Chinese aluminium major Chalco makes surprise gold leasing foray

Aluminum Corp of China (Chalco), the nation’s second largest smelter of the metal, has made an unusual and intriguing foray into the gold leasing business as a means to cut its cost of funding.

The state-backed firm, which booked a modest profit last year thanks to assets restructuring with its parent despite underlying losses at its core operations, said the leasing arrangement would help cut financing costs without subjecting it to the price risk of gold.

“[Our] directors are of the view that the quick acquisition of capital by the company by way of gold leasing and the business of purchasing and selling of gold with the same price through Bocom is free from the risks of gold price fluctuations, and broadens financing channels for the [company’s] production and operation and lowers the financing cost,” Chalco said in a filing to Hong Kong’s bourse on Wednesday.

Chalco said it has struck various gold leasing and hedging agreements with the Beijing branch of Bank of Communications (Bocom), under which the bank will provide Chalco with “standard gold in Au99.99 fineness” which is traded on the Shanghai Gold Exchange.

The market value of the “leased” gold is three billion yuan based on an undisclosed settlement price agreed between the two parties.

Chalco said it will pay the bank a leasing fee, certain charges for futures contracts and other transaction expenses, the total of which would not exceed the benchmark interest rate for one-year loans as set by the central bank, the People’s Bank of China.

The gold will be leased to Chalco for 12 months, and the bank will be “entrusted” to sell it to raise funds to be used by Chalco as working capital.

When the agreement expires in 12 months, the gold will be bought back at the same price via a forward contract and Chalco will return the same quantity and type of gold to the bank.

Instead of requiring Chalco to pay a security deposit, Bocom will freeze 3.3 billion yuan of working capital credit facility it has made available to Chalco.

Analysts were surprised by Chalco’s gold move.

“I have followed Chalco for over a decade, I have never heard that it has produced or hedged any gold,” said a mining sector analyst at an American brokerage.

Chalco did not respond to the Post’s queries on whether this is its first gold leasing deal and whether it is subject to any limit on the business.

Huarong Securities’ Beijing-based analyst Zhang Feihong said gold leasing is regulated on the mainland and is restricted to financial institutions, gold miners, smelters and traders that are members of the Shanghai Gold Exchange.

Bocom is listed as a member of the exchange, but not Chalco, according to the exchange’s website, although it is not clear whether Chalco may have acquired a company that is a member.

Chalco said it and Bocom will separately file applications for gold leasing through the “membership service system” of the exchange.

Zhang said due to lack of disclosure of the leasing fees Chalco has to pay, it is not clear how much funding cost savings it can achieve via gold leasing instead of borrowing through other means.

He said Ao Hong, who took over from Ge Honglin as Chalco’s new chairman in February, may be under pressure to improve the firm’s profitability.

“It is very difficult for Chalco to make a profit from its core aluminium operations [given its high production costs], it may have to think of ways to generate profits or savings from non-operating activities, and gold leasing may be one,” he added.