Africa's Riding the Red Dragon

By: Richard Mills | Thu, Jun 2, 2011
Print Email

As a general rule, the most successful man in life is the man who has the best information.

"When I entered the business world, three-fourths of the world was closed - China, Russia, Vietnam, India, most of Africa... In 2010, the entire world is wide open, the developing world is growing twice as fast as the developed world and there's still arguably several billion people out there that will modernize and progress." - Caterpillar's CEO Doug Oberhelman

"The mining industry is printing money: Citigroup expects it to have aggregate net cash of $70 billion by the end of 2012." - Wall Street Journal

The Competition

"Continued growth in consumption resources is being driven by growth in China and the rest of Asia. Chinese companies are increasingly acquiring assets, as are Indian companies, prompting other global miners into a race to secure mineral assets of their own." - George Fang, Standard Bank's Head of Mining and Metals China

The global mining industry is facing stiff new competition in getting deals done. The new competitor's for the world's resources have a mandate to secure long term resource deals for domestic use and have the financing capabilities any major mining company, or for that matter any government, would be envious of.

China was never a major investor in foreign mining deals - that has recently changed with China now a very active and increasingly aggressive investor.

China's state owned enterprises (SOE) and sovereign wealth funds (SWF) were armed with hundreds of billions of US dollars from the country's foreign reserves and sent out to scour the globe for resources - they went on the hunt to fuel China's exploding economy. China wants to diversify out of the massive US dollar component of its Foreign Reserves so the SOE/SWFs have no problem dealing in straight cash and operating in what some might consider high risk areas. The Chinese also have a longer term horizon for their ultimate payoff because they are mostly after off-take supply agreements from early stage development projects.

According to a recent PricewaterhouseCooper (PwC) report on M&A activity in the mining sector in 2010, six percent of the world's mining deals involved Chinese acquirers. Around 62% of China's deals were focused on projects within China and another 16% were in adjoining Asian countries. For the decade ending in 2010, PwC counted a total of 400 Chinese deals worth US$48 billion - at the start of the referenced decade China was a negligible player in M&A.

PwC also said they expect Chinese companies to be more active in M&A in 2011. PwC thinks part of that increased activity will be consolidation of the country's fragmented domestic mining sector, but a large part will also come from outside China where PwC says China controls only one percent of overall production.

Despite a few high publicity rebuffs the Chinese have completed a few deals in North America:

According to Paul Murphy, head of Asia Pacific Mining & Metals at Ernst & Young, Chinese investors have shifted their focus from Australia (In 2009, China became Australia's largest export market, surpassing Japan) and Canada to higher risk destinations which include Brazil (In 2009, China displaced the United States as Brazil's top trade partner), Ecuador and Africa.

Rising from $2 billion in 1999 China's trade with Africa is set to top $110 billion by the end of 2011.

Here are some of the African deals Chinese firms have become involved in:

Thanks to the trillions of foreign exchange reserves it currently holds China offers loans at highly competitive interest rates. For example, the Export-Import Bank of China (Exim Bank) gave the Angolan government three loans at interest rates ranging from LIBOR (London Interbank Offered Rate - the rate banks charge each other on loans) plus 1.25 percent, up to LIBOR plus 1.75 percent, as well Exim Bank offered generous grace periods and long repayment terms. Commercial lenders - such as Standard Chartered Bank - have charged Angola LIBOR plus 2.5 percent or more, with no grace period and a faster repayment schedule.

Reconstruction in war battered Angola was helped by three *oil backed loans and then Chinese companies came in and built roads, railways, hospitals, schools, and water systems. Nigeria took two loans from China to finance electricity generating projects, the Chinese built a hydropower project in the Republic of the Congo that's repaid in oil and built another hydropower project in Ghana that's repaid in cocoa beans.

*This kind of deal making isn't unusual for China - China has plans to construct its high speed rail line through Asia and Eastern Europe in order to connect to the existing infrastructure in the European Union (EU). Additional rail lines are planned into South East Asia as well as Russia - this will likely be the largest infrastructure project in history. Financing and planning for this monumental project is being provided by China - who is already in negotiations with 17 countries to develop the project. In return the partnering nations will provide natural resources to China.

