Mining the Future: Chinese Investment in South American Extractive Industries

1
Mining the Future Chinese Investment in South
American Extractive Industries

• Dr. Cynthia A. Sanborn
• Universidad del Pacífico
• Lima, Peru

2
Context .

• Global demand and competition all MNCs and SOEs
  seeking LA commodities.
• Renewed development concerns. Can we diversify,
  escape resource curse?
• Rethinking role of State, public institutions
• Democracy, diversity of actors issues
• Rights, environment, revenue distribution
• Higher global standards for industry, CSR

3
Questions

• In this context.
• What are the development implications of expanded
  investment by Chinese SOE?
• Do Chinese firms and government -- behave
  differently than others in this region?
• Do governments behave differently with them?
• What can we learn from recent cases?
• What more do we need to know?

4
General Comments

• Chinese interest primarily oil minerals, but
  also relative social stability, local capacity
  (vs. Africa)
• Actively recruited by governments, partners
• Primarily SOE, but also firm diversity
• What do Chinese offer?
• Broad government-government agreements
• Accomodationist position vis governments, local
  elites, changing rules (Gonzalez V.)
• More money on the table, access to finance
• Access to China market
• Increasing Chinese government concern about
  firms behavior, at home and overseas

5
However

• Goverment directives hard to implement afar on
  the ground.
• When host governments not strong
• When firms not national champion, central
  government linked
• Limited experience with community relations,
  multi-stakeholders
• Tend to assume governments will resolve social
  problems
• Limited vocation for dialogue, media
• Lack of transparency. Part culture, part
  distance and language
• Do not participate in EITI, local counterparts
• Delisting acquisitions (Toronto, London)
• Few effective channels for communication
• Limited local staff with main office authority
• Shareholder contacts, activism unlikely

6
Perucase
7
Peru

• Minerals 62 of exports
• 25 tax revenues, 20 FDI
• 6 GDP, 20-50 regions
• 26 Chinese world mineral MA
• 34 MA in Peru from China
• First projects 1992-93
• Second wave 2007
• 8 major firms
• China 2 trade partner
• FTA with China 2009

8
Peru context

• Since early 1990s, governments promote foreign
  investment with favorable tax, legal measures.
• Since 2006, renewed courting of China - FTA
  framework
• Relatively weak State capacity/will to regulate
  firms
• Challenges property rights (private, community),
  water rights, environmental impacts, labor,
  indigenous even Church.
• Increasing socio-environmental conflict.
  Communities vs firms, with State on sidelines.
• Chinese investing in conflictive situations

9
Major mineral investments

• 1992, Shougang buys government-owned property
• 2007-2010, Chinese acquire private juniors
• Zijin Consortium, Rio Blanco copper, 186m
• Chinalco, Toromocho copper, 792m
• Minmetals/Jiangxi, Galeno copper/gold, 432m
• Nanjinzhao, Pampa de Pongo iron, 100m
• China Sci Tech, Mina Justa copper, 240m
• Total announced mining investment in next five
  years 6.8 billion
• Also oil since 1993, CNPC - today 40 of total
  oil production in Peru. Amazon and coast.

10
Case 1 Shougang Corporation

• Fourth largest steel company in China, 90 year
  history
• 1992 buys Hierro Peru (Marcona) for US 188
  million (311 bid)
• First privatization for Peru mining sector
• Largest foreign investment for China in LA
• Labor conflicts 350 Chinese staff, fire locals,
  resist union
• Local government conflict over water, electricity
  
• Environmental impact outdated facilities, fines
  for non-compliance
• Initial investment commitment not honored, govt
  assumes 266 debt
• Three anti-corruption investigations since 2002,
  shelved due to perceived threat to expansion,
  other Chinese investments
• What learning here?

11
Case 2 Zijin Consortium

• Copper project on Northern border with Ecuador,
  UK junior firm
• Inherited troubles non-mining area, fragile
  environment, land rights disputed, strong
  opposition from local communities, violence
• Three Chinese investors (Zijin, Tongling, Xiamen
  CD) - mixed
• 2007 Only bidder, recruited by
  diplomats-turned-directors
• Chinese CEO, little change in community
  relations, conflicts persist
• 2008 President Garcia visits China, meets CEOs,
  promises help
• Project declared National Priority, protesters
  charged as terrorists
• Fined in Peru for safey violations, EIA
• not approved, expanded concessions
• 2009 more violence, project stand-off

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Case 3 Chinalco

• Large new copper project in Junin, Canadian
  junior
• Requires relocation of entire town (5,000)
• 2007 bought by Chinalco, national champion SOE
• Non-Chinese (expat) CEO, former head of
  world-class Antamina copper mine
• Staff 99 non-Chinese, local experience
• Extensive investment in environmental programs,
  cleanup old Acid Water Treatment Plant
• Greater engagement with local community,
  authorities, social investment residents
  approve move.

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Most likely to succeed?
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Conclusions

• Chinese investment a major opportunity for
  commodity producers, but development impacts
  mixed
• National level ability to harvest these
  resources for sustainable development, depends
  more on will and capacity of national
  policymakers - and vigilance of civil societies.
• Chinese more positive force, when local states
  are (Chile, Brazil)
• High potential for conflict when not the case
  (Peru)
• Local level reducing negative impacts still
  relies heavily on voluntary action of firms
• Chinese less experienced with stakeholders,
  unions, media
• Lack of transparency, accountability
• How fast can they learn?
• Latin Americans also need to learn more about
  China, its firmst and government institutions
  urgently.

15
Fin