China’s Global Investment in Coal

China’sGlobal Investment in Coal

China’sGlobal Investment in Coal

Chinais one of the companies that are investing heavily in foreign assets.China, unlike most of the developed economies, invests in foreignassets with the objective of sustaining the increase in demand forthese assets in the domestic market. Although China gets most of itsenergy from the nuclear power plants, there is still a high demandfor coal in its energy sector. This paper will address China’sinvestment in the coal sector in South Africa, Zimbabwe, Mozambique,Indonesia, and Mongolia.

Hostcountry: South Africa

TheChinese coal mining company, Beijing Hauhoa Energy, entered into theSouth African coal market by purchasing a stake of 23.6 % in CoAL.This transaction was worth $ 100 million, which was intended to helpCoAL venture into its unexploited coal deposits in Vele Colliery, andMakhado (Maoto, 2013). There was a take-over premium recorded withregard to this transaction. BHP did not intend to assume control ofCoAL operations since the 23.6 % stake was far less than thecontrolling shareholding. However, the main objective of BHE was toget a portion of coal that is mined by CoAL for its domestic usage inenergy production in the domestic market, in addition to financialgains resulting from the new venture. CoAL assets are located inLimpopo, South Africa. CoAL has several coal mines whose remaininglife was not disclosed at the time the transaction was made. Therights of the agreement can be terminated in case BHE sells itsshares to another investor or exhaustion of coal deposits. BHEselected to invest in South Africa because it could easily convinceCoAL, which was undergoing a financial crisis to surrender some ofits shares at a reasonable price. This gave BHE an easy access tocheap coal for its domestic usage. The main driver of BHE’sinvestment in China was an increase in demand for coal in itsdomestic energy production plants (Maoto, 2013).

Figure1: Location of coal-fields in Limpopo

Source:Exxaro (2014).

Hostcountry: Zimbabwe

TheChina Power Investment Corporation is a Chinese company that investedin Zimbabwe’s coal market by buying 100 % of Rio Tinto Plc. Thetransaction is estimated to cost $ 2.2 billion, but there is notake-over premium recorded (Latham, 2014). The 100 % stake impliesthat CPIC attained a full control of Rio Tinto Plc’s operations.The intention was to acquire coal that will then be used in theproduction of energy within Zimbabwe. This means that CPIC’sobjective was to increase its financial gains by investing inZimbabwe’s coal and the energy sector. Therefore, CPIC did notintend to supply its domestic market with coals, unlike of theChinese coal firm that buy foreign assets to address the demand indomestic market Rio Tinto Plc assets are located in Hwange, Zimbabwe.However, the remaining life of the coal mines was not disclosed. Therights of the agreement could be terminated by the unstable politicalenvironment in Zimbabwe or threats of the terror attack in coalmines, as terrorist aim at getting funds to finance their operations(Delor, 2014). CPIC was motivated to invest in Zimbabwe by a highdemand for energy in Zimbabwe. The key driver of this investment wasan investment opportunity in Zimbabwe’s energy sector, where thecompany approximately 1,200 megawatts every year, which is still lessthan half of the required 2,200 megawatts to sustain the nationaleconomy (Latham, 2014).

Hostcountry: Indonesia

TheChina Investment Corporation is a Chinese firm that invested in thecoal sector in Indonesia by buying 19 % of Kaltim Prima Coal. KaltimPrima Coal is a subsidiary of the largest coal mining company inIndonesia known as Bumi Resources (Indonesia Investment, 2015). Thistransaction was worth $ 950 million, but there was not a take-overpremium recorded. The 19 % stake was far less than the controllingshareholding, which implies that CIC did not acquire powers tocontrol operations of Kaltim Prima Coal. CIC is solely an investmentcompany that operates in the investment service industry. This meansthe CIC ventured in Kaltim Prima with the objective of increasing itsincome generating capacity. Kaltim Prima’s assets are located inJakarta, Indonesia. CIC had no intention of securing coal to addressthe increase in coal demand in China. The remaining life of resourceswas not disclosed. The recent risks of the terror attack in Jakartaand CIC’s decision to sell its 19 % stake are potential causes ofthe termination of the terms of the agreement (MEC Holdings, 2015).CIC chose to invest in Kaltim Prima because the target company wasfacing financial difficulties that made it a viable investmentopportunity for the Chinese firm. Therefore, the main driving forcethe CIC’s decision to invest in Kaltim Prima was the desire to takeadvantage of its situation to increase CIC’s financial gains.Kaltim Prima sold the stake to secure its financial situation.

