MCC Chief Defends Overseas Resource Strategy

(Beijing) - Share performance for Metallurgical Corp. of China (MCC) has been less than encouraging in the year since the company completed a dual listing in Shanghai and Hong Kong in September 2009.

H-share prices have fallen to less than HK$ 3.50 and A-share levels slipped below 4 yuan in recent weeks, down from the respective debut IPO prices in Hong Kong and Shanghai.

Investors are well aware that MCC's operating revenues grew a respectable 38 percent year-on-year, but they're concerned because the company's operating margin fell.

Seeking an explanation for this mixed record, Caixin interviewed Shen Heting, who serves as company president as well as party secretary and vice chairman of MCC's parent China Metallurgical Group Corp. He painted a confident picture of a company that's pursuing long-range mining projects around the world with huge profit potential.

"There is no pressure because I know the situation in the company," Shen said. "And I know we can fulfill our promise to shareholders as outlined in our prospectus."

The construction, real estate and mining group has been working especially hard to position itself overseas since the 1990s by developing projects for mining copper, iron, lead, zinc, nickel and cobalt – resources Shen favors. To date, seven overseas projects have been established, mainly through direct capital infusions.

But so far, no bright profit spots have appeared on the pages of the group's financial reports dedicated to the minerals business.

For this reason, Shen said he thinks the Chinese government should provide additional financial support. MCC is acquiring resources for the country overseas, he said, and should be given a corresponding level of policy support, with cash at the core.

Central government enterprises that secure mines overseas are in reality securing resources for China, Shen said. MCC has received some government capital, he said, the amount has been "insignificant" compared to the MCC's investments.

Each mine requires huge financial inputs, and so far the company has poured in some US$ 10 billion – an amount Shen said equals the company's current net assets. Its Papua New Guinea project, for example, cost US$ 1.4 billion, while a mine being developed in Afghanistan is priced at US$ 4.4 billion.

"This business is not only something we want to pursue but something we need to do for the country," Shen said. "But our capital capacity is limited. Clearly, it is beyond our means."

Diversification

The H-share and A-share listed arm manages almost 93 percent of the group's assets, including four of five of the group's main business sectors: contract engineering, resource development, equipment manufacturing and real estate development.

Under Shen's plan for the next few years, 30 percent of MCC's profits will come from resource development projects and 20 percent from real estate development by 2015.

"Mineral resources should be an area that will be MCC's new economic growth point, and where MCC will vigorously expand going forward," Shen said. "Regardless of whether we are looking at our country's demand for resources or MCC Group's competitive advantages, MCC Group must become a Chinese large-scale multinational that has ‘stepped outside' in the resource business."

The group kick-started a transition to resource development from construction after launching the Saindak copper and gold mine in Pakistan under a leasing scheme in 2002. That was followed by investments and developments at a lead and zinc mining project in Duda, Pakistan, as well as nickel, cobalt, copper and iron ore mines in Papua New Guinea, Afghanistan, Australia and Argentina.

Yet the company's 2010 mid-year report showed resource development accounted for a mere 4.7 percent of operating revenues. Contract engineering is still the dominant business area, bringing 78.8 percent of revenues, while real estate development accounts for 8.7 percent.

It takes about seven years for an overseas mining project to reach production level, Shen said, and most of MCC's current projects are still under development. The first, real contributions to profits from these projects are expected after 2012.

That's the year MCC expects to start extracting copper concentrates from the Aynak project in Afghanistan, Shen said. Site preparation at the mine, which has proven reserves of 12 million tons, broke ground in July 2009 but later had to be delayed due to political instability in that war-torn country.

Shen said site work at Aynak is scheduled for re-launch in the second half of this year, and should go into full swing by next March. The mine is expected to produce copper starting in 2012 with an initial production scale of about 200,000 tons a year.

Global Ambitions

Political issues in Afghanistan were not the only hurdles MCC had to overcome in recent years. Tribal problems and the illegal arrests of Chinese technicians hampered the early phase of the Ramu nickel laterite-cobalt mine in Papua New Guinea, which started in 2005. The region is also susceptible to earthquakes, typhoons and other natural disasters.

The production start-up date for Ramu has been repeatedly postponed. It was originally at the end of 2009, delayed to June 2010, and postponed again to the end of this year.

But after production begins, Shen said, the Papau New Guinea mine is expected to produce 30,000 tons of nickel and 5,000 tons of cobalt annually.

In addition, the group is a 20 percent stakeholder in Sino Iron, an iron ore magnetite project in Western Australia, and functions as the project's main contractor responsible for design, construction, installation, testing and inspection of infrastructure.

Sino Iron was originally scheduled to begin production in the first half 2009. The date was pushed back to this year, but it appears that will be impossible, forcing another postponement until next February or March.

"The main problem is funding because operating costs keep going up," Shen explained. "One component is labor cost, since Chinese workers are not allowed in Australia and local labor costs are very high.

Critics in the market have faulted MCC for working on projects involving several types of minerals and high risk levels, as well as long development and construction timeframes. But Shen says all of these issues are unavoidable for Chinese enterprises that acquire resources overseas.

In addition, MCC has come under fire for an expansionist strategy. "The feeling is that they will acquire any mine they come across without a clear understanding of what exactly they want to develop," said Lan Fang, an analyst with Southwest Securities.

Shen is quick to defend his company and its global acquisitions.

"High quality resources have already been taken by others, so at present, we can only go wherever there are still good resources," he said. "Which regions we invest in is not up to us to choose.

"As for risks, we can only avoid them to the best of our abilities," Shen said. "As long as it is a good resource, we will go for it."