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Dec 2012 - Hunting Grounds

Prime Hunting Ground

As one of the ~8000 delegates, we attended the China Mining Conference held in Tianjin again this year in early November 2012, and visited the booths of the top four Chinese gold companies that all claim to be China's highest gold producer, and were clustered around the Australian booth - which they classified as ideal (prime hunting ground) to acquire gold mines and prospects.

In a different twist it was interesting to see Chinese gold exploration companies that had pegged ground in Australia, seeking finance from Chinese delegates to invest in their company exploring in Australia.

In fact coloured yellow and amongst the Chinese gold companies, the Australian booth as shown in Figure 1, at a glance could have been mistaken for a gold company.

The four companies are Shandong Gold (which received AGM approval on 30 November, to take a 51% position in Focus Minerals through a placement of $227.5m), Zijin (which has the 89.2% holding in Norton Goldfields), and China Gold (which is apparently reviewing a number of gold mines and prospects in Australia).

The fourth gold company is Zhaojin, shown inset in the Figure and was located along the back of the Zijin and Australian booths. Zhaojin has a 5% holding in Citigold (which it made in 2010 and based its holding on the sizeable resources of 11moz [inferred] with upside potential of 50moz (1500t gold) that Citigold claims to have, and CTO's expected increase in production from ~20kozpa to >300,000ozpa within 5 years, at one of the lowest cash costs in the world of below $400/oz).

Zhaojin also took a ~9% interest in Norseman Gold (NGX) for ~$4m which it made in August 2012, but unfortunately the mine has yet again (for those that remember Croesus) since gone into administration, which occurred in October 2012.

Trying to get hard, individual mine or total production data on the Chinese companies is not easy, and hence a basic question like which Chinese gold company actually is China's highest gold producer is not simple, such that all 4 claim to be the highest gold producer in China, especially the top 3 (excluding Zhaojin).

Zhaojin has about 5 small mines in the Zhaoyuan district of Shandong Province and produces and sells gold and silver bars, taels, ingots and gold jewellery, and hence may excel in gold products.

One of the key issues is that most of the gold producers treat 3rd party cons and produce gold in addition to their own mine production resulting in mine-produced gold and additional (perhaps or some included) refined gold.

Zijin produced 28.6t (Chinese mines quote production in t of gold) of mine-produced gold in 2011 and 57.5t of refined gold which is lower than the 30.6t of mine-produced gold in 2009, but of that 30.6t,  23.7t was classified as bullion and 6.2t was classified as cons (yes we know that is less than 30.6, but those were the supplied numbers). For the March 2012 quarter mine-produced gold was 6.3t and refined 13.1t to total 19.4t for the quarter.

Of the 28.6t possibly collectively 0.5t could be from outside of China with apparently nothing from Shandong province, and most from the (Fujian) Zijinshan mine production of 16.2t (520koz - which sounds very high for China but may be a group of mines in an area), followed by Hunchun Shuguang 2.3t (75koz by-product), Guizhou Shuiyindong 2.1t (68koz) and 8t (258koz) from others. In other words, not all pure gold mines and some are base metal / polymetallic by-products, with the bulk of the gold production being from refined treatment of other mines' concentrates.

China Gold (or China National Gold Group Corporation) in fact had a material amount of general information on display at their booth, such as the top 10 gold producing provinces in 2011 were Shandong (100.4t), Henan (44.5t), Jiangxi (34.1t), Fujian (19.8t), Inner Mongolia (17.8t), Yunnan (17.6t), Hunan (14.9t), Anhui (13.7t), Shaanxi (12.2t) and Gansu (11.8t). China's production in 2011 being 361t and consumption 761.2t of gold.

China Gold is the company that has the majority of the shops in China's domestic airports selling five 9's gold being 99.999% refined gold, having the highest gold refinery technology in China. But as for hard data on its mines...and actual production. It appears to have two producing subsidiaries being the old Jinshan gold mine (of Ivanhoe) that became China International Gold (listed on the TSX) with production of ~150kozpa, and Zhongjin Gold Corporation.