Hostcountry: Mongolia

Chalcois aluminum Chinese Company that diversified its investment by buying60 % of the stake in SouthGobi Resource in Mongolia. This transactioncost Chalco $ 927 million, but the take-over premium paid for thistransaction was not disclosed (Space Media Network, 2015). With a 60% stake, Chalco gained the power to control the operations ofSouthGobi. It was also reported that Chalco intended to increase thestake to a 100 % stake within two years, which will give it fullcontrol over SouthGobi, including its operations and finances (SpaceMedia Network, 2015). The controlling share means that Chalco couldget access to coal as well as the financial gain from its investmentin SouthGobi. SouthGobi’s assets are located in Khan-Uul Districtin Mongolia. The remaining life of the coal mines owned by SouthGobiwas not disclosed. The termination of the rights of the agreementcould arise from two major factors, which include a decision byChalco to sell its stake or the exhaustion of coal mines. SinceChalco is determined to acquire all (100 %) it is unlikely that theterms of the agreement will be terminated in the near future. Chalcochose to invest in Mongolia because of the country`s strategiclocation, which could allow Chalco to import the coal into China. Thedesire to supplement the coal supplies in China was the major drivingforce for this investment. Space Media Network (2015) reported thatChalco sought raw materials to boost its economy, which was the majorreason for this venture.

Hostcountry: Mozambique

TheChinese companies ventured into Mozambique’s coal market when WuhanIron and Steel purchased an 8 % stake in Riversdale. The deal wasworth $ 200 million, and no take-over premium was paid for thetransaction. The 8 % stake was quite limited to warrant Wuhan anopportunity to control operations of Riversdale (Lapper, 2010).However, Wuhan gained a preferred position for a portion of coalmined by Riversdale and increased its financial gaining capacity.Riversdale assets are located in Tete Province, Mozambique. Theremaining life of assets owned by Riversdale was not disclosed.However, it was estimated that coal mines have about 13 billiontones, which means that they may not get exhausted in the nearfuture. The termination of rights can occur in case Wuhan sells its 8% stake to another investor or cases of political instability inMozambique. Mozambique is strategically located, with harbors alongthe Indian Ocean shore. This was a major reason Wuhan choseMozambique as the country of interest and worth investing in. Themajor driving force Wuhan’s investment in Mozambique was the needto satisfy the local demand for coal (Lapper, 2010). Currently, Chinaneeds a lot of energy to sustaining its rapidly growing economy andcoal will play a part in supplementing other sources of energy,including the nuclear energy.

Conclusion

Chinesecompanies have invested heavily in the coal asset overseas, wheremost of them intend to expand the domestic supply of coal to sustainenergy demand. However, a few of the companies are interested inincreasing their revenue by buying stakes in coal assets. Thisimplies that China’s investment in overseas coal assets has beenmotivated by different factors, apart from the need to supply powerplants in the local market. Moreover, this paper shows that most ofthe Chinese companies, apart from CPIC and Chalco, acquired less thanthe controlling shareholding. In addition, most of China’s investedin coal are done in the developing economies, which are easy targetsfor cheap coal assets.

Summary

Hostcountry: South Africa

Transactioncost and percentage interest

BHEbought 23.6 % stake in CoAL at $ 100 million.

Take-overpremium

Notake-over premium paid for this transaction.

Operatorship

BHEdid not get the power to control CoAL’s operations.

Productionrights

BHEgot the supply of coal and expanded its financial gaining capacity.

Location

CoALassets are located in Limpopo, South Africa.

Remainingmine life

Theremaining mine life was not disclosed.

Terminationof rights

Rightsof agreement could be terminated in case the mines get exhausted, orRHE sell its shares.

Reasonfor choosing the country

CoALwas facing financial difficulty, which made it an easy target forcheap coal assets.

Investmentdriving force

Theincrease in local demand for coal pushed BHE to invest in CoAl.

Hostcountry: Zimbabwe

Transactioncost and percentage interest

CPICbought a 100 % stake in Rio Tinto Plc at $ 2.2 billion.

Take-overpremium

Notake-over premium paid for this transaction.

Operatorship

The100 % stake allowed CPIC to control Rio’s operations.

Productionrights

Thistransaction helped CPIC to expand its financial gaining capacity.

Location

Rio’sassets are located in Hwange, Zimbabwe.

