Nice- Read ThisWill China Be the Top Gold Producer by 2010?
By Wang Pan
02 Aug 2007 at 10:27 AM GMT-04:00
BEIJING (Interfax-China) -- The Eldorado Gold Corp. [AMEX:EGO; TSX:ELD], headquartered in Vancouver, Canada, is an international gold mining company actively involved in both gold mine development and exploration. The company is currently expanding its operations in Brazil, Turkey and China.
The company is listed on both the Toronto and American stock exchanges and owns 7.1 million ounces of both proven and probable gold reserves out of a total of 10.9 million ounces.
Eldorado officially opened the Tanjianshan Mine in western China in November 2006, becoming the first North American gold producer to construct and operate a gold mine in China. The mine commenced commercial production on Feb. 1, 2007, and is expected to produce between 120,000 and 130,000 ounces of gold this year.
The company produced a total of 135,653 ounces of gold last year and expects production to increase by more than 100% to between 310,000 ounces and 330,000 ounces of gold this year, at an average mining cost of between $220 per ounce and $230 per ounce.
Eldorado intends to own multiple mines in China and reach a gold output capacity of 15.5 tonnes in 2008.
Interfax interviewed Richard Li, the general manager of Eldorado Gold's Beijing office, last week, with regard to production goals for its Tanjianshan project, domestic and overseas gold markets, as well as future company development plans in China.
INTERFAX: Please introduce the projects your company is currently working on in China.
LI: Eldorado Gold has only one gold project in China at the moment, located in Qinghai Province, but we are looking for more opportunities in the future.
INTERFAX: What future development plans do you have in China?
LI: Well, our Beijing office, to which you are one of the first visitors, was established three months ago with the intention of finding new opportunities in China. We have plans to grow and expand, but we're working hard on the possible opportunities.
INTERFAX: We understand that production started at the Tanjianshan Mine project in February 2007. What are the project's production goals both for this year and the next?
LI: Basically, gold production for this year will probably be somewhere in the region of 120,000 ounces, and we intend to carry on production at the mine for about 10 years.
INTERFAX: According to our information, the Tanjianshan project is one of the few successful foreign-invested gold mining projects in China. As a matter of fact, we've been informed by many foreign companies of the difficulties in dealing with local governments regarding exploration and mining rights. For instance, Chinese mining legislation states a company only has priority rights to mine exploration, meaning that after investing a large sum of money in pre-prospecting, the exploration license might be granted to a domestic company. What experience have you had with regard to licenses? Is there an effective way of securing the rights to a mine? And what is your opinion on current Chinese mining policy with regard to foreign companies?
LI: We are proud of being one of the few successful mining companies in the gold industry in China. Even though more than 250 foreign companies have been doing businesses in China since the 1980s, only a few of them have arrived at a stage like where we are now, so obviously we are doing much better and we're proud of this.
In terms of the mining rights issue, I think China is quite different from western countries, and if a foreign company chooses to do business in China, then they need to know both how China works and how to do business here - the differences are obvious.
Foreign companies also need to be aware of recent Chinese history, as even 20 years ago, people felt that China was quite a mysterious place and couldn't really understand it at all. Another 20 years from now and China will be quite a different place again, probably more or less the similar to any other country. You could say China is currently in an interim stage of development.
So, in one, two, three or something decades, the Chinese legal system has been transformed from supporting a planned economy, to moving towards supporting a market economy, and this has to some extent caused some confusion.
If a foreign company wants to do business in China, they should really try to get to know China well, not only the legal situation, but also the social and culture. A combined understanding of these issues is a great help to success in China.
With regard to the priority rights issue, this is indeed the source of much confusion to foreign companies, who tend to adopt an attitude of "we've invested the money, carried out all the exploration work and should therefore naturally receive the mining rights." In fact, as far as I am aware, the term "priority rights" is part of a regulation born in the planned economy days (when property ownership was not what it is now).
In the past, exploration rights were held by the China Geological Brigade that was not allowed to carry out any actual mining activity, so it was natural for mining rights to be granted to a different company from the one holding exploration rights. In any case, I expect concerns like this will be resolved in the future.
