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Mining In Asia

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					    XROSSBRIDGE VENTURES INC.                                                     JUNE, 2008




    Min ing in As ia
                                Show us the METALS, China!
                                Many senior mining firms pulled out of China in the mid nine-
                                ties for a number of reasons. The most prevalent of these
                                was the apparent lack of regulations toward ownership and in-
                                vestment in properties. These have since been addressed via
                                the Chinese government changing their laws to emulate those
 GO WEST!
                                of North American Mining standards. These laws and regula-
 MINING IN CHINA!
                                tions principally started being implemented and enforced in
                                2002.
                                So, are foreign mining companies truly ready to enter China?
 Topics Covered in Paper
                                What is holding them back? What is the right approach? Who
                                is responsible for executing the correct growth models in
 •DISAPPOINTMENT IN THE TSX
 •OBTAINING A LICENSE TO        China? What are my top picks for investment in China?
 MINE
 •TIMEFRAMES
 •BIDDING REGULATIONS
                                Get to the point!
                                The reason that the Peoples Republic of China (PRC) has not
 •INVESTMENT CLIMATE
 •MY TOP PICKS                  thrived in the eyes of the North American mining investor is
 •FUTURE OUTLOOK                lack of due diligence!
                                Profound I know, but there is an overwhelming lack of legal
                                and accounting parallels to that of a North American struc-
 MY CHINA MINING TOP            ture. The human body is lazy and in many aspects it is easi-
 PICKS & WHY!                   er to dismiss than hold the torch and lead the way.     But I
                                have found torchbearers doing just this with great success in
                                China.    These being Goldrea Resources Corp.(TSX.V- GOR),
                                Golden China Resources (recently acquired by Sino Gold - ASX-
                                SGX) and Jinshan Gold Mines (TSX-JIN). I will explain why on
                                page 5 of this document but first a little education on the
                                mining approval process in China.


                                Disappointed in the TSX!
                                China basically dominates the world as being one of the pri-
                                mary producers and consumers of almost all metals: precious,
                                base and strategic. Foreign investment has tried to enter
                                the Chinese Mining forum for some time with little success.
                                This has given a sense that China continues to be a high-risk
                                investment climate toward mining. I am generalizing but with
                                my tenure in dealing in the China mining environment I feel I
                                can speak from my experience. Quite often perception is re-
                                ality and therefore I feel that this stems from the very top
                                of the Canadian investment community, meaning the institu-
                                tions and exchanges themselves. The fact is that China is
                                huge and continues to grow at a tremendous rate. China holds


XROSSBRIDGE VENTURES INC.                                          Show us the METALS, China!
    XROSSBRIDGE VENTURES INC.                                                                                                                     JUNE, 2008


the single most mineral investment growth opportunity in the world and is likely the last
true frontier for mining potential we will witness in our lifetime. So then, why has the
Toronto Stock Exchange not set up a local office in China to deliver these offerings to Cana-
dian investors?
A tremendous shift has taken place in the last three years within the Chinese mining invest-
ment community. These assets were constantly looking at outside sources of funding in order
to progress but now more and more of them are being funded internally as well as internation-
ally by Chinese individuals. We are missing out on these investment opportunities and as a
result need to look to our brokerage firms. They are slowly setting up offices in order to
take paper on these deals; however, the majority is not seeing the best investments. On the
other hand, Asian investors are proving my theory that they have tremendous buying power and
the exorbitant valuations of the oversubscribed mining listings on the Hong Kong exchange are
but one of these indicators. There is no doubt that China will be self-sustaining in the
very near future. Once the PRC government regulations toward capital markets become more
developed internally the international investment door will become infinitely smaller for the
North American retail investor. China currently has over 100 million people (7% of total
population) that make an income comparable to the average North American. I am extremely
disappointed in the Exchanges efforts to educate and facilitate sound investment practices
for individuals looking to invest in China so I am taking on this responsibility myself.
Commencing in June, I will be releasing a monthly newsletter on topics individual investors
must know in order to invest successfully in China. I will also highlight the risk vs. re-
ward in my comments. You may also contact Annie Tau - The Toronto Stock Exchange Chinese
contact fro China investors @ 1-(888) 873-8392. She will be able to provide any legal mate-
rials pertaining to mining regulations in China. I plan on issuing a series of papers ex-
plaining the process and will provide other resources you may need in order to clear up any
ambiguities that individual investors may have regarding mining investments in China. The
beginning of this series will start with the basics of how one may obtain a mining license in
China.