Remainingmine life

Theremaining mine life was not disclosed.

Terminationof rights

Rightsof agreement could be terminated by an increase in threats of theterror attack and political instability in Zimbabwe.

Reasonfor choosing the country

CPIPwas attracted to invest in Zimbabwe by high demand for energy in thecountry.

Investmentdriving force

Thedriving force for this transaction was the need to increase therevenue generating capacity.

Hostcountry: Indonesia

Transactioncost and percentage interest

CICbought a 19 % stake in Kaltim Prima Coal at $ 950 million.

Take-overpremium

Notake-over premium paid for this transaction.

Operatorship

The19 % stake could not allow CIC control operations of Kaltim Prima.

Productionrights

CICexpanded its financial gaining capacity from this transaction.

Location

KaltimPrima’s are located in Jakarta, Indonesia.

Remainingmine life

Theremaining mine life was not disclosed.

Terminationof rights

Riskof terrorist attacks in Jakarta could result in the termination ofthe rights of the agreement.

Reasonfor choosing the country

Indonesiawas an opportunity to get coal assets at a low cost.

Investmentdriving force

Theneed to increase financial gaining capacity was the major drivingforce for this investment.

Hostcountry: Mongolia

Transactioncost and percentage interest

Chalcobought 60 % of the stake in SouthGobi at $ 927 million.

Take-overpremium

Notake-over premium was recorded for this transaction.

Operatorship

The60 % allowed Chalco to control operations of in SouthGobi.

Productionrights

Chalcogot the supply of coal and increased its revenue generating capacity.

Location

SouthGobiassets are located in Khan-Uul District in Mongolia.

Remainingmine life

Theremaining mine life was not disclosed.

Terminationof rights

Adecision by Chalco to sell its stake or the exhaustion of coal minesare potential causes of termination of the rights of the agreement.

Reasonfor choosing the country

Easeof access to Mongolia was an opportunity for Chalco to get cheap coalassets.

Investmentdriving force

Theneed to increase financial gaining capacity and the supply of coal inthe Chinese market were the major driving forces for this investment.

Hostcountry: Mozambique

Transactioncost and percentage interest

WuhanIron bought a stake of 8 % in Riversdale at $ 200 million.

Take-overpremium

Notake-over premium was recorded for this transaction.

Operatorship

Wuhandid not get the right to control Riversdale operations.

Productionrights

Wuhanaccessed the supply of coal and increased its financial gains.

Location

Riversdaleassets are located in Tete Province, Mozambique.

Remainingmine life

Theremaining mine life was not disclosed.

Terminationof rights

Politicalinstability and a decision to sell shares are potential causes oftermination of rights of the agreement.

Reasonfor choosing the country

Strategiclocation of Mozambique

Investmentdriving force

Theneed to increase China’s supply of coal

References

Delor,L. (2014, July 16). $800 million gold smuggling every month.Rosebank, GP: South African Resource Watch.

Exxaro,T. (2014). Mobilesurveying for open pit operations.Muldersdrift: EE Publishers Ltd.

IndonesiaInvestment (2015). Bumi resource debt settlement. IndonesiaInvestment.Retrieved February 4, 2015, fromhttp://www.indonesia-investments.com/news/todays-headlines/bumi-resources-debt-settlement-cic-takes-19-stake-in-kaltim-prima-coal/item2174

Lapper,R. (2010). China invests $ 1 bn in Mozambique coal.Johannesburg: Financial Times Ltd.

Latham,B. (2014). China power may buy Rio Coal Mine, build power plant inZimbabwe. Bloomberg.Retrieved February 4, 2015, fromhttp://www.bloomberg.com/news/articles/2015-02-03/meet-the-80-year-old-whiz-kid-reinventing-the-corporate-bond

Maoto,M. (2013). CoAL moving forward as Chinese company buys 23 % stake.TimesMedia Ltd.Retrieved February 4, 2015, fromhttp://www.bdlive.co.za/business/mining/2013/01/28/coal-moving-forward-as-chinese-company-buys-23-stake

MECHoldings (2015). MECpushes ahead with $ 1 billion infrastructure investment plan.Jakarta Selatan: MEC Holdings.

SpaceMedia Network (2015). China’s Chalco to buy stake in Mongolianfirm. SpaceMedia Network.Retrieved February 4, 2015, fromhttp://www.terradaily.com/reports/Chinas_Chalco_to_buy_stake_in_Mongolian_firm_999.html

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