Gold less important to China than base metals - Hallgarten's Ecclestone

Despite the popular belief China needs western mining technology, Hallgarten's Christopher Ecclestone argues China has been a mining power for centuries that isn't dependent on foreign mining for advancement.

Author: Dorothy Kosich
Posted: Tuesday , 23 Mar 2010

RENO, NV -

Almost any mining company in China with a decent prospect can get into production, provided that the company is exploring or mining for gold or silver.

Backed by a long history of mining that spans thousands of years, however, the Chinese appear far more determined to maintain control of China's industrial metals reserves and resources.

As metals analyst Christopher Ecclestone of Hallgarten & Company observed in an analysis published Monday, "A key factor to divide the waters on any discussion of mining investment into China is to separate precious metals from the industrial metals (base metals, specialty metals, Rare Earths etc."

"The Chinese do not seem preoccupied by foreigners exploring for an exploiting the former," he said. "They are very focused on policy towards retaining control of the latter though and thus discussion of the industrial metals in China is best left to the pundits and political strategists."

Meanwhile, Ecclestone suggested, "The openness to precious metals explorers may not be enough to derail criticisms that China is a ‘closed shop' on mining at a time when China wants to exploit the resources of other mining nations."

In his analysis, Ecclestone asserted China is not as interested in gold as gold bugs believe. This was particularly evident when the nation was not interested when the IMF sold some of its gold reserves, which eventually were purchased by India.

"This relative disinterest in gold is reflected in the fact that the Chinese have been willing to allow foreigners to pursue gold and silver within China but NOT base metals (and certainly not specialty metals)," he added. "And allowing foreigners into the precious metals space is not a production of any ‘special technology' that the foreigners are bringing, as there is little new under the sun in gold mining since decades."

Ecclestone believes "precious metals extraction is not a key priority for the Chinese. Where gold or silver is extracted by Chinese corporations or foreign ones is somewhat immaterial as the Chinese central bank can, if it chooses, buy the output of either type of producer."

CHINA MORE PROTECTIVE OF BASE METALS

China is far for more protective of its base metals reserves and resources, Ecclestone asserted. The nation's strategy "now would appear to be to keep major reserves in the ground in China and buy up the production and producing facilities of other countries."

"Twenty years on it will be other countries' resources that are depleted not China's," he observed, adding "it is clear that the country does not want foreigners buying, developing and bringing into production base and specialty metals within China."

"Early aspirants with this goal, from Canada in particular, have been sent away empty-handed. This had led to a practice of ‘recycling' of old China plays into new ‘flavours of the month.'"

Although China is the world's largest gold miner, Ecclestone suggested China has only gained the title of gold production leader only because perennial leader South Africa has gone into a terminal decline.

"While gold at the current record highs will make smaller deposits more viable it will not bring into existence the type of large scale mines that are now reaching the end of their useful lives in several of the historically leading countries in the sector," he asserted.

"There are some though who feel that China's gold mining industry, while relatively prolific, carries within it the seeds of its own destruction largest because the local industry is highly fragmented and has massive State participation," Ecclestone said. "As with anything involving the State in China, inefficiency comes with the territory and environmentally the mining process is even more gung-ho at disregarding the issues of pollution and remediation."

CHINESE SILVER PRODUCTION

While China's status as a top gold producer is often publicized, Ecclestone observed "its rapid rise in the silver production stakes is not so well known. This is particularly relevant as most of the major accessible plays...are silver, rather than gold-oriented."

"Having a major zinc industry also implies strong silver by-product credits by its very nature."

Nevertheless, Ecclestone noted, "Again we see that despite being the third largest silver producing nation, China's silver production comes principally from a considerable number of small mines as opposed to a few large ones. High fragmentation is the norm, with none of the top 20 silver producing companies operating in China, and none of the world's top 10 silver producer mines are in China."

WHO ULTIMATELY CALLS THE SHOTS?

In his analysis, Ecclestone suggested former China plays "now have the dubious distinction of residing in Toronto's recycling bin with uranium juniors down on their luck for the wash-and-repeat of being turned into backdoor listing vehicles for the latest flavor of the month."

Ecclestone asserted at least half of the new China listings on the TSX in 2007 "have since been recycled as something else or diversified out of China to the point that they can scarcely be called China plays anymore."

"One question that intrigues us though is the extent to which the permission granted to ‘foreign' mines is broad or whether it only really extends to ‘foreign' miners that are largely controlled by overseas or onshore Chinese," Ecclestone observed. "That raises the issue of whether they are really foreign. It might also raise the question of who ultimately calls the shots. "

Nevertheless, Ecclestone noted that one of the largest precious metals mining players in China is Eldorado Gold, which "is clearly not a Chinese company in any capacity."

In his analysis, Ecclestone said historically China has been a great mining nation for thousands of years. "One of the reasons why foreigners may not getting much traction in exploring China is that they don't bring that much to the table."

"The Chinese know very well where most of the mineral potential of their own territory lies. They have spent decades poring over the geological possibilities in a systematic way and millennia exploring and exploiting mineral resources in the more basic ways that preceded the Industrial Revolution," he observed.

"With nothing especially new to bring to the table, a language barrier to navigate and fairly primitive fundraising markets (yes, we mean Toronto), there is no reason why foreigners should be ahead of locals in the race to Chinese mineral resources."

"China has been hard going for foreign non-precious miners," Ecclestone observed. "If there is any sign that the precious metals miners also are going to be pressured then this country may be put into the ‘too hard' basket for many investors."

"Seemingly China is ruling itself off limits for anything more than precious metals miners," he added. "This is not enough potentially to deflect criticism that China wants to secure everyone else's industrial metals and wants to keep its own for itself."

"This complaint will be heard louder and louder in coming years. Thus the investor community are probably best at restricting their China mining forays to companies like those we highlight in this note for they seem to have passed the test of time (and politics)," Ecclestone concluded.