Zhongjin Gold Co is making a bid to become the leading producer of the yellow metal in China.

The Shanghai-listed company, controlled by the State-owned China National Gold Group Corp (CNGGC), plans to acquire seven gold mines in Henan, Hebei, Jilin provinces and Xinjiang Uygur autonomous region from its parent company in a transaction described by Zhongjin as an "asset injection".

In a statement to the stock exchange earlier this week, Zhongjin said the seven gold mines have a combined known gold reserves of 114 tons valued at around 23 billion yuan at current prices. The company said the combined annual output of these mines is estimated to be around 5 tons.

But analysts noted that after deduction of minority interests in these gold mines, Zhongjin would have an effective share of about 79 tons of the total gold reserves and 3.45 tons of the annual production. The acquisition, if it goes through, will boost Zhongjin's total gold reserves to 405.98 tons and annual production to 12.5 tons.

The enlarged reserves would also enable Zhongjin to dislodge Jiangxi Copper, with 405.16 tons of reserves, from the second slot among gold producers. Hong Kong-listed Zijin with reserves of 701.5 tons and annual output of 28.5 tons was the leading gold producer last year.

The size of a gold producer's reserve matters greatly as it gives the owner a greater say in determining the price of the metal on the exchanges and at the retail level, industry analysts said.

"Gold reserves in China is very limited," said Lan Ke, analyst, Southwest Securities. "Zhongjin's expansion will intensify competition in China's gold mining market."

Further details of the Zhongjin's inter-group acquisition weren't available. A highly placed company source told China Daily that the company expects to acquire at least two of the seven mines before the end of June, and the rest within this year.

Company sources said the proposed "asset injection" was planned years ago to allow the parent company to absorb the development costs of these mines before selling them to the listed subsidiary.

"It usually takes five to eight years from prospecting to production," said Xiao Zheng, analyst, Ping An Securities. "This is why CNGGC, the parent firm, has been holding on to the mines," he said adding "it is a common practice among mining corporations in China."

Comparing Zhongjin Gold and Zijin Mining, Xiao said they had advantages and shortcomings. "The parent company of Zhongjin Gold, CNGGC, is China's largest gold group. It has close connections with the central government, and therefore Zhongjin Gold will enjoy this support," Xiao said.

However, despite its abundant resources, Zhongjin's mines are scattered around the country, heightening the mining cost. Zijin Mining spends only 80 yuan in producing one gram of gold, much lower than the average 135 yuan for other firms. In addition, the privately owned Zijin has abundant experience in merging and purchasing overseas mines, said Xiao.

In 2008, China surpassed South Africa as the largest gold supplier, accounting for 12 percent of the global gold supply. Among the 300 tons supplied, Zijin contributed 28.5 tons, Zhongjin 11.63 tons, and Shangdong Gold Mining 16.4 tons.

Gold prices remained resilient even as prices of other commodities fell due to the economic slowdown, said Lan. He estimated gold prices would fluctuate in the $850 to $1,050 per ounce range this year. "We will see another premium year for gold miners," he added.

Zhongjin shares soared 7.89 percent and closed at 66.88 yuan on Wednesday. Trading was suspended on Monday and Tuesday due to market speculation that the company was about to buy seven gold mines within four months.

Its share price shot up to 73.57 yuan yesterday, rising 10 percent or the cap range allowed by the stock exchange.

Gold prices edged up 0.4 percent to $924.75 per ounce on Tuesday in London.

(China Daily May 22, 2009)