China Running Out Of Economic Gold Mining Reserves

Includes: FXI, GDX, GLD, IAU, VGZ
by: Russ Winter

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First order of business is that the Chinese stepped it up in Shanghai last night, trading 16,105 kg Au and 38,650 Au (T+D). Going forward, I think I will report this as T+D as the composition of activity has shifted of late. As importantly, 17,916 kg was delivered. That is roughly 702,500 oz. That brings it to over 2.5 million oz in the last four sessions since the phony economic numbers and the Lockhart Pinocchio routine.

Shanghai delivered more gold in just one session than the so called Comex "market" has registered to cover about 400,000 paper futures contracts. There seems to be such a quick and aggressive response to these paper attacks that it makes me wonder who is conducting them. Do the Chinese use agents on the phony Comex to flush out physical gold? I have no evidence or strong opinion. I'm just asking.

China's domestic mining industry does produce a lot of gold. For 2013, it is estimated to be 440 tonnes. I believe this is largely sold directly to the PBoC. However, China and its miners have a serious problem. Remaining mineable reserves are put at 1,900 tonnes. So unless China can turn up some major discoveries - and they have been somewhat unsuccessfully looking - then they have less than five years of production remaining.

A few months ago, Bloomberg ("China Gold Mine Deals") discussed the Chinese appetite for foreign acquisitions. Where possible, Chinese firms don't want to buy up gold on the open market, as the profits are greater with mining. From the Bloomberg article:

Financing is often easier for Chinese commodities companies compared with rivals overseas, Jake Klein, chairman of Evolution Mining Ltd., said in an interview: "They have access to cheaper, vast pools of capital, they are going to be competitive," said Klein, who previously ran gold mines in China. Zijin said in November 2012 it had received 30 billion yuan ($4.9 billion) in loans from the state-controlled China Development Bank's Hong Kong and Fujian units for overseas acquisitions.

"China's government has urged national gold producers to boost development of overseas resources in neighboring countries and in Africa and Latin America, according to its 12th Five-Year Plan which ends in 2015.

'There are some good bargains out there, and things that are too good to pass up on,' said James Wilson, a Perth-based analyst at RBS Morgans Ltd. and a geologist who has worked in Australia, Africa and China.

Acquisitions by China's gold mining companies reached a record this year as the metal's steepest quarterly drop in more than nine decades slashed mine values and sidelined Western competitors laden with debt. Takeovers and asset purchases by producers based in China and Hong Kong rose to a record $2.24 billion this year, beating last year's record $1.96 billion, according to data compiled by Bloomberg. Zijin Mining Group Co., the world's seventh-largest gold company by market value, and Zhaojin Mining Industry Co. are among companies looking to strike. Although Chinese miners don't overpay, they will act and might be the primary player initially.

Targets would include Australia, where business-friendly conditions make it a priority for Chinese direct investment, according to a recent HSBC survey. I think Vista's (NYSEMKT:VGZ) Mt. Todd, valued by the "market" as cow pasture, would be a great Chinese acquisition or partnership.

A source of Chinese deals done in 2011-2012: Casey Research. They are apt to go with frontier locations, such as Africa. I think Lydian in Armenia could be bought at a bargain price, say three times its current level.

In December 2011:

-- China Gold International Resources Corporation bought a gold mine in Central Asia, and is reported to be looking at Canada and Mongolia for its next targets. (It bought Canadian gold miner Jinshan a few years ago.)

-- The Chinese took control of A1 Minerals, a gold exploration and production company, and renamed it Stone Resources Australia.

-- Shanghai investors bought a controlling stake in the Australian-owned Zara gold project in Eritrea.

In April 2012:

-- Sovereign Gold Partners, along with Jiangsu Geology and Engineering, paid $4 million for a 30% interest in two gold tenements (an area of land in Australia where the holder may conduct exploration or mining activities). By November 2012, the firm increased its funding to fast-track exploration and development of the projects.

In August 2012:

-- A subsidiary of Zijin Mining Group (China's top gold producer by output) bought more than 50% of Norton Gold Fields, acquiring a large, operating gold miner.

-- China National Gold Corporation announced a $3.9 billion bid to acquire African Barrick Gold, Tanzania's largest gold miner. Barrick held out for too much and China National walked, but this is still out there. I hold African Barrick.

Between September and December 2012:

-- China's Shandong Gold Group announced its intention to purchase 51% of Australian gold miner Focus Minerals, which has four active mines in Western Australia.

-- China-based Western Mining Group, through its subsidiary, bought all of the outstanding shares of Inter-Citic Minerals, a Canadian-based gold exploration and development company.

Just the three most recent acquisitions (Focus Minerals, Norton Gold Fields and Inter-Citic Minerals) contain 12.5 million ounces of gold resources.

Disclosure: I am long OTC:OTC:LYDIF, VGZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.