Obtaining a mining license!
(Ministry of Land and Natural Resources (MOLAR)) is the Chinese regulatory body for all min-
ing assets and processes in China. MOLAR has been diligent in implementing new laws and reg-
ulations since 2002 to reduce barriers of entry for foreign investment and promoting interna-
tional mining standards. These efforts are now proving to be successful for MOLAR and for-
eign investors alike.
   Obtaining a Mining License in China
   A foreign mining company may obtain a right to mine by:
   • entering into a joint venture with a domestic entity that contributes the mining rights
in return for an investment in the joint venture
   (not activated until funds, license contributed);
   • purchase directly from a domestic entity in accordance with China’s regulations;
   • first obtain an exploration license, and, after discovery of a viable asset, apply for
a right to mine; or
   • obtain the right through the tender, auction or bid process 1
   Step 1
   Where initial exploration work reveals a deposit worthy of development, the exploration
license holder may apply to discontinue the minimum exploration expenditure required under
the terms of the exploration license and applies to reserve the exploration rights.

1
    Exploration and Mining Rights, Tender, Auction and Bidding Management Tentative Procedures, by MOLAR June 11,2003 and Effective August 1, 2003.


XROSSBRIDGE VENTURES INC.                                                                                                Show us the METALS, China!
        XROSSBRIDGE VENTURES INC.                                                                                                   JUNE, 2008


   The reservation period is two years and can be extended twice for a further two years each
time (for a total of six years).     Although the minimum exploration requirements would be
halted, the license holder is still required to pay the exploration fee.2
   Step 2
   The exploration license holder applies to MOLAR for approval of the mining area bounda-
ries.3
   Step 3
   The exploration license holder then works with a qualified appraisal organization that is
managed by, and reports to, MOLAR to produce a mineral deposit report that must be evaluated
and reviewed by the appraisal organization and reported to the Geological
   Mineral Department of MOLAR4
   Step 4
   The next step is preparation of a mining project proposal and feasibility study and es-
tablishment or, if required, application to restructure the exploration entity into a mining
entity. Whether this application is made to the Ministry of Commerce at the central or pro-
vincial government level will depend on the size of the project and the type of mine that is
pertinent to the application. There are restricted materials in China, which a foreign enti-
ty can not control, Uranium being one example. Other metals such as zinc deposits that are
less than US$30 Million (or projected value over this amount) which are classified in the
domestic provinces as “encouraged”, may be approved at the provincial government level. The
State Development and Reform Commission (SDRC) at either the local, provincial or state level
(depending on the size of the asset) must approve the feasibility study. The SDRC also en-
sures that the mining entity holds the correct qualifications to mine. The registration pro-
cess is continually upgraded and kept in compliance through good mining practices and princi-
ples like that in the Western mining world.
   Step 5
   A mineral resource development utilization plan5 must be carried out by the company. The
company (mining license holder) commissions a certified mining design organization to com-
plete this stage. Pending the proposed capital investment in the joint venture and the out-
come of the findings of the “mineral resource development utilization plan” additional ad-
justments may be made to the JV company. This would require further approval by the Ministry
of Commerce.
   Step 6
   A license holder submits the following to MOLAR in order to gain the right to mine:6
   • an application form and detailed map of the area with boundaries;
   • eligible applicant proof - meaning these individuals have the correct certificates,
technology, experience, equipment and access to funds;
   • a qualified design organization guarantor plan for mining and utilization of the re-
sources;
   • the business license of the joint venture or wholly foreign-owned entity (WFOE) mining
company;
   • an appraisal report if the deposit was found by exploration, funded by the state or,
where the right was obtained through;

2
3 Administration of Registration of Mineral Resource Exploration Blocks Procedures (February 12, 1998), Article 21.
4 Administration of Registration of Mineral Resource Exploration Blocks Procedures (February 12, 1998), Article 4.
5 Provisions for the Evaluation and Confirmation of Mining Deposits (May 15, 1999), Article 3.
    Notice of Relevant Provisions regarding Mineral Resource Exploration and Mining Registration, Article 2(2).




