Gold rush

Gold’s in them Australian hills

It’s Australia rather than Africa that seems to be promising the gold at the end of the rainbow for Chinese miners at the moment.

In one of two deals to make headlines for the wrong reasons in recent weeks, China National Gold’s $3.9 billion bid for the African operations of Barrick Gold fell through this month after the two sides couldn’t agree on a price for the Tanzanian project. A smaller pitch from Zhongrun Resources for control of Noble Mineral Resources, listed on the Australian Stock Exchange but with primary operations in Ghana, also foundered in November when Zhongrun was trumped by a rival bidder.

By contrast, two bids for Australian mines were completed in the second half of last year, with Shandong Gold Group acquiring a majority stake in Focus Minerals for A$227.5 million ($239 million), and Zijin Mining Group paying A$229 million to take over Norton Gold Fields.

Zijin has been one of the most active of the Chinese miners overseas, investing in gold projects in Kyrgyzstan, Tajikistan, the Congo and Mongolia. But the takeover of Norton last July was a milestone as the first ever of an Australian gold producer by a Chinese firm.

“The main path for increasing resource reserves is through overseas acquisitions,” Li Zhilin, president for international affairs at Zijin, told Century Weekly. “It can help a company upgrade to reach the status of an international mining firm.”

Shortly afterwards Norton announced that it had secured an A$105 million credit facility from the Industrial and Commercial Bank of China (ICBC). That level of financial support boosted rumours about some kind of China Inc move to control an increased supply of the precious metal overseas.

In fact, more gold is mined domestically in China than anywhere else but its reserves are depleting – hardly an ideal scenario when demand has been increasing at home for gold as jewellery or as an inflation hedge. Where possible, Chinese firms don’t want to buy up gold on the open market. Shandong Gold reports gross profit of up to 60% on sales of gold that it mines and refines itself, Century Weekly has suggested. By contrast, the same company source told the magazine that profit margins on sales of purchased gold were less than 1%.

Others suspect that there is more of a coordinated plan to secure future supply, thanks to Beijing’s concern about what quantitative easing might mean for the long-term prospects of currencies like the euro and the dollar.

According to the World Gold Council, China doubled its gold reserves in the 12 months to the middle of last year to 1,054 tonnes. That made it the world’s sixth largest holder of monetary gold. But as a proportion of total foreign reserves this is still a very low share – only 1.6%, compared with 76% for the United States, for example.

Buying gold mines could help with diversifying some of its currency risk. When state-owned China National Gold made its bid for the Barrick reserves in Tanzania, its chief executive Sun Zhaoxue seemed to allude to similar motives: “As gold is a currency in nature, no matter if it’s for state economic security or for the acceleration of renminbi internationalisation, increasing the gold reserve should be one of the key strategies of China.”

The Focus Minerals and Norton purchases also hold out hope of further finds in Western Australia. In another example of a preference for deals in the region, China Hanking said this month that it will invest at least A$50 million into the Marvel Loch mine. The bid now needs to be approved by Canberra’s Foreign Investment Review Board.

Analysts said that the Chinese buyers seem keener on cherry picking individual projects than buying companies outright. Purchasers have also been showing interest in mines formerly mothballed as unprofitable. Marvel’s previous owner closed it down last year claiming that further development wasn’t economic. Shandong Tianye Gold Mining, another Chinese buyer, purchased the decommissioned Minjar Gold project in Western Australia on a similar basis in 2010, filing applications to return it to production.

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