China`s Global Investment in Gold

Foreign Conquest for Gold 1

China’sGlobal Investment in Gold

ChinaGlobal Investment in Gold

Chinais theworld’slargestgoldproducingcountry,contributingapproximately9% of thegoldeveryyear.Thegoldminingsectorin China has morethan 50 companiesengagedin some100 goldprojectsin differentpartsof theworld.Justas manymultinational firms are searchingforgreaterinvolvementin theminingsectorin China, Chinese companyiesare headingoverseas(World Gold Council, 2013). Chinahas producedcloseto 410 metric tonnesof goldin thelast12 months,butthehomedemandforthepreciousmetalis nearly800 metric tonnes per year.The under-satiated demand of the precious metal in China has not onlynecessitatedinvestmentin goldminingindustriesbuthas dramatically increasedparticipationof Chinese companiesin theinternationalgoldmarket(Yap &amp Hoyle, 2012).

ForeignConquest for Gold

Chinadoesnot providea reportof its tradein gold,andanyanalysisrelies on data obtainedfrom jurisdictions,that showthebulkof thegolditis importing.RecordsshowthatChina has importedgoldweighingmorethan 955 tonnesin 2013 andexceededthis figure by 376tonnesin 2014 (World Gold Council, 2013). However, there is a notable dropof the imported gold by China in 2012, owing to the reduced demand ofgold jewelry in China in 2012. However the demand of gold has risenin subsequent years, making Chinaone of themostimportantphysicalgoldmarketsin theglobe(WorldGold Council, 2013). Ithas becomethenumberone consumerandproducerof thispreciousmetal.Thesefactsdemonstratetheextentto which the country has becomea keypartofglobal demand.Figure(1)illustratesthistrend

Source:World Gold Council, 2013

Oneof themostconspicuousfirm in involvedin thepurchaseof foreigngoldis theHongKong based Zijin mininggroup.In 2006,thecompanypaidAUD 18 million to acquire10 percent of Australia Allied Gold, a firm that isengagedin mininggoldin PapuaNew Guinea (World Gold Council, 2013). By buyinggoldminesfrom differentpartsof theworld,Chinacanaccumulatetheproducedgoldbefore thepreciousmetalhittheglobal market.In thisway,Chinacanbuygoldbelow theprevailingmarketpriceof gold,referredto as spotgoldprice.On theotherhand,bypurchasinggoldminesin countriessuchas Australia, PapuaNew Guinea andin Africa, China is takingon alltheminingrisks(Bancroft, 2012). Figure (2) shows China investment in Gold from 1994to 2012.

Source:World Gold Council, 2013

Ascan be seen from the figure above China investment has been growingsteadily since the authorization of bullion investment in 2004. Onaverage,thecostof extractinggoldfromthe minehas beenincreasingbutnot as fastas thepricesof gold.ThismeansthatChina canreapsignificantlevel of profits.In theyear2011 China wasproducinggoldat an averagecostof $657 andin thesameyear,Chinawasableto accumulatemorethan $915ounce at a discount(Bancroft, 2012). Ithas dawnedon Chinese tradersthat are there are goingto succeedin acquiringgoldthrough thisstrategyof purchasinggoldmines,andthentheyhaveto reachbeyond theboundariesof theRepublic of China andbuyforeigngoldmines.ThehighdemandforGold in China which at themomenthas surpassedthesupplyis thekeydriving factorbehind thisstrategy.Manybuyersin China are lookingforgoldbarsas an investmentandmakingjewelleryforsaleto theincreasingmiddle-incomegroup(World Gold Council, 2013). ManyanalystsalsothinkthattheCentral Bank ofthe Republicof China has beenpurchasinggold,thoughthiscannot beconfirmeddue to thelimitedinformationinthepublicdomain.Expertscan onlyspeculatesince China has not confirmedanyincreasein its goldreserves(Bancroft, 2012).

Acquisitionof Foreign Gold Mining Companies

Figure(3)belowprovidesa briefchronology of themostrecentChinese pursuitsin theforeigndomain.