6
    Administration of Registration for Exploitation of Mineral Resource Procedures, Article 5.


XROSSBRIDGE VENTURES INC.                                                                                             Show us the METALS, China!
  XROSSBRIDGE VENTURES INC.                                                      JUNE, 2008


   • an environmental impact assessment document and approval from the environmental gov-
ernment agency;
   • other specific documents may be required pending the province the asset is located in.
   Step 7
   Once the process is approved, a mining royalty fee must be paid within 30 days of receiv-
ing the approval notice. When payment has been received, the right to mine will be granted
and issued to the applicant.


Timeline of the entire process
Timelines can vary greatly. I have personally been involved in transactions in Gansu, Xin-
jiang (the western provinces) where the approval time takes a fraction compared to that of
the eastern provinces, but generally speaking one can expect the initial applications for the
mining area boundaries to take 60 days. The feasibility, mining restructure, approval and
authorization can take anywhere from 60 to 180 days. The final mining application generally
takes no longer than 50 days to make it through the system and the payment and issuance of
the license to mine will take an additional 30 days.


The Bidding Regulations
In 2002, Molar implemented three principle methods for Chinese and foreign mining companies
to obtain exploration and mining rights. These are auction, tender or bid. There must be
more than three bidders; the winning must be higher than the reserve set by officials (pend-
ing size of asset this can be provincial or state bureaus whom commission the valuation re-
ports) or in the case of state owned mining entities government officials’ value the mining
rights to be auctioned. This can be open to the public if a Public Notice has been given
which must be circulated at least 20 days in advance of the auction date.      Tender compli-
ance is similar to that of a public tender process in North America. A Notice will be posted
60 -90 days before the tender closing dates. Each participant will complete and file the ten-
der package to the offering office. They will each be reviewed based on overall merit of the
proposal and the appropriate bidder will be awarded the tender.     Also, like that of North
America, there must be at least three tenders submitted in order to deem the tender process
valid. If not, the tender will not be successful and the process must commence at the begin-
ning. The bidding process for mining rights includes a Public Notice posted 20 days in ad-
vance of the beginning of the “bid period”. The bid period runs for 10 days. On the begin-
ning of the bid period, bids will be submitted and posted at the venue chosen to display the
bid until it is replaced by a higher bid. The highest bid at the end of the 10-day process
will be considered to have been awarded the mining rights. As stated these three methods are
not necessarily used in every instance. It is noteworthy, that they are used for the alloca-
tion not for extensions, renewal, or rights. These methods are not used for current license
holders who have not proposed changes deviating from the original exploration boundaries de-
fined in the license.
If any of the following terms are not met then a bidding method will be applied for the min-
ing rights;
   • mining rights previously held by an party and have expired;
   • exploration rights have expired but there is historic data which supports there is a
viable asset;
   • an instance where the state funded the exploration, and a viable deposit was discov-
ered;
   • at the provincial or state level MOLAR approves one of the methods to be used; or




XROSSBRIDGE VENTURES INC.                                          Show us the METALS, China!
    XROSSBRIDGE VENTURES INC.                                                    JUNE, 2008


   • the government authorities declare that the specified ore can be mined without the need
for exploration.

Just because an entity obtains a Right to Mine via one of these methods does not make it
binding. They must enter into an agreement confirming the terms and conditions of the mining
rights approved. If this is not signed within a set timeframe (varies per province) the min-
ing rights becomes void.
No foreign company can bid directly on any asset! They must set up either a foreign invested
corporate entity, establish themselves as a Chinese entity or set up a representative office
in order to be eligible in the bid process and meet pre-qualification terms. There is little
information on qualification standards in order to be involved in the bidding process. This
for the most part, is one of the only “GREY” areas. The other regulations clearly state all
the equipment, technology and appropriate finding obligations which are required to qualify.


