Controlled Risk: 10 Junior Miners Doing Business With China
October 23, 2012 by metalinvestmentnews
SHENZHEN, CHINA – Metal Investment News
Despite jitters from Wall Street, China’s exports are rising at twice the rate predicted by economists.
China’s foreign exchange reserves rose to $3.29 trillion at the end of September, 2012 from $3.24 trillion a month earlier.
The FTSE China 25 Index Fund (FXI-NYSE) has $5.2 billion in assets under management. It holds 26 China focussed companies including CNOOC (CEO-NYSE) and PetroChina (PTR-NYSE). Trading an average of 13 million shares a day, FXI has been trending up sharply since the end of summer.
Total Foreign Investment from China has reached $70 billion.
According to The World Bank, the number of 1 million-plus cities in China will increase from 100 to 220 in the next two decades. To sustain this growth the Chinese will need to secure supply chains of copper, iron ore, potash, oil, zinc, silver, etc.
In 2011, China invested about $6 billion in the Canadian Resource Sector. In a Metal Investment News survey of Chinese QDII fund managers, a mantra emerged: “Controlled Risk”.
“We are looking for mid and late-stage projects,” said one Shenzhen-based fund manager, “We don’t mind waiting three years to get our money out, but we will not invest in countries where the government could take over the project”.
Since the Chinese are diligent researchers – and most North American investors are also trying to “control risk” – it is instructive to look at 10 junior miners that are already doing business with the Chinese.
1. General Moly (GMO-TSX) (GMO-NYSE MKT) is a U.S.-based molybdenum mineral development, exploration and mining company developing the Mt. Hope and Liberty projects located in central Nevada. GMO’s goal is to become the world’s largest primary molybdenum producer.
The Mt. Hope Project is currently designed at more than 60% engineering completion. The capex estimate is $1.28 billion – of which $197 million has already been spent.
On February 16, 2012 the Sichuan branch of the China Development Bank (“CDB”) confirmed the basic terms underlying a $665 million term loan to finance the Mt. Hope project. The CDB committed to lend $399 million and a consortium of Chinese and international banks will fund the balance.
On October 20, 2010 GMO closed its sale of the first of two tranches of equity to China-based Hanlong Mining Investment, for $40 million, representing a 12.5% fully diluted interest. The second $40 million equity tranche is scheduled to close once the Company receives permits for its Mt. Hope Project and when the CDB term loan becomes available. In addition, GMO has entered into a non-binding L.O.I. with Hanlong to provide or arrange up to $125 million in subordinated debt to supplement the CDB loan. GMO is currently trading at $3.64 with a market cap of $331 million.
2. West African Iron Ore (WAI-TSX.V) is developing a mineral resource in the Forécariah provinces of the Republic of Guinea. Assays from 326 Reverse Circulation Holes and 58 Diamond Drill Holes from the Wondima target returned an average grade of 30% Fe. The mineralization has an average thickness of approximately 8.5 meters, starting from surface.
The Wondima target will form the basis of a maiden NI43-101 resource report that is expected in Q4 2012.
On September 4, 2012 WAI signed a binding Letter of Intent for $30 million with the China International Fund (CIF) to finance exploration and production objectives. Terms include an off-take agreement for 50% of iron ore production for a term of 5 years. The purchase price of the iron ore shall be 95% of the market price.
CIF has a significant ownership position in Guinea Development Corporation (GDC), which owns the mineral licenses on the neighbouring properties. WAI is currently trading at .05 with a market cap of $8 million.
3. Avalon Rare Metals (AVL-TSX) (AVL-NYSE) is a development company focused on rare metal deposits in Canada. Its flagship project, the 100%-owned Nechalacho Deposit, Thor Lake, NWT, is one of the largest undeveloped rare earth projects in the world.
The Nechalacho Deposit is rich in ‘heavy’ rare earths – critical to clean technology and high-tech applications. China is currently the source of 95% of world supply.
Last month Avalon CEO Don Bubar joined the Council of the Federation mission to China and met with top players in the rare earths industry.
