MAC: Mines and Communities

China Update

Published by MAC on 2007-03-23


China update

23rd March 2007

Once again, the Chinese regime is seeking to reduce over-supply, pollutiion, and excess energy use, by phasing out small mineral related ventures - this time for lead and zinc.

In a potentially important move, the government's ministry of commerce has said that, while welcoming foreign involvement in certain sectors (including energy conservation and environmental protection), companies which seek investment in high energy consuming and "polluting" industries will be banned.

It's highly doubtful that such a stricture will be applied overseas. New joint ventures were announced last week in mining projects in both Afghanistan and Australia.

Meanwhile, Zijin Mining's attempt to take over Monterrico Metals - a company widely condemned, both inside and outside Peru - has been stalled. Not, however, from any moral considerations. But because Monterrico's main shareholders, the Greater Europe Fund, says the bid isn't high enough.


China strengthens zinc and lead smelting regulations - NDRC

China plans to block all new lead projects under 50,000 tons, according to a statement released by the National Development and Reform Commission on March 16.

The Chinese government aims to eliminate outdated production capacity in the industry, limit over-expansions and maintain a supply and demand balance for lead and zinc.

Zinc smelters with an annual capacity of under 100,000 tons and secondary lead producers with a capacity of under 10,000 tons will be gradually phased out. Secondary lead facility expansions and upgrades will be required to have a minimum production capacity of 20,000 tons per annum, while new secondary-lead projects will be required to have an annual capacity over 50,000 tons.

New lead and zinc mines will be blocked if their annual capacity is under 30,000 tons and service period less than 15 years. Medium scale mines are advised to have an annual output of at least 300,000 tons.

Mining projects with investment over RMB 500 million ($64.64 million) will be required to attain NDRC approval, smaller scale projects will require provincial government approval. In addition, at least 35 percent of the capital for lead and zinc mining, smelting and regeneration utilization projects must be in the form of liquid assets.


China welcomes foreign investment in high-tech industries, not key industries

The Ministry of Commerce (MOFCOM) yesterday encouraged foreign companies to invest in Chinese industries involved in high-technology, energy conservation and environmental protection, as well as in the technical reform and upgrade of traditional industries, but said the government will maintain control over the nation's key industries.

According to MOFCOM, foreign investment is welcomed in sectors including finance, logistics, information technology, software and technological research and development.

Foreign companies will be restricted from investing in high energy-consuming, high polluting and low value-added production industries. Foreign capital will be particularly restricted in the real estate sector.

Strategic foreign investment in listed domestic companies will require appropriate guidance and supervision, according to MOFCOM.

MOFCOM said that the government will strengthen relevant regulations to prevent monopolies and hostile takeovers by foreign companies and to ensure it maintains control over key national industries.

The Chinese government has not approved any new steel project or any capacity expansion projects funded by foreign companies since 2005. Arcelor Mittal's share acquisition proposal for Shanghai-listed Shandong Laiwu Iron and Steel Co. Ltd. has been awaiting government approval for over one year.

The total foreign investment into China's steel industry was $141 million last year, down 66.67 percent from the previous year.

China attracted $69.5 billion worth of foreign investment in 2006, 4.06 percent lower than the previous year. An additional 41,485 foreign-funded enterprises were established in 2006, down 5.76 percent from 2005.

Twelve foreign joint venture banks, insurance companies and fund management companies were established, down 33.33 percent from 2005, attracting $6.447 billion, down 46.46 percent, according to MOFCOM.


Jiangxi Copper, Zijin Mining and MCC jointly bid for Afghanistan copper mine

Jiangxi Copper Group, Zijin Mining Group and China Metallurgical Construction Corporation (MCC) will together bid to co-develop a world class copper mine in Afghanistan, a Jiangxi Copper official told Interfax on March 20.

The three companies recently signed an initial cooperation agreement in Beijing, to jointly bid for exploration rights to the Aynak Copper Deposit, located 35 kilometers south of the Afghan capital, Kabul, at the northern end of Logar Province.