Pan-African bank, Ecobank Transnational Inc. just opened a China desk, its purpose is to ease the flow of Chinese loans for African infrastructure projects. The desk includes two Ecobank employees and two senior staff from the Bank of China. The bank will offer a full range of banking services to Africans and Chinese.

"Africa is a strategic market for China and we are anticipating huge volumes." Henry Ampong, Ecobank's global account manager

Ecobank will roll out the services to its other branches on the African continent once the challenges of the pilot desk are dealt with.

China is building special trade and economic cooperation zones in Africa which provide a promising new approach to sustainable industrialization within the continent. Seven such zones are in the works: two in Nigeria, one each in Egypt, Ethiopia, Mauritius, Zambia and maybe one in Algeria, (Mauritius-JinFei, Nigeria-Ogun, Nigeria-Lekki, Zambia-Chambishi/Lusaka, Egypt-Suez, Ethiopia-Eastern). China has more than one hundred such areas and they were an important part of China's early development

Economic zones allow countries to improve poor infrastructure, inadequate services, and weak institutions by focusing efforts on a limited geographical area. China's venture capital fund for Africa, the $5 billion China-Africa Development Fund, has taken equity shares in three of the seven planned zones. A new $1 billion fund for small and medium enterprises in Africa, will help African entrepreneurs set up businesses in the zones.


In a decade China's economy will be much different than today's. Instead of being mainly an export driven one it will rely more and more on internal consumption as the countries massive urbanization growth fuels a rapidly expanding middle class. To feed this growth in consumption China is taking a leading role in the developing world.

I suggest PwC's six and one are perhaps just the tip of the iceburg regarding Chinese M&A activities and like an iceburg's true size the reality, the true scope of China's deal making is mostly out of sight. Many of the deals China signed would not show up in the PWC report because they take a non-controlling position - China funds undeveloped projects for off-take supply agreements without purchasing equity in the controlling company and often deals on a government to government level regarding loans, infrastructure build out and using the recipient countries resources for payback.

The Chinese are making massive loans, building huge infrastructure projects such as high speed rail, dams and other projects like bridges, roads, schools and hospitals. While SOEs and SWFs are making deals for the countries resources other Chinese companies are building the necessary infrastructure that every country needs to build a future for its citizens. This is the key to China's overseas investments - adding infrastructure capacity makes their massive, most often early stage, resource investments viable and creates a long lasting economic legacy for the host country.

The overall Chinese package is very attractive and there are a lot of resource rich countries taking the Chinese up on their offers.

"While the West supports microfinance for the poor in Africa, China is setting up a $5 billion equity fund to foster investment there. The West advocates trade liberalization to open African markets; China constructs special economic zones to draw Chinese firms to the continent. Westerners support government and democracy; the Chinese build roads and dams." - Isaac Twumasi Quantus

The fact that China is intent on acquiring Africa's (and many other countries) resources for itself should be on everyone's radar screen. Is it on yours?

If not, maybe it should be.


If you're interested in learning more about resource, bio-tech and technology companies please come and visit us at

Free investors forum, free newsletter, no credit card or personal information is asked for.

Richard Mills does not own shares of any companies mentioned in this report.



Richard Mills

Author: Richard Mills

Richard (Rick) Mills

Richard Mills

Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of His articles have been published on over 400 websites, including:, WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, and the Association of Mining Analysts.

Please visit

Moderated investor friendly forums - Ahead of the Herd is powered by Community Intelligence.

Free highly acclaimed newsletter featuring today's investable junior resource companies.

If you are interested in sponsoring Richard's site please contact him for more information,

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Ahead of the Media Group Inc.a division of Ahead of the Herd Holdings Inc. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. Ahead of the does not provide individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. The publisher, editors and consultants of Ahead of the may actively trade in the investments discussed in this website and newsletter. They may have substantial positions in the securities recommended and may increase or decrease such positions without notice. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this website and publication should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. Unauthorized reproduction of this newsletter or its contents by Xerography, facsimile, or any other means is illegal and punishable by law.

Copyright © 2009-2017 Richard Mills

All Images, XHTML Renderings, and Source Code Copyright ©