Zijin Says Timing Good for Overseas Deals as Valuations Slide

Updated on
  • Gold, Copper, Zinc Output to Rise by Over 4 Percent Next Year
  • Bullion Price Seen Fluctuating Around $1,200 Over Next 2 Years

Zijin Mining Group Co., China’s most profitable gold producer, will use the slump in metals prices to accelerate overseas acquisitions.

The company will pursue its “going abroad” strategy with new urgency given relatively low valuations in the mining sector, Chairman Chen Jinghe told Bloomberg Television in an interview in Shanghai that aired Tuesday.

The company, based in Fujian province, wants to secure producing assets overseas, as it juggles depleting mines and heightened environmental scrutiny at home with growing demand in the world’s biggest buyer of the metal. Gold consumption in China this year is forecast at 900 metric tons to 1,000 tons by the World Gold Council. Domestic production lags at around half that level, according to the China Gold Association.

“In the past we had focused on finding grassroots or greenfield projects,” said Chen. “Now we will turn our attention more to those projects that have existing production, which will have an immediate contribution to our output and performance.”

Zijin had about 3.3 billion yuan ($518 million) worth of cash and equivalents at the end of June, according to its first half results, down 27 percent from a year ago. In May, the company said it plans to raise up to 10 billion yuan in a private placement. It’s also looking for an opportune time to raise up to 13.3 billion yuan in debt, it said in June.

Porgera Template

Any acquisitions would add to the near-$1 billion in deals that Zijin has agreed in the past year. Chen said the purchase in May of a 50 percent stake in Barrick Gold Corp.’s Porgera mine in Papua New Guinea for $298 million is a template for future deals.

“We will proceed with more of this type of acquisition,” he said. Porgera will yield 7 to 8 tons of gold a year for Zijin.

Output at Zijin Mountain, China’s largest gold mine, is forecast at about 10 tons this year, falling from a peak of near 17 tons. Chen said the company needs growth elsewhere, highlighting the prospect of 10 tons of gold output a year in its new mine in Gansu province.

In sum, Zijin’s output of gold, copper and zinc will rise by over 4 percent next year, he said, although there is little scope for the company to further lower the cost of production, having made cuts in the past 2 to 3 years.

Gold Price

In Chen’s view, the price of gold is likely to fluctuate around $1,200 an ounce in the next two years, with the metal’s floor set at its cash cost of production. He didn’t elaborate on what that level may be, although earlier in the day the company’s president, Wang Jianhua, told a briefing in Hong Kong that gold wouldn’t breach $1,000 an ounce.

The metal has fallen about 40 percent from its peak in 2011 to trade around $1,130 an ounce. The price has been bolstered in recent weeks on concern over instability in global financial markets following China’s surprise devaluation of the yuan.

China announced in both June and July that it had increased its gold holdings. For Chen the pace at which the nation is adding to its reserves is too slow. China should seize on the price slump as an opportunity to raise its holdings and boost the yuan’s status as a global currency, he said.

Environmental considerations are “a sensitive issue” in China, Chen said. A string of deadly explosions last month at chemical warehouses in the port of Tianjin has stirred discussion over the use of sodium cyanide, which is used by the industry to separate gold from ore.

While the material in Tianjin wasn’t linked to Zijin, Chen responded by chairing a board meeting on Aug. 17 to strengthen controls over dangerous chemicals. The group is taking precautions that exceed state requirements, he said.

“The use of cyanide is a mainstream technique in the gold mining industry worldwide,” Chen said. “As long as we stick to strict control over transport, storage and use, we can be safe.”

— With assistance by Feiwen Rong, and Alfred Cang

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