I have heard it said that some companies have converted their exploration rights to actual mining rights. However, as far as I am aware, there has never been a case where a company has failed to complete such conversion. All in all, we feel reasonably comfortable with both our current and future business in China, even if the situation is somewhat uncertain by western standards, and we are hopeful that the situation will change to make foreign investors more comfortable and confident of doing business in China in the future.
INTERFAX: In 2005, your company signed an MOU with the Shandong Gold Corporation for a possible advanced exploration joint-venture project at one site, as well as two additional development projects. Please comment on any progress that has been made with the Shandong Gold Corporation. Are there any other gold companies in China with which you are considering cooperation?
LI: Actually, our MOU with Shandong Gold has already expired due to a lack of actual projects on which both sides could do a real deal.
The lack of actual projects meant that we had nothing to go ahead with. Even so, we do want to cooperate with Chinese companies and hope that some beneficial cooperation can be set up in the future.
We are still working on the possibility of working with either a Chinese gold company or the Chinese geological brigade on whatever they have mining and exploration rights to, and they probably want to cooperate with other companies both domestic and foreign. Anyway, we are still working on this.
INTERFAX: Gold prices have surged from an average price of $276.5 per ounce in 2001, to a current price of nearly $700 per ounce. What, in your opinion, are the main factors behind this remarkable price hike? Is it solely the result of excessive market speculation?
LI: Basically, I think it's mainly a geopolitical issue. On the one hand, people buy gold for personal use, and on the other hand, gold has a historic function in currency markets.
If people don't have confidence in the global economy, they tend to increase gold purchases, which is the case for individuals in particular. However, I personally don't see that the current gold supply and demand situation warrants a $700 per ounce price.
Furthermore, increased political tensions, for example the Middle East and particularly Iraq, have severely affected how safe people feel, and I personally believe this is the main factor behind the high gold price.
So to some extent, yes, I do think there is excessive market speculation. People don't feel safe, so they buy gold with the expectation that prices will continue to rise and enable them to sell at a profit. It it is a common business practice.
INTERFAX: What do you predict will happen in both the international and domestic gold markets this year and the next? For example, will China become the top gold producing country by 2010?
LI: Well, as I just mentioned, the major factor behind the high gold price is geopolitical tension, and if the situation remains as hot as it is now, I would say that it is quite possible that gold prices will break through the $700 per ounce mark.
Moreover, both international and domestic gold supplies will increase in the future, as gold mining increases.
So in answer to your question, yes, based on the current increase in gold production in China over recent years, it is quite likely that by 2010, China will be the No. 1 (gold producing country), as China's gold production is quickly catching up with South Africa (the current top gold producer globally).
INTERFAX: Chinese companies are being encouraged to “go out” in search of overseas mining projects. What in your opinion should they look out for, be wary of and focus on?
LI: First of all, I think it's quite good for the Chinese government to encourage domestic companies to go outside, regardless of the industry. Increasing globalization means that if a Chinese company aims to become stronger or even to become a leading company globally, this can't be done by limiting business scope solely to China and there must be a move out of the country. This is good for both Chinese and international companies, and I think both will benefit from the competition.
But in terms of how Chinese companies should go about finding opportunities to corporate with overseas companies, I think it all depends on the situation. It's very hard to say, because there are such a number of different ways to do businesses in foreign countries, such as purchase projects, share purchases or joint ventures. I cannot really say which way is better or best, every way works if you handle it well.
However, one of the challenges Chinese companies face when “going out” is how to best adapt themselves to foreign business environments, including the local legal system, society and economy, as well as local culture. These are exactly the same challenges faced by foreign companies in China.
INTERFAX: In what way should a domestic Chinese company approach an overseas project, and what in your opinion is the most suitable way for a Chinese company to participate in an overseas mining project?
LI: There is no specific way, as each way can be a successful case if you handle it well. However, I would suggest that Chinese companies set up some sort of organization to develop long-term plans for investment in overseas countries, just as foreign companies do in China when they set up offices in Shanghai or Beijing, etc.
