China: South African gold mine thieves unveil China gold rush

Last Updated: 12 May 2014

By February 16 local time, the rescue work ended for an open-pit gold mine collapse that occurred a day before. Except for the 11 illegal miners that were saved, the remaining 200 miners refused to get out of the pit for fear of being arrested.

The accident took place in Benoni, a small town east of Johannesburg, the largest city in South Africa. An accident thousands of miles away should not have grasped the attention of the Chinese people. What's more, gold mine accidents are common in South Africa because illegal mining is rampant. But this time things are little different, for some suspect that the mine may belong to a Chinese enterprise.

South Africa's mining regulators confirmed that its mining rights was held by Gold One International Limited (hereinafter referred to as "Gold One"), which had just been acquired by CITIC Group, China's biggest state-owned investment company. A consortium controlled by CITIC, which comprised Baiyin Non-Ferrous Group Company Limited, the China-Africa Development Fund, and Long March Capital Limited started talks about the acquisition in the second half of 2010 and concluded the deal in January this year.

Liu Lin, director of General Manager's Office of CITIC Trust, told China Business News that the mine was not related to CITIC as far as she knew. But due to differences in time zones, she could not give any accurate information before February 18.

According to reports, Gold One spokesperson had confirmed that miners were trapped in a ventilation shaft numbered "New Kleinfontein 6" and that Gold One did not operate the mine trapping illegal miners.

"Gold" Dream of CITIC

To fund the deal, CITIC Kingview Capital Management Co Ltd, a subsidiary of CITIC Group, launched a private equity fund named "Long Trust Element Gold". According to the fund's promotional brochure for limited partners, Gold One was a medium-sized gold mining company listed in both Australia and South Africa, with a focus on the exploitation and production of superficial-layer, low-cost gold. It owned four gold mines in South Africa, one of which was in operation and the other three being prospected, with 675 tons of total gold resources and 47 tons of reserves.

The latest figure on the official website of Gold One shows that it now has six mines with 552.46 tons of gold and 317.59 tons of uranium in reserves based on a totaling of proved reserves, controlled reserves and prognostic reserves. The company also holds mining concessions to two large gold mines situated in Tulo, Mozambique and Etendeka, Namibia, respectively.

In the second half of 2010, the consortium BCX Gold Investment Holdings Limited, which comprises Baiyin Non-Ferrous Group Company Limited, the China-Africa Development Fund, and Long March Capital Limited held talks with executives of Gold One and paid site visits to South Africa.

The long-term goal, according to the promotional material, was to build Gold One (which would be renamed "CITIC Gold One") into a large gold mining company in five years capable of producing more than 44 tons of gold annually and possessing 2000 tons of gold resources and 550 tons of reserves. It would be launched in the capital market of Hong Kong and join the rank of the world's top ten gold mining companies, exceeding Zijin Mining, currently the world's seventh largest gold miner.

However, Gold One's rival Zijin Mining is also picking up speed in international M&A. In 2013, metal prices experienced the sharpest decline in more than ninety years and western rivals were bogged down by debts. Therefore, Chinese gold miners went on an M&A spree with record-breaking deals in the international arena.

Yang Guisheng, senior partner of Dacheng Law Offices and geographical engineer, told China Business News that many factors led to the increase in gold mine investment in Africa, such as the call for Chinese enterprises to go out and the special nature of gold as a hard currency that investors prefer to minimize risks.

Gold rush of Chinese enterprises

With half the world's gold reserves, gold mining industry figures prominently in South Africa's national economy, contributing one tenths of its GDP. As the world's fourth biggest gold exporter, gold takes up 60% of total export revenue. In 2011, this sector offered close to 510,000 jobs.

Illegal mining is a common phenomenon in South Africa. Though measures have been taken to curb it, it is never out of sight. Meanwhile, accidents resulting from illegal mining frequently occur. In 2009, a fire broke out in a pit of Harmony Gold Mine, claiming at least 82 lives, most of whom were illegal miners. Bad governance and frequent accidents reveals the chaos and unsustainability of South Africa's mining sector.

One Bloomberg report says that American companies intended to sell part of their gold mine business in Johannesburg as a result of the local strike waves and inflation-driven wage hike. Their business was taken over immediately by yearning Chinese enterprises.

Why a hot potato Americans wanted to dispose of as quickly as possible became treasure in the eyes of Chinese entrepreneurs? Yang Guisheng told reporters that one probable explanation was the friendly relations established in the 1950s to 1960s between governments and folks of China and many African countries, such as Zambia. "There is an emotional link between us that enables Chinese to handle projects that may be difficult for Westerners,"said Yang.

Besides, China's huge demand for gold cannot be satisfied by the home market alone. Its gold reserve is small and of low grade. There is scarcely any large- to- medium-sized gold mine whose reserves of gold reach 50 tons or more. Powerful gold miners thus look overseas.

According to Yang, China is in fact one of the world's biggest producers of gold, and yet its domestic demand cannot be met. As income increases, more and more consumers buy gold jewelries at a rate that domestic production can hardly catch up.

Meanwhile, low gold reserves of central banks in emerging economies such as China, India, Brazil and Russia would boost the need of it out of financial stability concerns. This is particularly important for China who has tremendous trade surplus and foreign exchange reserves.

The different attitudes toward Africa's gold between China and the West, to some degree, reflect the lack of consideration on the part of Chinese enterprises.

A lot of China's private businesses, technically speaking, never engage in mining before but naively insist that as long as there is demand, there is money, Yang said. Their overseas expansion lacked proper consideration over the potential political, legal and technical risks.

For example, domestic miners would usually exploit a mine graded no more than 1g/t at home. But mines located in foreign countries are often graded 4 g/t, 5 g/t and even 6 g/t and are of much larger sizes. Mining companies take it for granted that such mines will make a large profit. However, the extraction costs and risks of overseas projects are much higher than domestic ones. A lot of Chinese enterprises seem to have neglected these risks. Yang thus cautioned that it is too early to be optimistic.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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