Concerns with the current mining environment in China
Project approval process
An accepted mining practice for international companies interested in a JV with a Chinese
firm works like this: A comprehensive agreement is forged first to include all the areas of
major business issues in the future with regards to exploration, feasibility, employees, in-
frastructure, construction development and future areas of partnered development. Investment
is committed for each stage of the combined development and once those criteria have been
achieved funds are released to execute the next stage. China currently has an appropriate
approval process depending on the industry and size of the project. This is almost impossible
for the exploration side of mineral deposits as this is unknown. An exploration party may
intend to spend $10 million, yet find absolutely nothing. The risk here is that a project
may be approved at a provincial level then when the deposit is realized a different form of
valuation will be implemented by the federal level and the project term will be changed.
This is slowly being corrected by implementing MOLAR approved provincial and state agencies
that work on arms length valuation of both private and state controlled assets.

Corporate Structures
There are a couple corporate vehicles available to foreign mining firms. One being a pure
PRC company registered in Hong Kong where the legal process is quick, clear and currently
enforced.   This is not the most advantageous from the North American markets perspective;
however, it is litigiously speaking a very good structure. The second accepted vehicle is a
Joint Venture and third being a Wholly Owned Foreign Entity (W.O.F.E.) where by foreign in-
vestors must register capital into the vehicle with terms applied. This is not beneficial
since before any exploration happens investors have to escrow their capital into this struc-
ture. This is a fairly large deterrent when trying to qualify to explore or mine. As explo-
ration companies are generally short on cash this is just another layer of complexity. If
the initial geological date is not favorable they must be able to reduce their capital in the
vehicle and move to “greener fields”. This is not easy in China as reducing capital in the
vehicle is subject to approvals are lengthy and in the public markets can greatly hinder the
momentum.

Priority Rights (who gets the deposit)
Like many developing countries, the country of origin always struggles with the correct
growth strategy when it involves foreign investment and development. There is a long list of
developed Countries; Canada, Japan, former Soviet Union and the United States that have all
suffered these growing pains. There are many instances where individuals have purchased land


XROSSBRIDGE VENTURES INC.                                          Show us the METALS, China!
  XROSSBRIDGE VENTURES INC.                                                      JUNE, 2008


in these countries only to have it ceased by the government. Therefore with the precedent
set, foreign investors are concerned that by investing in exploration in China the company
might make a notable discovery but not be granted the right to mine. The PRC Mineral Re-
source Law Implementation Rules state that “the exploration right holders have a ‘privileged
priority’ or ‘priority right’ to obtain the mining rights to mineral resources within the
exploration area.” China is not the only mining jurisdiction, which has these conditions in
place. Therefore investors must do their own due diligence. It is important to meet all the
pre-qualification terms and leave no room for discrepancies. I have not heard or been part
of any misguided investment in the past with regards to granting mining rights to the explo-
ration company after following due process and providing transparency to the government.

Taxation
The Chinese use a derivative of the somewhat unorthodox French corporate structure for their
taxation system. The taxation laws specific to mining and exploration vary depending on the
province so be aware of this. For example the “GO WEST” concept implemented in 2004 where
western provinces like Xinjiang, Qinghai, Xizang (Tibet), Gansu, Inner Mongolia, Sichuan and
Ningxia allow exploration expenses to be amortized as a carryover asset into the mining stage
and are provided tariff and VAT exemptions for imports of equipment under specific condi-
tions. This has proved successful and has brought a great deal of investment into these in-
credibly poor socioeconomic areas. Note in order to gain these exemptions and approvals one
must have an approved up to date exploration and or mining license. China is notorious for
verbal confirmation which I have witnessed can go either way, but in order to mitigate risk I
suggest getting written conformation and not going on faith alone, although this is part of
the culture.   Asian auditors will be required to translate to North American auditors via
their affiliate program in order to get a GAAP audit completed. There is constant confusion
regarding the complicated tax and royalty infrastructure currently in place, as it has not
been developed enough to make a seamless transition to North American GAAP and the explora-
tion deductions and large capital outlays for a sizable mining project. I can conclude that
the reporting has come a long way in five years and that China is almost there. However I
would advise before investing anything in China one should understand the accounting differ-
ences and deal with local North American auditors who have a direct office or a notable af-
filiate in China. Please note that the big three accounting firms do a good job but there
are smaller firms like Schwartz Levitsky Feldman LLP www.slf.ca in Canada which do very good
work as well.