It only takes a few professional people carrying out a study of the target country for a year or so for those people to be able to instruct you on the best way of finding opportunities in the country.
INTERFAX: There are currently an increasing number of Chinese companies expanding business to incorporate overseas mining projects. What in your opinion are their advantages and disadvantages in comparison to other international companies?
LI: Well, firstly in terms of the disadvantages in comparison to local companies, when a Chinese company arrives in a foreign company, they probably know little about the local legal system, culture, economy and marketing, so they should find someone [experienced] to help them out. In contrast, local companies will already have a thorough understanding of their own communities.
There are also some companies who look to cheat Chinese companies, as Chinese companies sometimes find it difficult to assess the credibility of an overseas company.
More importantly, Chinese companies should make sure they are well aware of the "rules of the game" in foreign countries. To begin with, it's likely they'll come across various difficulties, and even achievements could well be just plain luck.
In terms of the advantages of Chinese companies overseas, China's economy has maintained rapid growth and has a huge market. In some ways, this is one of the main strengths of Chinese companies, and they're likely to say, "Oh, I want to have the opportunity to work with you as well!"
When setting up a business overseas, Chinese companies can pull out another trump card like cheap labour, which is an extremely attractive incentive for foreign partners, shareholders and capital markets.
INTERFAX: It has been mentioned that gold prices will not rise above $700 per ounce as there are already vast supplies held in many central banks. Moreover, it is not looking likely that China will purchase large amounts of gold for central bank reserves (as many western countries have done in the past), and it is instead more interested in base metal investment. Please comment on how this huge gold reserve will affect global markets if production becomes insufficient to meet future demand.
LI: Well, people may still remember that in 1999, the Bank of England sold 450 tonnes of gold from their gold reserve. Gold is invisible money and psychologically, we view it as currency. Central banks presumed they had an obligation to maintain a certain amount of gold reserves due to historical precedent, as in the past, gold reserves heavily affected gold prices.
However, the present situation is that the U.S. dollar is weak, while other major currencies like the euro, the Japanese yen and the Chinese remminbi are trading well. (The U.S. holds by far the largest central bank gold reserve in the world).
I don't think there is any strong reason for central banks to feel they have an obligation to maintain the old monetary system or keep gold prices down. In other words, the connection between gold and currency systems is not what it used to be, supported by the fact that most major currencies are working well (while reducing gold reserves). Moreover, an economic crisis could easily be lead just by the U.S. dollar.
From March to May this year, Spain's central bank sold 105 tonnes of gold. This is not the action of a country trying to keep gold prices down, but a measure to control the domestic real estate market. They cashed-in the gold reserve for this purpose.
However, while it's true that a tight gold supply may lift gold prices, I still don't think the central bank has too strong a desire to lower prices, as even if they sold the entire gold reserve, the effect on market prices would only be short term and limited if geopolitical tension remains.
Moreover, I think it (the increased gold price) is more of a psychological matter depending on the geopolitical situation, as opposed to actual supply and demand pressure. A factor in support of this is that even when gold prices surged to $700 per ounce, there was no call for central banks to managing gold prices.
I therefore think it (central banks selling gold in order to manage surging gold prices and balance domestic supply and demand) is not likely to happen.
INTERFAX: According to our information, many overseas mining companies have plans for a Hong Kong IPO, in order to facilitate expansion into the domestic Chinese market. Please comment both on this strategy and whether your company has any similar plans.
LI: On the one hand, I don't really think it makes sense, nor will it directly assist them in business in China, in that if you need more money to expand into China, you can always raise money in any of the capital markets such as the London, New York or Toronto stock exchanges.
On the other hand, I believe it is just psychological that people think it's more comfortable and easier to start a business in China.
Our company has no plans to list in Hong Kong at the moment, as we are already listed both in America and Toronto.
© Interfax-China 2007. For more intelligence on Chinese metals and mining, click here or contact David Harman in Hong Kong at david.harman@interfax-news.com or (852) 2537-2262.