China’s Global Investment in Gold

China’sGlobal Investmentin Gold

China’sGlobal Investmentin Gold

Gold`sdemandin China has beengrowingexponentially within thelastone decade. Thedemandincreasedby 32 % in theyear2013, whenChina overtookIndia in termsof goldconsumption(Mathieson, 2014). Thisdemandis expectedto increaseto 1,350 tonsby theyear2017. Currently, China is importingabout 1,066 tonssince its domesticproductioncannot meetthelocaldemand.Thehighrateof an increasein demandrelativeto domesticproductionhas forcedChina to investheavilyin theoverseasgoldassets with themainobjectiveof meetingits localdemand.Thispaperwill analyzeChina’s global investmentin goldassets in South Africa, Brazil, andPeru.

Hostcountry:South Africa

CiticGroup is theChinese largeststate-owned firm that investedin South Africa’s Gold marketin 2011. Citic Group boughta stakeof 17.7 % of Gold One Company at a costof $ 469 million (Manny, 2014). However,there wasnotakeover premiumrecordedforthistransaction.With a 17.7 % stake,Citic Group could not controltheoperationsof Gold One since ithada lessthan controllingshareholding of at least50 %. ThistransactionallowedCitic Group to acquirethegoldminedby Gold One in South Africa andincreaseits revenuegeneratingcapacityas a resultof its newinvestment.Assets ownedby Gold One arelocatedin Johannesburg, South Africa. Theremaininglifeof theGold minesownedby GoldOne in South Africa wasnot disclosed.One of thekeyfactorsthat might resultin theterminationof thetermsof theagreementincludestheexhaustionof goldmines.Accordingto Rensburg (2011) mostof theSouth Africa’s goldmineswill getexhaustedwithin thenextten yearsorremainwith poorqualitygolddeposits.Chinachoseto investin South Africa becauseitcould getthegoldassets at a reasonableprice.Thehighrateof increasein thelocaldemandforgoldwasthemajorfactorthat drovetheChinese companyto investin South Africa.

Hostcountry:Brazil

ShandongGold Group bought100 % ofstakein Jaguar Mining in theyear2011. Thistransactionwasworth$ 1 billion (Wang &amp Willis, 2011). Thetwo companiesagreethatShandong Gold would pay$ 9.3 foreachshareand73 % premium.The100 % stakeallowedtheShandong Group to controltheoperationsof Jaguar Mining. AlthoughShandong’s mainaimwasto expandits supplyof goldfortheChinese market,thistransactiongaveitan opportunityto increaseits revenuegeneratingcapacity.Thegoldassets ownedby Jaguar Mining arelocatedin theregionof Iron Quadrangle, Brazil. Theestimatedremaininglifeof Jaguar’s assets wasbetween 6 and8years(Pedrosa, 2014). Therefore,therightsof theagreementcould be terminatedonce thegoldminesgetexhaustedbefore orat theendof 8 years.However,Jaguar has a planto lookfornewdepositsbefore thecurrentonesgetexhausted,butthisdidnot givea guarantee thattherightsof theagreementwill be indeterminate.ChinaChose to investin Brazil becausethecountryhas severallargergolddeposits,which impliesthattheChinese companywould getan adequatesupplyto addressthelocaldemand.Therefore,theincreasein demandforgoldin theChinese marketwasthemajordriving forceforChina’s decisionto investin thegoldassets in Brazil.

Figure1: Location of goldminesin Brazil

Source:Jaguar Mining (2014)

Hostcountry:Peru

ChinaMinmetals acquiredthemajorityshareholding of 95.92 % in Northern Peru Copper. Thistransactionwasworth$ 436.7 million, butthere wasnotakeover premiumrecordedforthetransaction.With thestakeof 95.92 %, China Minmetals could controltheoperationsof Northern Peru Copper (Xinhua, 2014). ThistransactionhelpedChina Minmetalexpandits supplyof goldin thedomesticmarketandincreaseits revenuegeneratingcapacity.Thegoldassets ownedby theNorthern Peru Copper arelocatedin El Galeno andHilorico,Peru. Theremaininglifeof Northern Peru Copper assets locatedin HiloricoandEl Galeno wasnot disclosed.Therightsof theagreementcan beterminatedin caseChina Minmetaldecidesto sellits staketo anotherinvestor orexhaustionof thegolddeposits.Chinachoseto investin Peru in orderto takeadvantageof thenewlydiscoveredandrichgoldmines,especiallyin thenorthof Peru. Theincreasein thedemandforGold wasthemajordriving forceforChina’s investmentin Peru’s Gold market.

