Who’s Next? China Finally Starts Snapping Up Gold Miners

John Rubino:  One (perhaps the only) bright spot in the past few years’ gold market has been Chinese and Indian demand for the metal.

Here’s a chart, courtesy of Ed Steer’s Gold & Silver Daily, showing that the two countries have imported a cumulative 15,000 tonnes since 2008, which is not far from the total production of the world’s gold mines in that period.

But physical bullion is only part of the story, and may not be the biggest one going forward. Speculation has been circulating for years that China’s miners, flush with cash from selling their low-cost output to the government, would soon start buying up the world’s in-ground gold reserves. Here’s a representative opinion from 2010:

China buying Gold Mines Instead of Gold Bullion

A top industry official from the China Gold Association told The China daily back in February that the Chinese purchase of IMF bullion would cause market speculation and volatility. Instead, China is continuing to buy gold not directly from the market but through acquiring gold mines…abroad!

Dennis Gartman reported in March: “Perhaps we are to begin owning gold mines rather than gold futures of gold ETFs. We have avoided owning mines for years, preferring the “purer” play of owning gold rather than the mines, for we fear being exposed to poor mine management, or accidents in a mine that might do damage to the equity while gold itself moves higher. But if the Chinese authorities want to own mines, perhaps we have to consider doing so also…”

Why shouldn’t this make sense? After all, where do investors want to put their money? Banks are unsafe. Stocks are unsafe and speculative. With Real Estate at least you have a tangible asset and it will hold some value despite market busts. And buying Gold Bullion, especially buying in large quantities, can cause the prices to fluctuate significantly.

The best bet? Gold Mines! Maybe even patented gold mines where the investors own both the title to the land AND the Gold in the ground. Get ready to see a huge surge in gold mine buyers, especially from China!

That was obviously a little optimistic, since mining shares have plunged in the ensuing five years. But price action notwithstanding, the speculation didn’t let up. From 2013:

5 reasons China is coming to buy your gold mine

Chinese producers are aggressively looking at picking up gold companies and mines elsewhere as domestic demand reaches record highs.

Takeovers and asset purchases by Hong Kong and mainland miners increased to a record $2.2 billion in 2013 according to data compiled by Bloomberg.

Chinese companies like Zijin Mining Group and Zhaojin Mining Industry Co are in a good position to to take a bite out of struggling North American and European-based producers because:

• Chinese gold demand is soaring and at 1,000 tonnes will overtake Indian purchases this year, but domestic deposits are less than 5% of the global total.

• Targets are cheap – the S&P/TSX Global Gold Index of the globe’s 49 biggest gold companies are down 31% this year alone.

• Domestic Chinese producers enjoy some of the lowest cash costs – Zhaojin manages $549/oz, compared with a global average of $831/oz

• Chinese and Hong Kong companies have access to cheap capital – Zijin got $4.9 billion in soft loans from a state bank for M&A

• The majors are actively looking to sell as debt levels increase and high-cost mines are mothballed – Barrick could dump as many as 12 of its mines.

Possible targets include:
• Australia’s Mali-focused Papillion Resources ($390 million)
• Toronto-based Iamgold ($2.5 billion)
• Amara Mining active in West Africa ($48 million)
• Perseus Mining ($325 million) with producing mines in Ghana and Cote d’Ivoire

While these companies are looking to get rid of a number of mines:
• Barrick Gold
• Newmont Mining Corp
• Gold Fields
• Alacer Gold Corp

Again, too early. Mining stocks are down by about half since that article was published.

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