China’s lack of gold reserves and its young gold mining industry
Commodities / Gold & Silver 2009 Oct 01, 2009 - 01:03 PM GMTBy: Miles_Banner
Over the last few weeks we’ve been paying more attention to China as it emerges from the East. There are three reasons why China poses such an interesting potential return of value for traders.
China is an emerging country. - China holds a huge amount of US dollars.
- China’s gold mining is in its infancy.
A very interesting read is an interview with Jim Rogers about his thoughts on China.
Of particular interest are his thoughts on commodities…
"While he says that China is the only emerging market where he isn’t selling right now, he is no longer buying new Chinese shares, and says he is now only investing in China indirectly through commodities investment."
Mr Rogers also sites China as a country that could benefit from its stimulus package in the long run, due to it spending the reserves it had saved over years.
China did save over the years. It boomed from the arrangement it had with the US. Whilst the US racked up bills with China, paying for their goods to be made and exported to America, China profited. It was a classic example of why the US dollar as a global reserve currency can benefit an emerging market.
China’s US Dollar reserves
China now has a reported 2 trillion US dollars in it’s reserves. This is why it has stepped up pressure on America to retain the value of its currency.
"The stability of the U.S. dollar has a keen influence on world economic recovery," Xie Duo, an official with the People’s Bank of China, the nation’s central bank, told a news conference in Pittsburgh.
Xie said Washington should take into account the importance of the dollar as a global reserve currency in setting domestic fiscal policy.
"The two sides should be balanced," he said.
What can China do to offset the risk in a devalued dollar?
On Tuesday the Financial Times covered a story about a Chinese state owned oil company, CNOOC, unsettling the world’s oil major’s by entering into negotiations with Nigeria.
It reported that some analysts thought CNOOC had made an offer in the region of $50bn for 6bn barrels, one in every six barrels of the proven reserves in Nigeria. A spokesman for Nigeria said the Chinese are "offering multiples of what existing producers are pledging [for licences]. We love to see this kind of competition."
This sort of competition is offensive. China needs to fund it’s growing economy over the years and balance its portfolio. To do that they need to invest in commodities…
For the past six years China has quietly been stocking up on gold, boosting its holdings of the yellow metal to approx 1,000 metric tons from 400 metric tons in 2003 [see BBC report]. BUT even at 1000 tonnes, which is about US$ 32 billion (at $1000 per ounce), it is only about 1.5% of China’s foreign reserve holdings. When you compare this to the gold reserves of the Eurozone and US level (11 and 8 thousand tonnes) China would need to buy in the region of $215 billion worth of gold at $1000 an ounce to allocate 10% of its reserves in gold (which is thought of as a good percentage to hold in a portfolio). That’s a large amount which is not easy to buy without attracting the attention of traders the world over which would push the gold price higher.
China’s Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party, recently told Great Britain’s Telegraph newspaper
“When we buy, the price goes up… We have to do it carefully so as not to stimulate the markets.”
The IMF has given China the opportunity to acquire gold without heavily affecting its price with the sale of 403.3 tonnes reported here last week but even this is child’s play. China has to find a way to buy gold without affecting its price, how does it do that? It does as it’s been doing for the past decade – it gets it locally.
The state of China’s gold mining
So we know China is an emerging market with financial muscle, it’s also diversifying into commodities to hedge against the value of the dollar declining, and we know it is keen to build it’s reserves of gold.
The easiest, and cheapest place over the coming years for China to increase it’s prosperity and get its hands on gold is from it’s homeland. So how big are China’s gold reserves?
Until this decade the Chinese mining industry was amongst the worst in the world. Gradually from 1979 onwards it allowed foreign exploration companies to explore the minerals in it’s geology. Welcoming foreign mining companies, with their expertise, capital and equipment, fed the growth of their mineral industry. From 1997 to 2007 China’s gold production rose 134%. It is now the biggest producer of gold in the world… a staggering rise.
There are mining companies eager to benefit from the emergence of China’s mining industry. Two that have been in the news recently are Sino Gold and Eldorado Gold. Recently Eldorado Gold (TSX:ELD) purchased Sino Gold for $2 Billion. Sino Gold shareholders will vote on a deal by late November and it’s expected to close early December. When you look at the Sino Gold operation it is clear why they are sought after…
Sino Gold’s Chinese ambition
Sino Gold was one of the first western companies to enter into the Chinese gold industry which means it has over 15 years experience. It is also, currently, the largest international gold explorer and miner in China. The company has spent years constructing its own comprehensive geological map and has significant resources devoted to, and expertise in, exploration which is a major barrier for new mining companies.
Sino Gold operates the Jinfeng Mines in Guizhou Province, is developing the White Mountain Mine in Jilin Province and has projects at an advanced stage in Inner Mongolia and Heilinjong Province. Their approach is to identify an area with mineralization and then expand the ground position to expand the size of the deposit.
They acquired 82% of Jinfeng in 1991 when it had just a 1 million ounce resource. Today it’s China’s second largest gold mine with resources nearing 10 million ounces. From construction to production took 2 years. That’s extremely quick.
In 1993 Sino Gold acquired the White Mountain project. It took 4 years to take it to production, another quick turnover. It now owns 95% of the gold mine which sits on a 1 million ounce resource.
To bring these mines to production so quickly clearly shows they have a good relationship with the Chinese government. Their advantage in terms of exploration and in its approach to community and environmental issues are essential for their long term stability.
Eldorado Gold
Under the planned acquisition Vancouver based Eldorado Gold will have a combined stock value of $6.4 billion.
The takeover of the Australian company begun in June when it acquired a 20-per-cent stake from Gold Fields Ltd, a major South African miner. The Gold Fields purchase was valued at about $305.5 million and also gave Gold Fields a seven per cent interest in Eldorado, which operates in Brazil, China, Greece, and Turkey. Eldorado Gold is an international gold mining company. It has two operating mines, Kisladag in Turkey (which they own 100%) and Tanjianshan in China (which they own 90%).
For a full report on Eldorado Gold visit here
What’s striking about Eldorado Gold is it’s high operating margin of 38%. It also boasts a growth in net income from $3 million in 2006 to $163 million in 2008.
Both Sino Gold and Eldorado Gold are ideally positioned to capitalise on the growth of China’s mining industry. Indeed over the years ahead if the gold price stays the same and South Africa’s gold production continues to decline China will attract more and more attention. With first mover advantage and a solid foundation to build from Eldorado Gold’s acquisition of Sino Gold is a smart move.
We’ll keep an eye on what happens with these two, and keep you updated.
That’s all for now,
Regards,
Digger
Gold Price Today
P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).
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