--China's talks on African Barrick latest step in overseas gold
hunt
--Chinese miners seek metal quality and mining technology
--China produces less than half the gold it consumes
By Chuin-Wei Yap and Rhiannon Hoyle
BEIJING--After years of scooping big overseas energy and
industrial metal assets, China is gaining momentum in another
commodity sector: gold.
China National Gold Group Corp.'s potential $3.9 billion bid to
acquire African Barrick Gold PLC (ABG.LN) 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.
If the talks succeed, state-owned China Gold, the country's
largest gold producer, accounting for a fifth of national output,
will join a clutch of domestic gold producers that have ventured
overseas in the last two years.
Zijin Mining Group Co. (2899.HK), China's second-largest gold
producer by output, said last week that its subsidiary has acquired
more than 50% of Kalgoorlie's Norton Gold Fields (NGF.AU).
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
US$20-million-plus acquisitions of Australian gold assets, worth a
combined $1.6 billion, according to Dealogic. Half were initiated
since last year.
In November, Shandong Gold-Mining Co. (600547.SH) launched a bid
to acquire Brazilian gold miner Jaguar Mining Inc. (JAG.T) for $1
billion.
"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," said Li Ning, precious-metals analyst for Shanghai
Cifco consultancy.
While Chinese gold-mining technology can reach to depths of at
most 2,000 meters below sea level, foreign technology can penetrate
three times deeper, Ms. Li said.
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 Corp. (ABX.T). Barrick needs to raise cash at a
time of shareholder pressure for better returns. 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 this week 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 U.S., Germany, Italy and France.
"Going overseas makes sense for two reasons; 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," said Jo Battershill, mining and resources analyst at
UBS.
"Secondly, 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.
Still, 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 U.S. securities filings Tuesday.
--Aaron Back in Beijing contributed to this article.
Write to Chuin-Wei Yap at chuin-wei.yap@dowjones.com and
Rhiannon Hoyle in Sydney at rhiannon.hoyle@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires