Zijin Expansion Stymied by China Gold Industry's Worst Spill in Two Years

Zijin Mining Group Co., China’s biggest gold producer, planned for two big foreign acquisitions this year. Chairman Chen Jinghe instead is saddled with regulatory probes and a plunging share price after the industry’s worst environmental accident in years.

“The company will have to focus on cleaning up, and their expansion plans in and out of China may be put on a backburner” for the next year or two, said Helen Lau, a Hong Kong-based analyst at UOB-Kay Hian Ltd.

Zijin tumbled 17 percent in Hong Kong trading last week after the company said July 12 that 2.4 million gallons (9.1 million liters) of acid-laced waste spilled from its largest mine, polluting the Ting River and poisoning enough fish to feed 72,000 residents for a year. It was the worst accident in the Chinese gold mining since July 2008, when runoff from a Zhongjin Gold Corp. site in Dandong poisoned the water supply of 210,000. No people were hurt in the latest incident.

The stock-market drop wiped out $1.7 billion in value from Zijin, which since its founding 17 years ago Chen transformed into a company with projects in seven countries and gold output accounting for 9 percent of the nation’s total. Chen planned to make two foreign acquisitions this year, after spending $200 million to buy convertible notes in Glencore International AG, the Swiss-based commodity trader that’s the biggest in the world.

Zijin will “actively cooperate” with the Fujian branch of the China Securities Regulatory Commission, which is investigating a possible breach of information disclosure rules related to the spill, the company said in a statement to the Hong Kong stock exchange today.

Work Safety

The leak on July 3 has caused “enormous economic losses” to society and the company, Zijin said in a separate release to the exchange. The company will step up inspections of its waste disposal systems and improve work safety, according to the statement.

The regulatory investigation came after the company delayed disclosing the leak at its Zijinshan mine for nine days. The Fujian-based company, which was cited for seven environmental violations last year, said it withheld the information on concern its release might create a panic. Police detained three managers.

“Zijin’s expansion over the past years has been too fast,” Yi Yangfang, investment director at GF Fund Management Co., said by phone from Guangzhou. “It focused too much on expansion, and neglected efforts on internal management, risks control and the environment.”

Largest Producer

Zijin’s sales soared 68-fold in the past decade as it led the Chinese gold industry to become the world’s largest producer of the commodity, overtaking South Africa in 2007. The company, the largest publicly traded Chinese bullion producer, operates in Peru, Mongolia, Canada, and Myanmar, according to its website.

The stock, the second-worst performer on the Hang Seng China Enterprise Index, set a 15-month low in Hong Kong the day after announcing the leak. The stock fell 3.7 percent today in Hong Kong, taking its annual decline to 40 percent. It fell 46 percent in Shanghai this year.

“We need to rethink our corporate values and improve management,” spokesman Zhao Jugang said in an interview. “We should make continued investments on environment and safety measures. This is a big lesson for Zijin.” He declined to comment on the company’s plans for foreign takeovers.

Improve Performance

Zijin will invest 200 million yuan ($30 million) within a year to improve its environmental performance, he said. The sum is equal to 6 percent of last year’s net income.

China has been struck by a series of health and environmental standard failures at plants, with excess lead found in toys, and melamine-tainted milk and waste from smelters killing children in the past two years. An oil spill caused by an explosion on July 16 in the northeastern city of Dalian has polluted the sea, according to Xinhua News Agency.

Zijin’s leaks came after the same mine was cited for excess waste discharge last September, a problem the company didn’t fix, the local government said last week. China has issued new environmental standards for commodity producers, threatening closures if they weren’t met.

Zijin initially blamed heavy rains for the leakage near Shanghang county, where about half a million people live. There was another leak on the 16th at the plant, with 500 cubic meters of waste water discharged, the company said on its website.

Investor Concerns

“The pollution issue may just be an accident, but the stock has tumbled so much that to some extent it reflects investors’ concerns,” said Tony Zheng, president of Shanghai Good Hope Equity Investment Management Co. which sold its Zijin’s shares before the leak. “They are uncertain about the corporate governance of this company.”

The accident risks worsening its relationship with the Fujian government, which has to approve takeover plans. The government delayed approval of Zijin’s planned A$545 million ($471 million) purchase of Australia’s Indophil Resources NL for three months. Zijin last month canceled the deal, which would have given it a stake in Philippines’ Tampakan project, Southeast’s Asia largest untapped copper and gold deposit.

The delay “indicates an awkward relationship with the local government,” Leo Gao, who helps oversee $600 million at APS Asset Management Ltd. in Shanghai, said by phone. “The company’s low-cost, old mining methods poise huge environmental risks. It’s like a sword handing over their head.”

Cyanide Waste

Zijin’s Chen discovered the Zijinshan mine and decided to use a leaching technique that generates cyanide waste to extract metal, because only 0.3 grams of gold can be obtained from each ton of ore pulled from the earth. The company spends only 60 yuan to produce a gram of gold at the mine, compared with 110 yuan at rivals, according to Zijin.

In response to the leak, Zijin shut its copper smelter for an indefinite investigation and doesn’t know when it will reopen, spokesman Zhao said. Zijin is China’s sixth-largest copper producer.

The copper production at Zijinshan accounts for about 15 percent of Zijin’s annual output, according to Guotai Junan Securities Co. The mine generates about 60 percent of Zijin’s gold production.

At least two of Zijin’s expansions abroad have stalled. A plan to develop the Rio Blanco copper project in Peru was suspended after prices tumbled and the local community protested. The Congo government in May said it objected to Zijin’s plan to jointly acquire Platmin Congo, gaining copper and cobalt assets, with China-Africa Development Fund for $284 million.

Pollution Crackdown

The Chinese government may make an example of Zijin as it seeks to highlight a crackdown on industrial polluters, Bank of America Corp.’s Merrill Lynch said July 12.

“Investors now want a model of sustainable growth, a model that not only shows profit growth, but also a commitment to social responsibility,” UOB’s Lau said. “It’s not like five to 10 years ago when companies could get away with what you want. Now, neglects must be repaid.”

--Xiao Yu, with assistance from Sophie Leung. Editors: Tan Hwee Ann, Andrew Hobbs, Nerys Avery

To contact the Bloomberg News staff on this story: Xiao Yu in Beijing at yxiao@bloomberg.net

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