Making an acquisition in China

With the dollar falling against the world’s major currencies and oil prices climbing upwards of $65 a barrel, gold has naturally taken centre stage as a safe haven for investors during the past couple of years.

Moreover, the value of the precious metal continues to climb and since January the price of gold has risen 14.5 per cent, closing in on $700 (£350) an ounce. As analysts predict that the price could top $1,000 by 2008, companies involved in gold exploration and mining are suddenly hot tips as quality investment plays.

Related: Gold exploration on AIM

One contender that appears to be already whetting investor appetite is China Goldmines (CGM), an AIM-listed firm that floated in February last year at 60p a share with a market cap of £13.5 million. With the company’s recent acquisition of eight gold mines in Western China, the share price has since doubled to 119p along with the market cap at £26.8 million.

At the time of the listing, CGM raised a relatively modest £4.5 million to help secure mines in its Guangzhuang project in Hunan province. Working with its joint venture partner, Hunan Geology and Exploration Bureau, CGM’s subsidiary – Hunan Westralian Mining – recently took 100 per cent control of the eight mines for about £12 million.

For chief executive Frank Vanspeybroeck, it was the culmination of three years of often tortuous negotiations at county, provincial and national level that he admits took its toll on his health. ‘Before I came to China I didn’t drink or smoke and now I’m an alcoholic and chain smoker,’ he laughs.

Joking aside, he’s deadly serious about the huge potential of the acquisition and the opportunities now open for CGM. As part of the agreement, the company has tidied up any minority rights issues by paying compensation to local mining concerns. This also eliminated any previous profit sharing arrangements on the site, which is now under the sole ownership of CGM’s local subsidiary.

Safe pair of hands

For shareholders, Vanspeybroeck is a safe pair of hands who they can trust to get the job done. He’s the founder of Wedgetail Exploration, an ASX-listed gold mining company with a 600 sqkm concession in Western Australia. Wedgetail, which has an AUS$60 million (£24 million) market cap, recently raised AUS$17.5 million and is currently considered a good buy for gold investors in Australia.

With the Chinese concession, Vanspeybroeck has proved his worth by pulling off that relatively rare achievement for a foreign enterprise – it has 100 per cent ownership of land use for mining. He says: ‘Everything is included, so that includes all of the infrastructure, processing plants, equipment, vehicles, and the assets of the miners we compensated.’

CGM has already started a feasibility study to consolidate all mining operations within the concession. The mines currently produce 25,000 ounces a year, but the company intends to increase this significantly.

A deep history

Gold mining in the area has existed for more than 100 years and some of the larger projects are already 1,200 metres deep, with the capability of digging down a further 500 metres. Vanspeybroeck maintains that CGM’s concession is identical but has only been worked since 1996.

‘The mines that we’ve purchased are only down to 300 metres, so they’re just scratching the surface,’ Vanspeybroeck says. ‘There’s potential for us to go down to 1.5 km and also the strike length is very good, 70 km long. So it has enormous potential.’

This is helped by the swelling populations in nearby cities such as Yuanling and Dongping. ‘There’s a very good infrastructure locally because there are existing gold mines in the area,’ Vanspeybroeck adds. “This is main the reason why I took those gold mines. They’re on the grid, the highway crosses the project area, there’s an abundance of water and it’s a subtropical climate, so you can mine and process all year around.

‘The nearby town has 50,000 people working in the mining industry. So it’s not like in Australia where you’re in a desert building roads and putting in the power. And, above all, China’s still very cheap.”

Going public

Vanspeybroeck’s use of AIM as a vehicle to leverage the deal was vital to give the local Chinese authorities confidence in CGM. He spent three years talking to local government while CGM was still a private company and once the joint venture negotiations were finalised, he decided to go for the AIM float. The decision helped seal the deal.

‘The government wanted to have one party to deal with,’ Vanspeybroeck continues. ‘A party that was accountable and with international standards and because we became a pubic company it was easy for them to control it regarding health, safety and environmental issues. If we had been a private partner, it would have been far more difficult for them to check and negotiate with us.’

The London profile also helped Vanspeybroeck when it came to working through the maze of Chinese bureaucracy, especially on the county level.

Vanspeybroeck: ‘In China everything is done on a provincial basis, the central government is only there on a regulatory basis. The provinces have all the power. Inside the provinces you have counties, and they are the biggest power.

‘So you deal with the local county government. They also have local councils. It’s like an onion; you have to peel all the layers. People outside don’t understand that the highest power in China is the county government. They ratify everything. They look after themselves and look after their own budgets.’

Future growth

Now the acquisition has been signed, Vanspeybroeck will be going back to the market to raise more funds for consolidation and building a central processing plant. He also believes the deal has finally laid to rest any qualms investors might have about CGM’s ability to see the project through.

Vanspeybroeck’s 25 years’ experience in the industry was crucial for maintaining the board’s belief in his strategy to take CGM to market and then to build the project in China.

Vanspeybroeck: ‘I’ve listed a lot of companies in Australia. I know how expensive it is to explore and you have to raise additional capital. Mining and exploration is not like a factory where you have cash flow figures each year and the market understands your business.

‘It is very difficult keeping the attention of the brokers and investors when you’re an explorer. You have no figures to show and you are making a loss each year. People always want to impress when they first list and maintaining that momentum is often difficult.’

Ironically, those opportunities are diminishing for foreign exploration and mining firms as China’s economy expands and the country’s middle and senior managers gain the ability to do the jobs without foreign expertise. Chinese investors in the regions are also becoming more savvy when they see foreign entities looking for land to develop. Vanspeybroeck believes the days when foreign companies could negotiate similar deals to CGM’s are over.

Vanspeybroeck says: ‘For foreigners I don’t think it will last much longer. The Chinese see how foreign investors do things. They now see how they can then get their money from under their mattresses and invest in their own resources.’