year

Chinese Company

Foreign Gold mining firm

Country of Company acquired

2011

Stone Resources Inc

Cresent Gold

Australia

2011

Baiyin Nonferrous Group

Gold One International

South Africa

2011

Shangai based Investor

Zara Mining

Eritrea

2012

Zijin Mining Group

Norton Goldfields

Australia

2012

Sovereign Gold Partners &amp Jiangsu Geology and Engineering

30% of Gold tenements

Australias

2013

Yunnan Tin

12.3% of Hera Goldmine

Australia

2013

China Gold International Resources Corporation

Gold mine

Central Asia and Canada

Source:World Gold Council, 2013

ChineseNational Gold Group Corporation has spared$3.9 billion, which itintendsto usein acquiringAfrican Barrick Gold PLC, in its latestmoveto supplementthedomesticshortfall in goldsupply(Behrmann, 2011).In2010,China producedthree hundred andsixty (360) metric tonsof gold,which is significantly lessthan therequisiteeight hundred metric tonnes.Ifthetalkssucceed,thestate-owned Chinese National Gold Group Corporation will be thelargestgoldproducerin China (Behrmann, 2011). Itwill accountformorethan twenty percent of National goldoutput,joiningthelistof domesticgoldproducingfirms that haveventuredoverseasover thelasttwo years.Thesecondlargestgoldproducerin Chinese, The Zijin Mining Group, has confirmedthatits foreignsubsidiary has acquiredmorethan fifty percent stakein Kalgoorlie’s North Gold Fields of Western Australia. ThisdealmakesgivesChina a footholdin theAustralian market,makingitthesecondlargestsourceof goldoutputafter China (Behrmann, 2011). Additionally, Zijinacquiredsixty percent of Altynken, a minerbased in Kazakhstan. Thisgiveszijinto accessgoldmines locatedin Kyrgyzstan. TheDealogic estimatesthatChinese companieshavecompletedmorethan ten andtwenty million dollarsaccusationsof Australian goldassets since 2008, halfof which werecompletedin 2013 (World Gold Council, 2013). Additionally, theShandong Gold Mining Co floatedover one billion U.S dollarsin November 2014, in a bidto acquirea Brazilian goldminer,The Jaguar Mining Inc. Figure (4): Map Area: Kalgoorle

Source:World Gold Council, 2013

AtfirstZijin investedmorethan $27.67 million to purchasemorethan 100,000,000 ordinary sharesof thecompany.Thiscombinedwith the5,900,000 shares that Zijin has subscribedin thesecondarystockmarket,thecompanywasableto raiseits staketo 16.98% of theNorton Goldfieldshares(Zijin Mining Group Company, 2011).Thisrepresentedone of thefirstsuccessiveacquisitionof foreignfirms by Chinese enterprises in a bidto augmenttheir goldproduction.In themonthsthat followedtheNorton Goldfieldtakeover,Zijin tookover Kalgoorlie Mining Companywhich raiseditsstaketo 82% of thecompany’sshares.Based onthe reportreleasedby theZijin’s president,Zijin Companyownsandcontrolssix goldminesin Australia, Mongolia, Russia andTajikistan (Zijin Mining Group Company, 2011).

Figure(5):

MapShowing China Gold Interest Around the Globe

Source:World Gold Council, 2013

Anothermajortakeoverthat has happened in the recent past,is theacquisitionof Gold One International Company by one of China’s largeststate-ownedinvestmentfirm, Citi Group. GoldOne International is a South African goldminingcompanythat posesgoldminesin differentpartsof South Africa andtheneighboringCountries suchas Mozambique andZambia (Behrmann, 2011). Cit Group boughtthefirm fora whooping$469 million enablingitto getgoldassets in South Africa. Itis worthnotingthatmostof theseacquisitionsare formalandas suchcontractscannot be terminateddueto internalandexternalfactors.Nonetheless,manyof theagreementhaveprovisionthat in theeventthat goldis exhaustedin thegoldmines,thenthedealcan beterminated.

Conclusion

Itis evidentthattheChinese goldplayersare increasingforeigninvestmentin mininggold,to supplementdomesticsupplyof gold,acquiregoldof superiorqualityand accesssuperiorgoldminingtechnologies. Chinese goldminersare exploringtheworldin pursuitof internationaldeals.ThemostconspicuouscompanieshavebeenChina Gold groupwhich is Chinas’largestgoldproducer,Zijinacquiredmorethan 80% of Australian largestgoldminingfirmNorton GoldfieldsandChinese State Investment Group that boughtSouth African goldminingcompanyGold one Inc. ThehighdemandforGold in China which at themomenthas surpassedthesupplyis thekeydriving factorbehind thisstrategy.It is clear that China has grown into a major global player in thetrade of this precious metal.

References

Bancroft,W.(2012). BuyingGold at Discount. KitcoMetals Inc. Retrieved from: http://www.kitco.com/ind/Bancroft/20120419.htmlBehrmann,E. (2011). ChineseState Investment Group Buys Gold One For Its South African Assets.BloombergL.PRetrievedfrom: http://www.bloomberg.com/news/2011-05-16/chinese-state-investment-group-buys-gold-one-for-its-south-african-assets.html

Jones,S. (2012). BRICSand beyond: Executive lessons on emerging markets.Hoboken, N.J: Wiley.

WorldGold Council, (2014) China’s Gold Market: Progress and Prospects. London, Old Bailey.

Yap,c.w. &amp Hoyle,R. (2012). China`s Hunt for Gold Goes Overseas. TheWall Street Journal.Retrieved from:http://www.wsj.com/articles/SB10000872396390444508504577594723116538562

ZijinMining Group Company. (2011). Zijinsuccessfully acquired Norton Gold Fields. Retrievedfromhttp://www.zjky.cn/publish/english/tab969/info30253.htm