Anvil acquisition helps Minmetals turn the corner in Congo

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Three months after a $1.3-billion takeover, the new owners of Anvil Mining Ltd. have posted an ambitious business plan on the wall of their Congo mining office.

At the top of the list: "savvy acquisitions" – with the goal of becoming one of the world's three biggest mid-tier miners and creating a $20-billion global player. And the former Canadian-owned copper mine in Congo is crucial to the strategy.

Anvil's acquirer, China Minmetals Corp., has learned its Canadian lessons well. Eight years ago, the state-owned company ignited a firestorm of controversy in Canada with its clumsy bid for Noranda Inc., sparking fierce criticism from Canadian politicians and leading to the eventual failure of the bid.

This time its expansion drive is shrewd and carefully planned. Anvil will become the springboard for Minmetals' aggressive growth plan, which is focused primarily on Africa – especially the risky but mineral-rich terrain of Congo.

Senior executives at Minmetals acknowledge the Chinese company was unprepared for its 2004 attempt to acquire Noranda. It was rattled by the political furor and reportedly couldn't even get clear support from Beijing as Noranda's value soared.

After the Noranda fiasco, Minmetals licked its wounds and retreated to Beijing to do its homework. It learned to prepare its bids more diligently and avoid political controversy. Last year it made a hostile $6.3-billion bid for another Toronto-based company, Equinox Minerals Ltd., and failed again when it was outbid by Barrick Gold Corp.

But this year the Chinese company finally emerged with control of a key Canadian asset: Anvil and its Kinsevere copper mine in southern Congo. "We see it as a cornerstone," says Andrew Michelmore, chief executive officer of Minmetals Resources Ltd. (MMR), the main international subsidiary of China Minmetals.

"Our focus for the moment is on Africa," Mr. Michelmore said in an interview. "The Chinese take a long-term view."

His goal is to help MMR to grow fivefold to become a $20-billion company by 2016. With China anxious to secure long-term supplies of the minerals it needs for its relentless economic growth, the executives at his Chinese parent company have access to capital that can only be dreamt of by most Western investors.

And now they have learned the political skills that they lacked in the Noranda bid. After spending $1.4-billion to acquire an Australian mining company in 2009, they retained the Australian management team, including Mr. Michelmore, to spearhead their global expansion.

"I think they learned a lot from Noranda," he said. "They put their toe in the water, and they got burned."

Congo had plenty of experience with Chinese investors in the past, but much of the experience was negative. Chinese entrepreneurs had flooded into southern Congo during the commodity boom, setting up small smelters and processing plants that became notorious violators of environmental and labour laws. Many of the Chinese fled from Congo after the global financial crisis.

Now the Chinese are back, led by Minmetals and another big state-owned company, Jinchuan Group, which recently completed the $1.3-billion purchase of Metorex, a South African company with copper and cobalt mines in Congo and Zambia. A third major Chinese takeover is likely to be announced in the near future, according to officials in Katanga province, the main region in Congo's Copper Belt.

After their headaches with polluting Chinese smelters in the past, Katanga's political leaders were surprised to see Australians as the front men for Minmetals.

"The look on their faces when we walked in and they saw these WASPs. … They said, 'Oh, I thought you were Chinese,' " Mr. Michelmore recalls. "It's what makes us unique."

He recognizes the scandals that were created by Chinese investors in Katanga in the past, and he's determined to avoid them. "The Chinese government is acutely aware of the potential for embarrassment," he said. "There's no way they would want a state-owned enterprise to be involved in that."

Despite their early missteps, it's clear that the Chinese have strong political support in Congo these days. Moise Katumbi, the powerful governor of Katanga, recalls how he shut down dozens of small Chinese-owned processing plants that were violating labour and environmental laws – and he says the new Chinese investors are a lot better.

"They're very aggressive in the market, and they're looking for more resources," Mr. Katumbi said in an interview. "I think it's a good thing for the mining sector. They're paying taxes, creating employment and increasing production. That's what we need."

Chinese investors will soon be buying one of the biggest mines in Katanga, he said, but declined to identify it.

Katanga's mining minister, Barthelemy Mumba Gama, said the Chinese businesses were "ignoring all the rules" when they first arrived in Congo. "They made a lot of mistakes. Now they realize that it's better to consolidate and do things properly."

From the Chinese perspective, Congo is still a risky place to invest. With military clashes persisting in eastern Congo and other regions, MMR would definitely not invest in some parts of the country, Mr. Michelmore said.

Congo's crumbling infrastructure is another problem. MMR has already faced trouble in getting a reliable electricity supply for the former Anvil mine, forcing it to install temporary diesel generators for half of its capacity.

Yet Congo is underdeveloped, and it holds some of the world's richest reserves of minerals – including about 5 per cent of the world's copper and 35 per cent of its cobalt. And the mineral grades are high. "It's better to get in there early," Mr. Michelmore said.

Access to capital may be MMR's biggest advantage. Beijing has already said that it will use its $3.3-trillion in foreign exchange reserves to help finance its acquisitions in international resource companies. While many Western lenders might be cautious about Congo, the country is a natural target for China.

"There are lots of Western companies that would like to invest there, but they can't get the funding," Mr. Michelmore said. "That's the extra leverage we have."

Another advantage for MMR is the Chinese government's pledge of loans to help Congo rebuild. Beijing has promised to spend billions of dollars on roads, railways, power lines and other infrastructure projects in Congo – if Chinese mining companies can benefit.

The former Anvil mine will be key to the Chinese expansion. "It gives us a platform," Mr. Michelmore said. "It enables us to have our people there, including local people. They will know where other opportunities are."