandum of understanding (MOU) with Ipilan Nickel Corp. to construct a nickel and cobalt plant at a laterite deposit on the Philippine island of Palawan, Ipilan-shareholder Toledo Mining Corp. Plc announced July 9.

Jiangxi Rare Earth will fund the construction of a joint venture leaching plant and associated infrastructure, in exchange for either an equity interest in Ipilan or a guaranteed long-term laterite ore supply agreement, according to Toledo Mining, a London-listed company with a 52 percent stake in Ipilan.

Products from the joint venture leaching plant, which is to have an annual production capacity of 40,000 tons of mixed nickel and cobalt hydroxide, will be sold to Jiangxi Rare Earth under a long-term off-take arrangement.

Construction of the plant is expected to commence in late 2010 or early 2011, following the completion of a feasibility study, test work results and the establishment of the plant parameters after a trial processing plant is first constructed in China.

Jiangxi Rare Earth will hold a 51 percent or 65 percent stake in the leaching plant joint venture, while Ipilan will hold the remaining 49 percent or 35 percent. The final stake distribution is to be settled after further negotiations.

In addition, Jiangxi Rare Earth will construct a 40,000-ton refinery in China that will feed on products from the Philippine leaching plant. Ipilan will have an option to acquire an equity interest of up to 25 percent in the refinery.

Jiangxi Rare Earth, a provincial state-owned company under the management of the State-owned Assets Supervision & Administration Commission (SASAC) of Jiangxi Province, is one of the largest tungsten and rare metals mining and processing companies in the world.

Interfax China Metals and Mining 11 July 2008

China's MCC will take over Cape Lambert iron project in Australia

China Metallurgical Group Corp. (MCC) has won National Development and Reform Commission's approval for its purchase of Cape Lambert's iron ore project for AUD 400 million ($384.88 million) in the Pilbara region of Western Australia, the Australian-listed company Cape Lambert announced on July 10. (Australian Stock Exchange)

Interfax China Metals and Mining, 11/7/08

Chinalco and MCC edge into Fortune Global 500 list

The Aluminum Corporation of China (Chinalco), China's largest aluminum and alumina producer, and China Metallurgical Construction (Group) Corp. (MCC), China's leading engineering contractor, entered Fortune magazine's latest list of the world's top 500 companies, based on sales revenue generated in 2007.

Chinalco ranked 476th in the list with sales revenue of RMB 120.24 billion ($17.58 billion) in 2007, up 36 percent on an annual basis. Its net profit rose 14 percent year-on-year to reach RMB 7.46 billion ($1.09 billion) for the year.

Chinalco greatly enhanced its global presence through a joint acquisition with Alcoa of an approximately 12 percent stake in Australian miner Rio Tinto's London-listed subsidiary for a consideration of RMB 96.1 billion ($14.05 billion) in January 2008. Chinalco's dual Shanghai and Hong Kong-listed subsidiary, the Aluminum Corporation of China Co. Ltd. (Chalco), produced 9.57 million tons of alumina and 2.8 million tons of primary aluminum in 2007.

MCC closely followed Chinalco on the Fortune Global 500 list. The company ranked 480th with sales revenue of RMB 119.83 billion ($17.52 billion) and net profit of RMB 2.63 billion ($384 million) for 2007.

MCC, which is also expanding its mineral resource operations, currently holds an agreement with China's leading copper smelter Jiangxi Copper Industry Co. Ltd. to buy a controlling 75 percent stake in their joint Aynak Copper Mine development project in Afghanistan.

Other companies in China's metals industry were listed, with Baosteel Group jumping from 307th place last year to 259th place this year, and China Minmetals Corp. taking 412th place with sales revenue of RMB 140.35 billion ($20.52 billion).

Baosteel Group, which has stayed on the list for six successive years, is among China's largest steelmakers and acts as the representative for all Chinese steel mills in negotiations with the world's three iron ore giants over annually-contracted benchmark iron ore prices. The company produced 28.58 million tons of steel and generated sales revenue of RMB 204.78 billion ($29.94 billion) in 2007.

Minmetals specializes in the development and trade of mineral resources, and currently holds a 25 percent stake in Codelco's Gaby Copper Mine.

All four companies mentioned above are state-owned enterprises under the direct jurisdiction of China's central government.


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