Overseas Resources M&A Needs to Look out for the Effects of Non-economic Factors

23 April 2012

The Mineral Resources Authority of Mongolia made an announcement on 17th April demanding suspension of the exploration and exploitation activities with respect to several licenses held by the wholly-funded subsidiary company of SouthGobi Resources Ltd. (including the license for Ovoot Tolgoi coal mine held by SouthGobi Resources). Aluminum Corporation of China (CHINALCO) is currently evaluating the effects of the said issue on the plan to acquire SouthGobi Resources.

The traditional convention of Chinese enterprises for prospecting abroad is usually to directly negotiate with the enterprise of the country where the mineral resources are located, buy the minerals and then explore, exploit and process the minerals. In recent years, there has been a gradual breakthrough. Some enterprises develop overseas resources by various means and approaches such as acquisition of outstanding shares or cooperation with international business companies to indirectly own such business company’s share of mineral resources in any third country. Merging or acquiring the shares of such enterprises actually means avoiding much of the preparatory work and the risk of gaining nothing or gaining little upon preparatory investment. However, judging from the acquisition of SouthGobi Resources’ shares by CHINALCO, the risks facing Chinese enterprises in overseas M&As come from not only economic factors but also potential non-economic variable factors such as remediation.

In developing the overseas M&A business, the Chinese enterprises should first change their concept, which means they should recognize that overseas M&A does not represent a simple buyer-seller relationship; in particular, the development of mineral resources involves broader aspects and would be affected by various factors. Therefore, Chinese enterprises should make more efforts in preparation for M&As of overseas resources. They must have an emergency plan, enhance their awareness of risk prevention, enhance pre-project research and purchase insurance premiums against political risks from appropriate countries when necessary. Chinese enterprises should also learn to cooperate with other international companies and the companies in the country where the mineral resources are located, rather than fighting alone. Nor should Chinese enterprises ignore the assistance from law firms, accounting firms and investment banks, and it’s necessary for them to retain professional public relation companies to pave the way for the M&As, specially working on the local assemblymen and government officials, in order to prevent the M&As from failing due to non-economic factors.

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