Conclusion

Chinaiscurrently theworldlargestconsumerof Gold after overtakingIndia in 2013. AlthoughChina has someof thelargestgolddepositsin theworld,its domesticproductioncannot meetthegrowingdemandforthispreciousmetal.Therefore,therapidincreasein gold’sdemandis themajorfactorthat has forcedChina to investin theoverseasgoldassets. However,goldmineshavea shorterlifecomparedto othermetals,which meansthatitis difficultforChina to getreliablesuppliers. In addition,thequalityof goldminesandthesizeof depositsin countriesthat werepreviouslyrecognizedas thelargestproducersof gold(includingSouth Africa) havebeendecreasingconsiderably. Itwill, therefore,becomingincreasinglydifficultforChina to sustainits domesticdemand.

Summary

Hostcountry:South Africa

Transactioncostandpercentageinterest

CiticGroup purchaseda 17.7 % stakein Gold One at $ 469 million.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

CiticGroup didnot acquirethepowerto controltheoperationsof Gold One.

Productionrights

CiticGroup expandedits supplyof goldandrevenuegeneratingcapacity.

Location

GoldOne’s assets arelocatedin Johannesburg, South Africa

Remaininglife

Theremaininglifeof assets wasnot disclosed.

Terminationof rights

Rightsmight be terminatedfollowingtheexhaustionof goldminesandproductionof poorqualitygold.

Reasonsforchoosingthehostcountry

Availabilityof cheapgoldassets

Drivingforce

Theincreasein gold`sdemandin thelocalmarket

Hostcountry:Brazil

Transactioncostandpercentageinterest

ShandongGold Group purchaseda 100 % stakein Jaguar Mining at $ 1 billion.

Take-overpremium

Shandongpaid$ 9.3 per shareand73 % premium.

Operatorship

Shandongacquiredthepowerto controltheoperationsof Jaguar.

Productionrights

Shandongexpandedits domesticsupplyof goldandrevenuegeneratingcapacity.

Location

JaguarMining assets arelocatedin theregionof Iron Quadrangle, Brazil.

Remaininglife

Assetshada remaininglifeof between 6 and8years.

Terminationof rights

Rightsmight be terminatedfollowingtheexhaustionof goldmines.

Reasonsforchoosingthehostcountry

Availabilityof largegolddeposits

Drivingforce

Theincreasein gold`sdemandin thelocalmarket

Hostcountry:Peru

Transactioncostandpercentageinterest

ChinaMinmetalboughta 95.92 % stakein North Peru Copper at $ 436.7 million.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

ChinaMinmetalacquiredthepowerto controloperationsof Northern Peru.

Productionrights

ChinaMinmetalexpandedits goldsupplyforlocalmarketandrevenuegeneratingcapacity.

Location

ChinaMinmetalassets arelocatedin El Galeno andHilorico,Peru.

Remaininglife

Theremaininglifewasnot recorded.

Terminationof rights

Rightsmight be terminatedfollowingtheexhaustionof goldmines.

Reasonsforchoosingthehostcountry

Availabilityof richgoldmines

Drivingforce

Theincreasein gold`sdemandin thelocalmarket

References

JaguarMining (2014). About us. JaguarMining.Retrieved February 17, 2015, fromhttp://www.jaguarmining.com/s/Overview.asp

Manny,W. (2014). China overtakes India as top gold consumer. TheWall Street Journal.Retrieved February 17, 2015, fromhttp://www.wsj.com/articles/SB10001424052702304675504579389261432501856

Mathieson,R. (2014). Citic Group agrees to buy Gold One for South Africaassets. Blumberg.Retrieved February 17, 2015, fromhttp://www.bloomberg.com/news/articles/2011-05-16/chinese-state-investment-group-buys-gold-one-for-its-south-african-assets

Pedrosa,W. (2014). Iam Jaguar Mining.Concord, NH: Jaguar Mining.

Rensburg,D. (2011). Most SA gold mines to close in 10 years. Miningmx.Retrieved February 17, 2015, fromhttp://www.miningmx.com/news/gold_and_silver/Most-SA-gold-mines-to-close-in-10-years.htm

Xinhua,N. (2014). China Minmetals buys majority stake in Peru Mines. ChinaOrganization.Retrieved February 17, 2015, fromhttp://www.china.org.cn/english/business/241141.htm

Wang,C. &amp Willis, K. (2011). Exclusive: China Shandong offers $ 1billon for Brazil’s Jaguar mining. Reuters.Retrieved February 17, 2015, fromhttp://www.reuters.com/article/2011/11/16/us-jaguarmining-shandonggold-idUSTRE7AF0NB20111116

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