ACQUISITIONS

Zhaojin Mining hunts for overseas bargains as valuations fall 30pc

With valuations of overseas mines down by up to 70 per cent from their peaks, the mainland company is in talks with potential targets

PUBLISHED : Thursday, 23 October, 2014, 6:25am
UPDATED : Thursday, 23 October, 2014, 6:25am

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Zhaojin Mining Industry is in talks over potential overseas acquisitions as lower gold prices have brought down the value of international resources by more than 30 per cent this year, making them cheaper than domestic ones, according to its chief.

The company was in talks to buy both exploration and producing assets in North America and Australia, chairman Lu Dongshang said on the sidelines of the China Mining conference.

Lu noted some overseas-listed gold miners' valuations have fallen more than 70 per cent from their peaks to "severely undervalued" levels.

"The domestic market has a lower level of understanding of how markets work," he said, explaining why overseas assets are now more attractive.

Lu said this did not mean Zhaojin would give up looking for domestic acquisition opportunities but potential asset sellers required more convincing to let go of their projects.

He said Zhaojin, a unit of one of the nation's largest gold miners Shandong Zhaojin Group, was interested in domestic projects with at least 20 tonnes of reserves and overseas ones with over 50 tonnes. For underground mines, it would prefer the domestic reserves contain more than 2gm of gold per tonne of rocks, while the hurdle for overseas reserves was 5gm.

The more stringent requirements for overseas targets reflect higher mining and environmental protection compliance costs, resident resettlement costs, and political and regulatory risks overseas.

Song Xin, the president of the nation's largest gold miner, state-owned China National Gold Group, told the conference the mainland's seven largest gold miners together spent about US$2 billion on overseas acquisitions between 2011 and last year, yielding total resources of more than 300 tonnes.

Still, the industry as a whole continued to suffer after average gold prices fell 15 per cent to 278.60 yuan (HK$353) per gram last year from 2011, while production costs rose 16.8 per cent to 197.30 yuan per gram in the same period largely due to higher safety and environmental protection compliance costs, Lu said.

The industry's average profit margin fell to 4.7 per cent last year from 10.5 per cent in 2012.

The low profitability of the industry is also partly due to its high fragmentation and miners' small size. The top 10 miners together produced 160 tonnes last year, compared with the 228 tonnes by the world's largest miner, Barrick Gold, Lu said.

China, however, produced 428 tonnes last year, the seventh consecutive year that it was the world's largest gold producer.

Both Lu and Song said cost reduction and production efficiency improvements through innovation to enhance gold recovery rates from ore were key to sustaining profits amid low gold prices.

Amid tightened bank lending to the mining sector due to lower metal prices, Lu said Zhaojin was raising more funds from mid-term debt papers, trust loans and corporate bonds, as well as mining industry fund products.

Zhaojin's net profit rose 8 per cent year on year to 324.1 million yuan in the first six months, as a 12 per cent increase in gold output offset higher finance costs and lower gold prices.

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