Zhongjin Gold produced 91t of gold in 2011, clearly the highest gold producer in China....in terms of total refined production, however, its own mined gold in 2011 was only 22.5t. The China Gold booth thought they had a target of 30t of gold per year, although some of that may also contain concentrates.

A comparison between Shandong Gold, Zhongjin and Zhaojin shows Shandong as having the highest market cap, revenue and profit.

The Shandong Gold Group was the highest gold MINE producer in Shandong Province and probably China with production of 7.7t in MQ2012 and has a target of 35t for 2012 (~1moz) of gold production from at least 7 mines. Four of the mines are in China's top 10 gold producers, being Jiaojia, Linglong, Sanshandao [6tpa] and Xincheng [3.5tpa] with total costs ~$550/oz to $600/oz, and average underground grades of ~2g/t to 3g/t (ref : International Mining, March 2012).

The International Mining article of March 2012 provides the most comprehensive recent technological detail that we have seen on Sanshandao and Xincheng, but as the editor / author says "that was it", ie nothing on anything else.

 We also have some detail on Sanshandao having visited it in 2003 and included in our "Goode News" column submitted to Paydirt in October 2003 (all of the articles as submitted to Paydirt can be seen on our website : www.eagleres.com.au).  Further detail on Sanshandao can be seen in the ERA report on Michelago dated October 2003 that is also available on the website - note that reports download from the ERA website in high resolution). While 2003 may sound dated, it isn't when you trawl through what information is available in English, or can be translated into English.

Although SD-Gold does refine some gold, it may only be its own.

The SD-Gold booth probably contained the most information on a Chinese gold company in English (and Mandarin) including a dual subtitled video. However, caution has to be applied when reading translations as the Sanshan(dao) Island poster read as  "....with the most mechanised on seabed trackless mining". The consequent conversation was progressing remarkably well until they stated that they were using "cut-and-fill" on the seabed.

Shandong Gold (SD-Gold) has its own plant and mining equipment, shaft sinking, technology division, real estate, ecological green mines and high quality reputation. The Shandong Gold Group NPAT in 2011 was ~$275m (Rmb1.79bn), and Shandong Gold Ltd has a market cap of ~Rmb 54bn (~A$9bn), so it can comfortably finance the $227.5m Focus placement from cashflow.

The regular use of the name Shandong can cause confusion. However the following explanation should make it clearer., viz :

At the Focus Minerals AGM on 30 November 2012, ~82.4% of the shareholders voted in favour of the $227.5m placement of 4.55bn shares @ $0.05 to Shandong Gold International (a 65% subsidiary of the Shandong Gold Group Co., Ltd [which is 100% owned by the Shandong Provincial Govt], the other 35% being held effectively by the Shandong Provincial Govt).

The Shandong Gold Group holds 56.4% of the Shanghai Stock Exchange listed Shandong Gold Mining Co., Ltd which produced 22.24t (710koz) of gold in 2011,  and has a target of ~1moz in 2012,  with a market cap of RMB59bn ($9bn).

Shandong Gold has a reputation as a high quality, innovative market leader, reminiscent perhaps in some ways to Anglogold in South Africa or Barrick in North America.

We have often commented about the number of shares in issue that Focus has, and which increases to 8.87bn post the Shandong placement. However,  such numbers do not appear to "phase" Chinese investors, as Zijin for example has 14.4bn shares in issue of which 4bn are listed on the HKSE and 6.3bn on the Shanghai SE (being ~70% of the total). Shandong Gold has over 1bn shares in issue.

It was very clear at the conference that Chinese gold companies are on the "look out" for preferably Australian gold producers to invest in. However they are understandably cautious given losses in other resource companies in Australia, and Zhaojin's recent experiences with Norseman and Citigold (so far).

It was surprising to see so few Australian gold companies looking for investment from China at the China Mining Conference and consequently it is understandable why Chinese companies are pegging ground in Australia and inviting investors to participate in their company's exploration of/in Australia.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1 - The Australian Booth Surrounded by Chinese Gold Producers
GDM dec2012

  • Written by: Keith Goode
  • Saturday, 01 December 2012

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