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Sep 2012 - Enter The Dragon

 Enter the Dragon

The placement of 4.55bn shares in Focus Minerals (FML) to Shandong Gold International at 5c per share, raising $227.5m, marks a further advance by a Chinese gold company taking a different kind of position in an Australian gold producer.

In just over the past year, we have seen the multi-national Beijing Stone or the Stone Mining Group take a position in A1 Minerals (AAM), and gradually take control of it in August 2011 and rename it Stone Resources Australia (SHK, over the old Brightstar and Cork Tree Well mine at Laverton), together with buying 15% of Crescent Gold (CRE) on market above the FML offer, apparently mostly after August 2011.

This was followed by Zijin after taking an almost 17% position in Norton Goldfields (NGF) making a takeover offer of $0.25 plus a $0.02 per share special dividend, in May 2012 and closing the offer on 20 August 2012 with 89.15%, ie not quite enough for compulsory acquisition. The decision commented at Diggers that Zijin was apparently not really interested in achieving 100% control took the market by surprise, and seemed to result in a mad panic of acceptances amongst those hoping for an arbitrage play, unless perhaps Zijin wants to keep the listing open and rename it Zijin Australia.

Like SHK, Zijin seems to be gradually replacing the board and management with Chinese personnel.

However, the Shandong Gold International move appears to be a new phase, namely keeping the company [FML] (it may of course become Shandong Australia, as they will have 51%) by injecting cash for the company [FML] to develop, but also wanting to keep the existing management team - which is a major management approval tick for Focus Minerals.

These moves by Chinese companies are occurring at a very auspicious time, as the current year is the "Year of the Dragon" and the change of power in China.

In the last gold mine consolidation phase when Australian companies were taken over by the North Americans and South Africans, the Australian companies were acquired for cash or shares and replaced, never for cash injection.

The initial takeovers also replaced the board and management, but the later ones didn't, because of the realisation that the experienced way of mining underground in South Africa did not help when local knowledge and the efficient operational way of running mines in Australia was required.

China and the way it operates appears to be ever changing at a fast rate. It was once said of Anglo American that in hindsight it was easy to see what they were going to do. The Chinese acquisition of FML represents a different kind of move, and we do not have the benefit of hindsight to assess what could happen next.

However, there are at least 3 possible conclusions, namely :

Finance appears to now be available to develop mines at a time when credit markets are tight (or are they).

China has decided that it wants to have gold mines and Australia appears to be a relatively safe, low inflation, mining friendly, strong currency address.

China does not perceive the old Kalgoorlie, Coolgardie, Laverton districts as having been overpicked and could still contain material discoveries, especially at depth.

As most employees we/ERA encountered on a recent visit in August 2012 to FML's operations stated "we joined FML because of the upside potential in Coolgardie and Laverton".

The market perception of the Goldfields region is that it is a big yawn, whereas the Chinese (who also do their homework) are instead clearly keen on the area.

Phoenix (PXG) have also been showing that their areas NW of Kalgoorlie and Coolgardie are not well picked over. Often it is a case of shallow drilling or even in many cases a case of hardly any or no drilling at all around old worked areas.

Such as PXG's original Ora Banda prospect (the original Ora Banda town moved south to the current Ora Banda location), or FML Laverton's Burtville where SGW mined a pit, but not the historic high grade workings all around the pit.  SGW apparently last mined there about 1996, because they became increasingly distracted by super rich newly acquired mines such as Yilgarn Star.

However, surrounding the old Burtville pit are old workings such as "Away From Home Leases" : initially 6.5oz/t, averaged 2.2oz/t (1900 to 1909), "Sudden Jerk" ~1.5oz/t (1902 to 1904), "Bell" ~1oz/t (1901 to 1903), and "Blue Moon" at ~1.8oz/t (but only 63oz from 35t) - yes that's right, these workings are still there, untouched, undrilled for over 100 years.

There's also south Burtville (further south on the other side of the road) also called Merolia, minor RAB drilling to 20m, with two old headframes and the shafts striking in different directions, with one of the shafts professionally re-timbered.

While the war chest that Shandong Gold International (a 65% subsidiary if Shandong Gold Ltd, which owns 56.4% of Shandong Gold Mines that produces >700,000ozpa with a market cap of  ~$9bn) has provided to FML clearly means that FML can fix the plant at Barnicoat for its Laverton operation (and no longer be reliant on toll treating through Barrick's Granny Smith). It does also mean that FML can prove up resources at Coolgardie and Laverton, but at this stage, that really only provides them with ~200,000ozpa or so.

Whereas FML's stated intention is to grow to ~500,000ozpa, so what is coming next in an industry ripe for merger and acquisition ? Clearly for FML, the backing of a major gold company makes a significant difference.

However, of equal and perhaps more interest is what are the Chinese mining / gold companies next moves going to be and are they the ones that are going to provide the merger and consolidation in the Australian gold sector this time round ? And is it just Australia, or  West Africa etc too ?

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.


  • Written by: Keith Goode
  • Wednesday, 01 August 2012