Zijin Mining: Pollution Draws Beijing's Ire

Until recently, Zijin Mining Group, much like the Chinese economy, was on a roll. Sales have grown 68-fold in the past decade. Zijin became the mainland's largest publicly traded gold producer, a major supplier of copper, and had big international growth plans. Then came a leak of 2.4 million gallons of acidic copper waste from Zijin's flagship mine in Fujian province in early July that resulted in a polluted river, almost 2,000 metric tons of poisoned fish (enough to have fed 72,000 people for a year), and a probe by Chinese regulators into the timing of the disclosure of the mishap.

Now, Zijin may find its growth stymied. "For the next one or two 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," said Helen Lau, a Hong Kong-based analyst at UOB Kay Hian. Zijin Chairman Chen Jinghe planned to make two major overseas acquisitions this year after buying $200 million of Swiss commodity trader Glencore International's convertible notes.

Jinghe delayed disclosing the leak at its biggest mine, Zijinshan, for nine days, prompting the government probe. Waste water containing acidic copper seeped into the Ting River on July 3 from its plant at Zijinshan mine, the company said on July 12. Zijin had initially blamed rains for the leakage near Shanghang county, where about half a million people live. The Fujian-based company was cited for seven environmental violations last year.

Zijin's already weakened stock price plunged 12 percent the day after it announced the leak. (The shares have dropped about 37 percent in Hong Kong and 41 percent in Shanghai this year.) Company officials are trying to restore investor confidence. "We need to rethink our corporate values and improve management," spokesman Zhao Jugang said in an interview. "We should make continued investments in environment and safety measures. This is a big lesson for Zijin." He said the company plans to invest 200 million yuan ($30 million) within a year on environmental and risk measures.

Zijin "focused too much on expansion and neglected efforts on internal management, risk control, and the environment," says Yi Yangfang, investment director at GF Fund Management. The Fujian government earlier this year delayed approval of Zijin's $480 million purchase of Australia's Indophil Resources for three months. In June, Zijin canceled the deal, which would have given it a stake in Southeast Asia's largest untapped copper and gold deposit. The delay "indicates an awkward relationship with the local government," says Leo Gao, who helps oversee $600 million at APS Asset Management in Shanghai. "The company's low-cost, old mining methods pose huge environmental risks. It's like a sword hanging over their head."

Chairman Chen decided to use leaching, which generates cyanide waste, to extract metal at the Zijinshan mine because only 0.3 grams of gold can be obtained from each ton of the mine's very low-grade ore. It costs only 60 yuan to produce a gram of gold at the mine, compared with 110 yuan at rivals', according to Zijin.

The company shut its copper smelter, where the leak occurred, and doesn't know when it will reopen, spokesman Zhao said. Beijing may make an example of Zijin as it seeks to highlight a more serious stance toward environmental issues, Bank of America Merrill Lynch (BAC) said in a July 12 report. Beijing has ordered the closure of polluting plants and issued new standards for steelmakers and smelters in the past year.

"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, neglect must be repaid."

The bottom line: Zijin Mining is under investigation after an acid leak at its mine in Southeastern China, just as Beijing is cracking down on polluters.

    Before it's here, it's on the Bloomberg Terminal.