Geological Data
Although China is the most democratic, communist country I have conducted business in, it is
still secretive as to its natural resources. So access to past geological data is hard to
find. In most cases one has to work with the local military brigades who have gathered most
of the geological data in the past century. Depending where you are looking to invest most
of the data will be in Chinese. If looking west at southwestern China this data will be in
Russian or possibly German as many Germans were interested in Tibet prior to occupation by
China.    If you are looking for base metals, Tibet is well known for it’s ample supply of
lead, zinc and copper among others.


China Mining Management Public Markets Perception
Traditionally these producing mining assets are run 100% by Chinese nationals via old mining
methods. The perception of the public markets is instant wealth. There is little to no un-
derstanding of the compliance associated to running a public company by current management
and chances are none of them have ever been part of a public company in the past. There is


XROSSBRIDGE VENTURES INC.                                          Show us the METALS, China!
    XROSSBRIDGE VENTURES INC.                                                      JUNE, 2008


however an unstoppable force for success by the Chinese, something that you can feel when you
are there, a billion plus people all working toward one goal to be (or have) the North Ameri-
can lifestyle. This is hard to quantify but I guarantee they are learning and they do have
the biggest mineral growth potential left on the globe. As little as five years ago the Chi-
nese were having difficulty with foreign investment in China and now most of the orders are
being filled internally. It will not be long before China will be self sustaining and will
have no further need of foreign investment and North American investors will have limited
opportunity to gain a share in these vast resources.


China Mining Summary
As investors China has become a place where we “must invest” it is not a matter of “if we
should invest”.   China is currently the largest Gold producer and climbing fast.     It also
ranks at the top in not only consumption but also production of tungsten, copper, lead, zinc,
vanadium, manganese and molybdenum, etcetera for all precious, base and strategic metals.
Their is no sign of it slowing down in the next 5 years at which time India (which shares
borders with China) will be reaching it’s stride from an infrastructure growth perspective
and any base metals used in the production of infrastructure materials (steel, wire, cement,
fertilizers etc.) will continue to be in demand. I have written many reports on China and
tracked almost every public company that have either dipper their toe or jumped head first
into these waters. I have seen a few successful ventures over my tenure and will discuss my
picks in the closing paragraph below.


My Choices for Chinese focused mining firms and why!
In my opinion successful ventures in China are defined as being currently in production and
should have a proven mining management team with international experience. Due to the fact
that the Toronto Stock Exchange is home to more than 60% of the worlds mining companies I
will use these companies to outline my idea of a good approach and therefore a good start
toward investing in China. I would not look to junior exploration companies only unless you
are a high-risk educated investor.
This approach will take 8-10 years to get in to production via traditional NA methods and by
then I am not sure what the state of the mining environment in China.       Meaning restricted
metals or restricted high grades or change of land lease terms etcetera.
My top choices I would consider to invest and learn the industry are Goldrea Resources (TSX-
GOR), JinShan Gold Mines (TSX-JIN) whom is partnered with Ivanhoe Mines (currently has the
worlds   largest    copper-gold   deposit   in   Mongolia    and   Golden    China    Resources
(www.goldenchina.ca) whom was just purchased by Sino Gold (ASX-SGX).      I believe these are
good companies to track and watch. (There are many others depending on your investment style
but I do not feel they have as much growth opportunity in a short timeframe.) My reason be-
ing, all of them have great mining management. Larry Reaugh, President and CEO of Goldrea
Resources has 42 years mining experience and has brought 4 mines into production.        He has
chosen to grow in China with acquisition of a producing State owned asset.       While this is
good for the mitigation risk aspect the only drawback is the amount of time it takes to fi-
nalize a state owned acquisition.    This can currently be seen reflected in the GOR stock
price but this also marks a great buying sign for investors. I have stayed away from state
owned assets in the past but it is proving to be a good choice for Goldrea and will no doubt
be an attractive takeover for a major looking to establish itself in China and expand on an
already sound footprint. Now we have recently witnessed this happen to Golden China which
was acquired by Sino Gold (looking to be China’s lowest cost large scale gold producer with 8
million ounces of resources in China) I have known Doug Betts, Grant Chen and Gary for some