“China is the centre of the world of the rare earths business,” stated Bubar, “We’re starting to develop contacts in China.”
China’s rare earth production will drop 30% by 2015. Avalon is a potential Chinese buy-out target, or it may forge a strategic partnership with a Chinese rare earth miner.
AVL has $38 million in cash and is fully-funded through to completion of Definitive Feasibility Study in 2013. It is currently trading at $1.68 with a market cap of $174 million.
4.) Minco Silver (MSV-TSX.V) is focused on the acquisition and development of the Fuwan Silver deposit in southeastern China.
The Fuwan Silver deposit has a reserve of 9.1 million tonnes averaging 189 g/t Ag, which will support a 3,000 tonne per day operation for 9.2 years. It has an excellent opportunity to expand its mine life along the relatively un-explored 10 km long Fuwan belt.
The company has $68.1 Million Cash in the bank, with access to a $45 million line of credit at Industrial and Commercial Bank of China (ICBC). MSV has 157 million ounces of silver, in all three categories, (55 million probable reserve) an International Bankable Feasibility completed indicating 5.5 million ounces of production per annum at a cost of $5.65 per ounce, (3,000 tpd mill) with a CAPEX of USD$73.
Minco Silver is fully financed, nearly fully permitted, with the company currently filing for its administrative EIA, which in China, triggers the mining permit.
Minco Silver, and its sister company, Minco Gold have experienced international management teams. Minco has been operating in China for over a decade, and currently has no debt. Although headquarted in Vancouver, BC, MSV is noteworthy for its solid relationships with the Chinese government, Hong Kong investors and mining organizations. MSV is currently trading at $1.62 with a market cap of $96 million.
5.) Chieftain Metals (CFB-TSX.V) is developing the Tulsequah Chief Polymetallic Project in north-western British Columbia, Canada. The Tulsequah Project consists of 38 mineral claims covering 14,000 hectares, including two previously producing mines.
The project hosts two high-grade Polymetallic deposits, Tulsequah and Big Bull, with NI 43-101 indicated resources of 6.3 million tonnes grading over 17% zinc equivalent and inferred resources of 1.8 million tonnes grading over 15% zinc equivalent. The project is fully permitted for production. CFB anticipates completion of a feasibility study by the end of 2012.
On September 24, 2012, CFB announced a Memorandum of Understanding with China CAMC Engineering Company (CAMCE) and its subsidiary, Procon Holdings, for a collaboration to finance, construct and operate Tulsequah Chief. In conjunction with the agreement, Procon invested $9.9 million in CFB through a private placement. The funding provides capital to complete the new feasibility study.
CAMCE is an incorporated company registered with the Ministry of Commerce and listed on the Shenzhen Stock Exchange (Stock Code: 002051). It focuses on engineering procurement construction (EPC) projects primarily in Asia, Middle East, Africa, South America and Caribbean region. CFB is currently trading at $2.70 with a market cap of $39 million.
6.) Changfeng Energy (CFY-TSX.V) is a natural gas distribution company with operations in Southern China. It has urban gas pipeline networks and CNG refuelling retail station servicing homes and businesses as well as fuel for transportation.
CFY owns 30 years concession rights in Sanya City, Hainan Province, a popular tourism destination in China. It also owns a 50-year operation right in Xiangdong District, Pingxiang City, Jiangxi Province, an industrial ceramic production base in China. Changfeng Energy has built and operated a modern pipeline system in Sanya city and supplies natural gas to over 100,000 residential households and 500 hotels in the city.
Currently, the Company strategically targets on the emerging markets along the Petro China’s Second West-East Pipeline in mainland China, focussing on regions with intense commercial and/or industrial activities.
Revenue for the six months ended June 30, 2012 was $14.5 million, an increase of 9%, from the same period in 2011.
Located at the southern tip of Hainan Island to the east of Vietnam, Sanya City has a population of 481,200. Often described as “the Hawaii of the East”, it is China’s top tourist destination. Chinese investors understand Changfeng Energy as a play on the increasing demand for clean energy in China. CFY is currently trading at .21 with a market cap of $13 million.