The three companies have not yet discussed the form their cooperation will take or the share distribution, as the copper project is currently only at tender stage, a senior Jianxi Copper official, who wished to remain anonymous, said.

Surveys show that the Aynak copper deposit contains 240 million tons of grade 2.3 percent copper reserves in the central portion of the deposit, making it a world-class copper deposit, according to information released by Afghanistan's Ministry of Mines and Industries. An exploration right tender for the deposit began in August. Applicants were required to be international investors with a proven track record in fiscal excellence and technical competence in copper exploration, processing and marketing of concentrate, blister or refined copper.

The ministry also requested applicants to provide infrastructure improvements of benefit to mine operations and to the country as a whole.

In November, the ministry announced a shortlist of nine interested mining companies from China, India, Australia and America.

According to a MCC announcement, MCC will be in charge of preliminary prospecting, project design and infrastructure and project construction. Jiangxi Copper and Zijin Mining will be responsible for mine management and operations and will also have priority on copper concentrate supply, if the three companies win the bid.


Hunan Nonferrous to develop tungsten-molybdenum mines in Australia

Hunan Nonferrous Mtleetals Holdings Group Co. Ltd. will collaborate with Thor Mining Plc. to develop tungsten and molybdenum mines in Australia, a company official told Interfax on March 21.

"Hunan Nonferrous has recently conducted initial talks with Thor Mining to develop tungsten and molybdenum mines in Australia's Northern Territory, but the company has not yet drafted any plans on how to collaborate with Thor Mining, as the completion of a due diligence assessment is still pending," a company official with the Investment Planning Department, surnamed Jiang, said.

Thor Mining announced the completion of a memorandum of understanding (MOU) with Hunan Nonferrous Metals to develop its Molyhil tungsten-molybdenum project last Tuesday. The MOU allows Hunan Nonferrous to complete their due diligence assessment by April 15 and to decide on suitable off-take amounts by April 30.

Hunan Nonferrous is a leading producer of nonferrous and minor metals in China. The company holds the world's largest deposits of tungsten and bismuth and owns China's largest zinc and antimony smelters.

Thor Mining's main business focuses on the exploration and development of molybdenum and tungsten deposits in Australia's Northern Territory. The development of the Molyhil tungsten-molybdenum project is planned to commence in May, with off-take starting in the first quarter of 2008, according to Thor Mining.
Early this February, Hunan Nonferrous announced that it will invest $116 million in Australian Compass Resources NL after receiving National Development and Reform Commission approval to explore and develop base metal oxide resources in the Australia's Northern Territory.


Jinchuan Group signs Australian nickel mine deal with Metals X

Gansu Jinchuan Group Ltd., China's largest nickel producer, has signed a framework agreement to assist Australian mining company Metals X Ltd. in the development of its Wingellina Nickel Limonite deposit project in Western Australia, Metals X announced on March 20.

The Wingellina deposit is estimated to be the 16th largest nickel oxide deposit in the world, with preliminary surveys suggesting an annual production capacity of approximately 40,000 tons of nickel and 2000 tons of recoverable cobalt as co-product.

Current surveys suggest that the mine holds deposits of 213.2 million tons of ore grading 0.95 percent nickel, 0.074 percent cobalt and 45.2 percent iron oxide. The deposit contains 2.03 million tons of nickel metal and the project has an estimated service period of over 40 years. Jinchuan has entered into a subscription agreement to purchase 117 million Metals X shares at AUD $0.28 per share, which will raise a total of AUD $32.76 million.

This will make Jinchuan the largest single shareholder in Metals X with 13 percent of the expanded share capital. As part of the deal, Jinchuan's vice-president will join Metals X's board of directors.

Under the framework agreement, Jinchuan will provide technical assistance to Metals X for the construction and operation of the Central Musgrave project. In return, Jinchuan will be granted nickel oxide off-take rights and first right of refusal to purchase products from any other projects it is directly involved in.

The agreement is subject to approval by the provincial government of Gansu Province and Chinese central government authorities.


Shougang to develop Australian iron ore mine

Shoudu Iron and Steel Group (Shougang) will provide an interest-free loan of AUD $56 million ($45.17 million) for Australasian Resources Ltd. (AR)'s Balmoral South iron ore project in the Pilbara region of Western Australia, according to an AR announcement on March 21.

