Unlisted United Company Rusal's recent concession of holding debt of USD 14bn, including an agreement that USD 7.4bn owing to non-Russian banks was in standstill, has raised the spectre of further substantially stressed mining assets going to cash flush Chinese mining companies. Rusal ranks itself as the global No 1 in bauxite mining and also in aluminium smelting.Rusal is far from alone among heavily indebted mining companies; Rio Tinto, Xstrata, Teck, Anglo American, Freeport-McMoRan, and Alcoa, which have a combined market value of USD 83bn, carried aggregated net debt of USD 90bn as of 31 December 2008. Some of the remedial action taken since then includes a rights issue sale of 26.80m shares by Freeport-McMoRan, the world's biggest listed producer of copper and molybdenum, and a substantial gold miner as well, to raise USD 750m, and the sale of 1960.00m new shares by Xstrata to raise the equivalent of about USD 5.7bn.But the most substantial deal - yet to complete - is from Rio Tinto, which held USD 38.17bn in net debt on 31 December 2008. While it has since announced asset sales for cash of USD 2.5bn, Rio Tinto wants to sell a number of equity stakes in some of its prize underlying operations to Chinalco, a smaller rival, for USD 12.3bn. Rio Tinto also wants to sell USD 7.2bn in convertibles to Chinalco.Meanwhile, Australian stock Fortescue, which for some time has donned the mantle of an emerging regional superpower in iron ore, and held about USD 3.13bn in net debt at the end of 2008, has recently sold fresh shares in batches of 225m and 35m to China's Hunan Valin, allowing Fortescue to raise the equivalent of about USD 413m in cash.Then there is China's Minmetals, currently in a bid worth around USD 1.7bn for Australia's debt-stricken Oz Minerals, whose woes have been amplified by the misfortune of being exposed to zinc, where it ranks as No 2 in the world, and lead, and in spite of some relative lift from the pricing for its production of gold, copper and silver.There has also been the relatively remarkable example of European Nickel, with a small market value of USD 35m, which managed to get Jiangxi Rare Earth and Rare Metals Tungsten and China Tianchen Engineering Corporation to provide a guaranteed USD 350m bank facility for development of the ÇaldaÄŸ nickel mine in Turkey.Chinese companies enjoy strong government backing - directly or indirectly - and are backed by the highest country foreign reserves (by far) in the world, at more than USD 2 trillion, and rising. The Chinese government has made no secret of its desire to secure further strategic supplies of raw materials, and in some cases, has sponsored multi billion dollar package investments, as seen in the Democratic Republic of the Congo.Strategically, the current debt debacle among a good number of non-Chinese mining companies allows actual and potential corporate action in the area to appear as reactive, rather than predatory. There are dozens, if not hundreds, of potential opportunities.China already houses a good number of mining companies that appear in the world's top 100 mining companies by market value, starting with Shenhua, which ranks as No 3 overall, followed some way down by the likes of Zijin, a Tier I global gold miner, and then Chinalco, China Coal, Qinghai, Shanxi Xishan, Jinduicheng, Yanzhou Coal, Jiangxi Copper, Shandong, Western Mining, Shanxi Lu'an, Minmetals, Pingdingshan Tianan, Zhongjin, SDIC Xinji, Hebei Jinniu, Hunan Valin, Shanxi Guoyang, Shenzhen Zhongjin, Yunnan Chihong, and Yunnan Tin.
Relatively sound financial and related discipline has reinforced the continued emergence of Chinese entities as a force to be reckoned with. Chinese banks - which refused to fiddle as Wall Street burned - such as China Construction Bank and ICBC currently rank as the world's most valuable, when measured by market value. China's resources sector stretches from mining to hydrocarbons, to the likes of CNOOC and Petrochina, ranking second among oil majors only tor Exxon Mobil, the world's most valuable stock of any kind.Rusal's debt tremors, like those at a number of big Western miners, are the fruit less of bad luck than of indiscipline and the likelihood that corporate cultures also gorged on the rotten caviar that destroyed Wall Street. Just as a number of Western miners may now happily fall into Chinese arms, so some big Russian ones may go as well, not least Norilsk, the world's biggest nickel and palladium miner; Metalloinvest (unlisted), Evraz, and Mechel, three of Russia's biggest names in iron ore and steel, and also Uralkali and Silvinit, two big potash miners, along with Apatit, a phosphate miner. White Rabbits are on their way to the Kremlin, whether the Kremlin wants them or not.SELECTED MINING NET DEBT: MARKET VALUE RATIOS
Note: most debt numbers are as at 31 December 2008
(1) Unlisted; market value is an estimate
Source: market & company data; analysis by Barry Sergeant.