XROSSBRIDGE VENTURES INC.                                           Show us the METALS, China!
  XROSSBRIDGE VENTURES INC.                                                      JUNE, 2008


time and although their momentum was not in line with what North American institutions would
have liked they were persistent and worked with the Chinese culture and it paid off for their
shareholders. Now Jay Chmelauskas, CEO of Jinshan Gold Mines (TSX-JIN) is doing what most
exploration firms do, scooping up vast numbers of land leases but in this case Jinshan is not
a junior and is acquiring good valued assets at a fast rate with a good team behind them. As
we all know every market has consolidation at some point in time and he who has the biggest
assets wins. I like what JIN is doing and would continue to watch all of these stocks.
These changes and increased understanding of these laws has helped a great deal over the past
five years but there continues to be uncertainty and doubt as to repatriation of finds and a
reporting standard that does not have exact parallels. Therefore there seems to be always a
bit of a lag in translation, this is due in large part to a huge cultural difference and lan-
guage barrier. I myself have been performing RTO’s and M&A work in China for 10 years now
and have seen the industry come full circle. So without sounding biased I am not blaming the
Chinese for these discrepancies I would rather highlight the fact that the North American
markets need to do some educational promoting as to a good risk mitigating structure and due
diligence practice much like you would do for any deal in North America. I will continue to
choose topics to discuss and feel free to contact me directly with any question on China and
mining.


Before you invest please read the following links
www.chinamining.org/Investment/2007-06-27/1182925046d5838.html
China’s Policy on Mineral Resources
www.chinamining.org/Investment/2006-08-04/1154674314d441.html
Main Policies on taxation and finance
www.chinamining.org/Investment/2006-07-25/1153813527d201.html
Overview of the economics of Mineral resources
www.chinamining.org/Investment/2006-07-25/1153813195d199.html
Characteristics and distribution of China's mineral resources
www.chinamining.org/Investment/2006-07-25/1153812794d198.html
Overall Good links on this site with updated material
www.goldrea.com
International Trade laws and mining in China
www.mofcom.gov.cn

About The Author
Gavin Treanor writes investment analysis on behalf of undervalued companies. Gavin started
his career in Aerospace Engineering and has been involved in private placement and IPO fi-
nancing for over 10 years. In performing due diligence for the readers we have conducted
independent research outside of the company information provided in order to validate and
clarify terms and forward looking statements. This report does not imply a recommendation to
buy stock. Please speak with your investment advisor for such recommendations. A fee was
paid for this report to be completed to the author. The author may buy or sell stock of RD
from time to time. To discuss this report please call Gavin Treanor at 905-315-7715.

Disclosures
Xrossbridge Ventures Inc. charges fees to companies covered by individual research reports or
continuous coverage. These fees cover costs of identifying and analyzing potential opportu-
nities, constructing financial models and writing fact-based research. We seek to correlate
industries and show transparency in order to allow investors to understand the workings and
key drivers in the specific sectors of interest. We also provide access to dynamic financial
models for a growing investment base.
In order to insure quality, independence and objective research, we abide by the standards of
Professional Practice of professional Engineers among other Professional Standards in ethics.
Fees are charged to undervalued companies seeking exposure on their assets. All editorial
decisions are under the control of the author. Xrossbridge Ventures Inc. makes no represen-
tations as to the accuracy, completeness or correctness of its research. Opinions and esti-


XROSSBRIDGE VENTURES INC.                                          Show us the METALS, China!
    XROSSBRIDGE VENTURES INC.                                                    JUNE, 2008


mates are subject to change without notice and have been provided in good faith and without
legal responsibility. Our research is not an offer to buy or sell securities. Xrossbridge
Ventures Inc. and its analysts accept no liability whatsoever for any direct or indirect loss
resulting from any use of our research. This report is not to be reproduced, distributed or
published without prior consent from Xrossbridge Ventures Inc. and the author.




XROSSBRIDGE VENTURES INC.                                          Show us the METALS, China!

				
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