Shougang plans to fully fund project construction, including all related infrastructure and guarantees to off-take all the premium iron ore during the project's 25-year lifespan. The loan will enable Shougang to acquire 56 million AR shares at AUD $1.00 ($0.81) per share, with 28 million free attaching options excisable at AUD $1.50 ($1.21) per share for three years after the loan is issued, according to AR.

Shougang will invest a further AUD $42 million ($33.88 million) in the form of project attaching-options in the next three years.

The project will produce and export 5 million tons of iron ore concentrate, 5 million tons of pellets and 1.5 million tons of hot briquette iron.

A Shougang Group official, surnamed Wu, declined to give further comment when reached by Interfax.

State-owned Shougang Group is the ninth-largest steelmaker in China and currently imports over 20 million tons of iron ore annually to supply its steel mills. At present, the group is attempting to secure overseas iron ore supplies in order to reduce raw material sourcing costs. Shougang abandoned the development of an iron ore deposit owned by Australia's Mount Gibson Iron Ltd. in December due to the high price of the deal.

Shougang's iron ore concentrate demand is increasing at a rapid rate, due to the development of a large integrated steel facility on Caofeidian Island, near the city of Tangshan in Hebei Province. Project construction formally commenced last week and Shougang expects the facility will produce 10 million tons of steel annually by 2010.

[All the above news stories are from Interfax China, 23 March 2007]


Monterrico's largest shareholder to reject Zijin offer

LONDON, (Reuters)

21st March 2007

The Greater Europe Fund, Monterrico Metals' largest shareholder, will reject a takeover offer from a Chinese consortium because the offer undervalues the London-listed miner, the fund's adviser said.

The offer valued the company at around 94.6 million pounds ($186 million) and investors have to accept or reject by March 26. Dublin-listed Greater Europe owns 7.27 percent of Monterrico.

Greater Europe's adviser, German-based Wermuth Asset Management, said its research showed the fair value of Monterrico Metals at between $500 million and $1 billion depending on the valuation model.

That would imply a price per share -- based on around 26.3 million outstanding shares -- of around $19.00 to $38.01 or 9.76 to 19.52 pounds.

Peru-focused copper miner Monterrico Metals Plc agreed in early February to a takeover by a consortium led by Chinese No. 2 gold miner Zijin Mining Group Co. Ltd.

"We believe that Zijin's offer may be at least 2.5 times lower than Monterrico Metals Plc's fair value," Wermuth said. Monterrico's shares have risen to around 3.50 pounds -- the value of the offer -- from below 3.0 pounds in early February when the company detailed a feasibility study on its Rio Blanco copper and molybdenum project in Peru.

OPPORTUNISTIC

Copper is used extensively in the construction, power and auto industries and molybdenum by stainless steel makers.

The Rio Blanco project is seen by analysts as the largest copper project in the world not owned by a major firm.

"Takeover offer and feasibility study serve to support our valuation of around $1 billion for the Rio Blanco copper project in Peru," Numis Securities said in a research note.

"We believe the Zijin offer is opportunistic and represents a significant discount to our valuation of the `world class' Rio Blanco Copper project ... we believe the project should be valued at over $1 billion."

Wermuth said it believed cash-rich companies in the metals sector in the former Soviet Union as well as cash-rich investors could be very well placed to acquire Monterrico and might well find a diversification of their asset base very attractive.

Monterrico is not allowed to seek an alternative bidder, so Wermuth is planning to approach other potential bidders.

"We will discuss the matter as a major shareholder with Kazakhmys, Norilsk Nickel, Uralskaya Gorno-Metallurgicheskaya Kompania (UGMK), Kazzinc, other companies and large investors," Wermuth said.

"Taking into account the current volatile situation in global equity markets around the world there is a risk that some shareholders will accept Zijin's offer, pursuing a short-term goal to fix profit and raise cash."

The Greater Europe Fund has $520 million under management and has returned about 1,500 percent since it was launched in 1998.

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