Gold producer eyes fresh overseas deals

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By Hou Qingyang (China Daily)
Updated: 2009-10-21 08:26

State-controlled China National Gold Group Corporation is planning to step up presence in Central Asia, Russia and Africa as part of its plan to scout for new investment destinations.

"We are considering two new precious metals projects in these regions and expect to finalize the deals early next year," said Tong Junhu, overseas business manager of China Gold.

The nation's largest gold producer also said it has achieved breakthroughs in Russia and Mongolia but declined to divulge any details.

Traditionally Chinese mining companies prefer investing in Australia and Canada.

According to figures from Ernst & Young (China) Advisory Ltd, nearly 60 percent of China's outbound transactions this has been in Australia, while Canada accounted for 32 percent.

Though resource-rich developed economies like Australia and Canada enjoy sophisticated infrastructure and legal systems, the volatile prices and rising protectionism have made it difficult for Chinese investors to clinch deals in these regions.

"There is still a valuation gap between buyers and sellers, and good deposits are impossible to find," said Mike Elliott, global mining & metals sector leader of Ernst & Young.

"With regard to investment, the acceptable risk level has also changed. The screening processes has now become more rigorous and most of the projects are being discarded at the due diligence stage."

In October, Baosteel Group Co, China's largest steelmaker, was asked by the Australian government to resubmit its application to invest $240 million for a 15-percent stake in iron ore explorer Aquila Resources Ltd.

In September, the Australian Foreign Investment Review Board (FIRB) asked Yanzhou Coal Mining Co Ltd to resubmit its takeover application for Felix Resources. In the same month, China Nonferrous Metal Mining Group was blocked from investing $222 million in rare earth miner Lynas Corp.

Australian media cited a senior FIRB official as saying that the board preferred not to see foreign majority stakes in new mining projects.

About half of the 30 mergers in Australia's mining and metals sector failed in 2009. Elliott said: "Foreign regulatory restrictions on Chinese buyers of assets require greater flexibility."

He suggested that Chinese companies should shorten the decision-making procedure and opt for minority stakes instead of looking to control the target company to clinch the deals in a timely manner.

"If companies do not purchase at a good price in the short term, then they will lose the opportunity and the door will not remain open forever."

Outbound investment often accompanies higher risks and only full control of the project will help minimize risks, said a domestic mining executive who declined to be named.

In June, China Gold and Renova Group, a large Russian conglomerate with interests in metals and energy assets, signed a memorandum for jointly exploiting precious metals.

In 2008, China Gold acquired 41 percent of Toronto-listed Jinshan Gold Mines Inc. Jinshan owns an operating gold mine in Inner Mongolia autonomous region and has become China Gold's offshore platform.

China Gold is the controlling shareholder of Zhongjin Gold Co Ltd, the first gold stock in China. Zhongjin's interim report said it would acquire five gold mines in the second half of this year, adding some 100 tons of new gold reserves.

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