Subscribe to our newsletter

China’s Hunts Gold Overseas

After years of scooping big overseas energy and industrial metal assets, China is gaining momentum in another commodity sector: gold is the latest in a series of recent moves by Chinese gold producers to plug a domestic supply shortfall, efforts that amount to a bet on sustained strength in the gold market even though the economic slowdown is dragging down prices.

For the world’s second-largest economy, fundamental factors starkly favor an overseas push. China produced around 360 metric tons of gold last year but consumed nearly 800 tons.

That deal gives it a foothold in the Australian market, the world’s second-largest source of gold output after China itself.

In 2011, Zijin bought 60% of Kazakhstan-based miner Altynken, which has access to a gold mine in Kyrgyzstan.

Since 2008, Chinese companies have completed 10 $20-million-plus acquisitions of Australian gold assets, worth a combined $1.6 billion, according to Dealogic. Half were initiated since last year.

Chinese gold players are definitely on the hunt for external resources, in part because the domestic quality of gold isn’t as good, and also because they want access to superior gold-mining technology

While Chinese gold-mining technology can reach to depths of at most 2,000 meters (6,562 feet) below sea level, foreign technology can penetrate three times deeper.

China has relatively short life-of-mine production levels compared with other countries, according to the World Gold Council. It also has one of the smallest percentages of global gold-mine reserves, at less than 5%, which underscores the need for the resource-hungry giant to find its bullion elsewhere.

In its bid for Barrick, China Gold is seizing on an opportunity afforded by the languishing shares of the Tanzania operation’s parent Barrick Gold

Barrick needs to raise cash at a time of shareholder pressure for better returns.

Interested in Investing in Asia? Hedge Funds, Real Estate, Trading, Research, Advice, Data Apply Now

The Heffernan Group of Companies is a leading provider of consulting, technology, research and management services dedicated Governments, Funds, Listed Companies and High Net worth Individuals. Our clients call us when they need help with strategic, operational or market challenges. They look to us for honest, objective advice in delivering results. Read More

China Gold didn’t respond to a call for comment Friday.

The window of opportunity also isn’t lost on other producers. Zijin Chairman Chen Jinghe said the company would continue to hunt for overseas acquisitions as recent weakness in equity markets has helped to make gold companies attractive.

Beijing may also be on the prowl for more gold for its official reserves. The People’s Bank of China said in June that it had 1,054 tons of gold, unchanged since April 2009, though it may well have added to the reserves off the books.

China’s official gold holdings amount to just 1.6% of the country’s total foreign reserves, compared with more than 70% in the US, Germany, Italy and France.

Going overseas makes sense for two reasons;

1. it is probably a relatively cheap and effective way for China to increase gold reserves through less obvious measures than buying gold on the market, and

2. when you look at the current reserves of the mines in the country, it doesn’t look like there are many years left. So sometimes going out and buying unwanted assets is the best option.”

The Barrick play is coming at a time when a broad slowdown is weighing on Chinese demand and gold prices, which have fallen about 10% domestically and globally since their peak this year in February.

Other prominent investors share China Gold’s view on bullion; hedge funds run by John Paulson, and George Soros lifted their holdings of the yellow metal in the second quarter, according to US securities filings last Tuesday.

Kevin Maloney