January 23, 2013 / 4:40 AM / 5 years ago

INTERVIEW-Minmetals' MMG takes unique route to expand offshore

MELBOURNE, Jan 23 (Reuters) - Six months into the job of running a Chinese-owned, Australian-run global mining company, Andrew Michelmore knew he had won the confidence of his major shareholder, state-owned China Minmetals Corp.

MMG Ltd had shown it could generate cash for its new owner, even in the depths of the global financial crisis, and Minmetals’ president Zhou Zhongshu spoke to Michelmore, a 60-year-old mining veteran, at a meeting in Beijing with another Chinese board member.

“Mr Zhou told me face-to-face he trusted me,” Michelmore said in an interview in his spacious glossy white office adorned with little but an abstract painting and a Russian nesting doll set.

MMG, a $2.3 billion copper, zinc and lead producer with mines in Australia, Laos and the Democratic Republic of Congo, was picked up by Minmetals when it bought most of the assets of base metals miner OZ Minerals’ in 2009.

The purchase was part of a state-mandated plan for key Chinese resources companies such as Chinalco, CNOOC, and Zijin Mining, to expand offshore, but unlike other Chinese companies, Minmetals kept its newly acquired Australian management team.

Listed in Hong Kong, run by Australians out of Melbourne and with a mixed Chinese and Australian board, including three independent directors, MMG has a remit to grow.

Its structure is seen as a likely template for Chinese companies looking to become multinationals, following disastrous results with offshore investments where Chinese managers have taken over.

These include CITIC Pacific’s Sino Iron project, which is over budget and well behind schedule, and Metallurgical Corp of China’s idled Cape Lambert iron ore project.

“(The Chinese) have struggled at least in Australia to adapt to the operating environment. And the more successful ventures are the ones where they use local management. So from that point of view, we think it’s the basic model they’ll be using for a while,” said Mike Harrowell, senior resources analyst at BBY.


Minmetals’ confidence in Michelmore grew during talks that led to the takeover and a successful integration of the OZ Minerals assets into Minmetals, with the Australian business beating operational targets by the end of 2009.

The admiration is mutual. Michelmore said Minmetals is different from many other Chinese firms, as it has had 60 years of trading experience in the West and is run by a cohort of young, internationally educated, English-speaking Chinese executives, led by Zhou, who is also fluent in Spanish.

Minmetals wants MMG to become one of the top three mid-tier diversified miners outside China within three to five years, and has left it to MMG to work out the strategy. Michelmore has said the company would need to make a $1 billion to $7 billion acquisition every year to meet that goal in five years.

MMG’s first acquisition after the OZ assets was Africa-focused Anvil Mining, bought for $1.3 billion last year. That followed a scrapped $6.6 billion bid for copper miner Equinox Minerals in 2011, when MMG was trumped by Barrick Gold .

Dropping that bid was seen by some analysts and investors in Hong Kong as a failure.

But Michelmore said it actually won him praise in China, from the top levels of Minmetals as well as from the government, where he was seen as having made the right decision not to overpay.

“So the concept of ‘loss of face’ by not winning the bidding competition now came to where ‘loss of face’ was seen as overbidding and destroying value....That was a very important step,” he said.

MMG also managed to make a profit of $160 million on the bid as it had bought a 4 percent stake in Equinox before Barrick came and offered a big premium over MMG’s bid, another tactic that was new for a Chinese company.


MMG’s biggest advantage over non-Chinese rivals is not what others perceive as access to cheap capital, but it’s the power of Minmetals’ balance sheet and access to banks that are willing to take a long term view.

“This is unlike most western banks, who will pull the pin if they’re under pressure,” Michelmore said.

“China’s in there for the long term. It still demands a good return, but it’s patient.”

Minmetals delegations coming over to MMG have become accustomed to the western style of holding meetings — with no pecking order at the table.

Culturally they have found it can work to their advantage having “brash Australians” on board who are willing to deal with sensitive issues with employees that Chinese managers would prefer to avoid.

And while he has a strong rapport with his top shareholder, Michelmore does not want to give ammunition to anyone in China who wonders why Minmetals hasn’t employed a Chinese CEO and end up like global miner Rio Tinto’s chief, dumped last week due to soured multibillion dollar deals.

“That’s why I intend not to stuff up,” Michelmore said. (Reporting by Sonali Paul; Editing by Richard Pullin)

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