7.) IMX Resources (IXR-TSX.V) (IXR-ASX) is a base and precious metals exploration company based in Perth, Australia. The company retains a pipeline of strategic investments and a portfolio of assets in Australia, Africa and North America.
IXR operates the Cairn Hill Mining Operation which produces 1.8Mtpa of a magnetite-copper DSO (Direct Shipping Ore) product. The product is crushed at site before being trucked and railed to Port Adelaide, Australia where it is then shipped to China. Cairn Hill is a joint venture between IMX Resources (51%) and Sichuan Taifeng (49%).
Headquartered in Chengdu, China, Sichuan Taifeng was a trading company, then a real-estate company and is now heavily invested in mining. With a staff of 2,000 and branches in Perth, Hong Kong, Beijing, Chengdu, Chongqing and Kunming, Sichuan Taifeng has invested about $45 million in the Cairn Hill Project. IXR currently trades at .15 with a market cap of $54 million.
8.) Canaco Resources (CAN-TSX.V) is focused on advanced exploration projects in Africa. The Company has $95 million cash and no debt.
Canaco’s lead asset is the Magambazi gold project in Tanzania. It has 721,300 indicated ounces, and an inferred mineral resource of 292,400 ounces. With favourable government policies, stable democratic government, and strong economic growth, Tanzania has one of the lowest risk profiles in Africa.
Canaco has developed a partnership with Sinotech Corporation, SinoTech (Hong Kong) Corporation Limited., a subsidiary of Sinotech Minerals Exploration Co., Ltd., a major Chinese exploration and mine development company. Sinotech has mineral exploration projects in mainland China and more than 10 countries worldwide and is Canaco’s largest shareholder.
On August 2, 2012 Canaco announced it has also entered into a memorandum of understanding with a Chinese gold producer to create a joint venture to develop the Magambazi project.
The Chinese gold company may earn up to a 55% interest in the joint venture by funding 100% of the costs of the ongoing operations until the earn-in is complete. CAN is currently trading at .36 with a market cap of $73 million.
9.) Majestic Gold (MJS-TSX.V) headquartered in Vancouver, BC Canada, is an emerging gold producer in Shandong Province, China. In the last year MJS has achieved a 225% increase in gold production (from 4,384 oz to 14,237 oz) and a 19% reduction in cash costs (from $995/oz to $806/oz)
On June 20, 2012, – Majestic Gold Corp. announced $35 million financing led by NewMargin Ventures, a Chinese venture capital company in China. Several other Asian-based investors will subscribe for the remaining portion of the offering.
NewMargin is headquartered in Shanghai and has offices in Beijing. It has $1.5 billion under management. It is the first venture capital management company in China to advise both domestic and offshore funds.
MJS is currently trading at .13 with a market cap of $113 million.
10.) Advanced Explorations (AXI-TSX.V) (AE6-Frankfurt) is developing its Roche Bay and Tuktu Iron Ore Projects in Melville Peninsula in Nunavut. To date, AXI has delineated over 1 billion NI 43-101 compliant tonnes of iron ore.
On August 21, 2012 AXI entered into a 3-stage $20 million agreement with XinXing Ductile Iron Pipes Co to develop of the Company’s Tuktu 2 project. An initial $5 million payment will fund a drill program designed to establish direct-ship ore (“DSO”) potential. Xinxing is a primary supplier of ductile iron and cast iron products to international engineering and construction clients.
Field geologists have concluded that the Tuktu 2-H Anomaly had the potential for multiple lenses of high grade iron mineralization.
“Our recent field work is further evidence of the potential to define direct ship ore at Tuktu,” States President and CEO, John Gingerich. AXI is currently trading at .17 with a market cap of $28 million.
These 10 companies are riding the first wave of a massive incoming tide. The Chinese are not day-traders, they are looking for supply chains of commodities and strategic investments that will pay-off over years.
The QDII (Qualified Domestic Institution Investor) scheme allows Chinese fund managers to invest in overseas financial markets, including the TSX. As of September, 2012, the total QDII quota stands at $84.3 billion.
Investors looking to “control risk” – may wish to follow the Chinese money.