Gold still gleams for China's acquisitive miners


By Yvonne Lee
The Wall Street Journal
Monday, June 3, 2013

Chinese companies are snapping up overseas gold mines in their quest to become international giants like Canada's Barrick Gold Corp., even as prices for the metal hit a two-year low.

Driven by strong domestic demand for gold, Chinese miners are taking advantage of depressed company valuations to boost gold reserves by acquiring mines. The challenge they face is that most of the mines that are large enough to pique their interest are either not for sale, already developed with dwindling reserves, or in politically unstable countries.

"New significant mines are always harder to find and more expensive or in a more difficult political environment. If you are a latecomer, you are unlikely to ever become as big as an earlier participant," said Viral Gathani, head of energy, natural resources, and infrastructure investment banking at CIMB Securities Ltd. in Hong Kong.

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Despite a 17% drop in gold prices this year, Mr. Gathani also noted that valuations for miners haven't come down. "Sellers still have robust valuation expectations," he said.

Deal activity has declined since last year, but Chinese gold miners continue to buy mines, as they count on a recovery in gold prices. On Friday, Chinese gold miner Kingwell Group Ltd. said it plans to make an offer for more than half of Brazilian Gold Corp., a Canadian mining firm with a major project in northern Brazil, taking the value of deals launched by Chinese companies this year to $436 million, according to data provider Dealogic.

The total is a fraction of last year's $2.9 billion but it is sharply higher than the $260 million worth of deals from Canada, where some miners are seeking to sell noncore assets in response to the decline in gold prices. The nation is home to Barrick Gold, the world's biggest gold miner, as well its smaller rival, Kinross Gold Corp. "Some companies have lowered their prices by about 20%-30% after the recent gold price correction," said Kam Kit, managing director at Kingwell.

Kingwell, which owns gold mines in Russia's Amur region and China's Shandong province, remains optimistic about the gold market and is seeking overseas assets to boost its reserves. Mr. Kam said he expects gold to rise to more than $2,000 a troy ounce in two to three years, arguing that loose monetary policy in Japan and Europe will likely support the market.

On Friday, the Hong Kong-listed company said it could make a general cash offer to Brazilian Gold's shareholders for at least 50.95% of the company's outstanding common shares at 27 Canadian cents (26 U.S. cents) each.

There have been other deals in recent months, too. In May, Shenzhen-listed Shandong Qixing Iron Tower Co. agreed to acquire Australia-listed Stonewall Resources Ltd.'s gold assets for $140 million.

State-owned Zijin Mining Group Co., China's biggest gold producer by output, is looking to bid for three of Barrick Gold's mines in Western Australia, a person familiar with the matter told The Wall Street Journal in May, just months after Zijin acquired more than 50% of Australian miner Norton Gold Fields Ltd. in August. On its website, the gold miner said it wants to be a leading international mining firm by 2020.

Barrick Gold and Zijin Mining didn't immediately respond to requests for comment Monday. An Australia-based spokeswoman for Barrick declined to comment in May, while Norton's chief executive officer confirmed the company's interest.

Gold, which is widely considered a store of value, surged to a record high in September 2011 as money managers seeking haven investments after the financial crisis piled in. But interest has receded in recent months, thanks to economic expansion in the U.S., tame inflation, and a rising dollar.

Strong demand for physical gold in China, which is the world's largest consumer of the precious metal, could help buoy prices.

China's gold demand rose 20% from a year earlier in in the three months ended March 31, according to the World Gold Council, indicating retail investors' confidence in the long-term value of the precious metal.

On Monday, spot gold was trading around $1,393.30 an ounce, up 5% from its April low of $1,321.50 an ounce, but still down 17% year to date.

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