GUEST COLUMN — China needs expertise for gold hunt

On our return trip to Beijing, we stopped in the city of Lanzhou on the banks of the Yellow River to meet with the top brass of the Ganzhou Provincial Gold Corp. We learned that Ganzhou province currently produces 30,000-40,000 oz. (1-1.25 million grams) gold per year with one underground gold mine yielding 10,000 oz. and six dredges yielding 3,000-7,000 oz. each. A typical dredge employs about 200 people, and the total provincial gold industry employs 2,000-3,000 people. These numbers are typical of China’s gold mining industry.

Lanzhou is an industrialized area, which is polluted by an aluminum smelter, oil and gas refineries and coal-fired power generation plants. On top of that, China burns about one billion tonnes of coal per year. All this creates opportunities for North American companies to help China clean up its environment.

Then we visited Jinchangyu, the largest of 43 gold mines in Hebei province. Design capacity is about 1,100 tonnes per day at an average millhead grade less than four grams per tonne for total production of about 30,000 oz. gold annually.

Exploration along a geological structure has delineated several small-sized orebodies of 20,000-2,000,000 tonnes. The mine started up in 1965 at a rate of 440 tonnes per day. About 2,100 people work at the gold mining company while the province’s gold mining industry as a whole employs about 15,000 people.

Jinchangyu has about five million tonnes or 15 years of reserves and no expansion is considered. In the mill we again saw freshly painted equipment and generally well-kept facilities.

At the mines, we saw a blend of high-tech underground mining equipment such as pneumatic drill jumbos and LHDs purchased in France, Finland or Canada, and the massive amount of labor used for construction or maintenance of ancillary facilities.

In the long run, China will have to consider opening up its gold mining industry if it wants to attract the necessary capital and expertise to increase production. The country needs a strong exploration program, without which new orebodies are not going to be found. Although the geology is favorable, China has yet to find a world-class mine.

Estimates of China’s annual gold output range from 60 tonnes to 120 tonnes. On the consumption side, the central bank markets gold internally at a fixed price of 100 yuan per gram (US$460 per oz.). With gold trading on the world market at US$330 per oz., there is a tremendous incentive for a black market operation and vast quantities of gold flow from Taiwan and Hong Kong to the mainland to satisfy the appetite of the Chinese. For 1992, Robert Sitt of Mase Westpac in Hong Kong, a veteran observer of gold dealing in southeast Asia, predicts that China will use about 400 tonnes gold, of which 80% will be imported via the black market.

Judging from China’s growth rate at 10-12% per year, one can predict that Chinese gold consumption could easily double to 800 tonnes and possibly as much as 1,000 tonnes by the end of this century. I am convinced that if China had not been a substantial buyer this year, gold would have sunk to the US$250 level over a year ago.

China’s own gold production is likely to continue to grow over the next five years to possibly as much as 120 tonnes per year. However, any future increase will, in my view, be predicated on opening up the industry to foreign partners as well as liberalizing the gold industry itself, both of which are very likely to happen in the not too distant future. Shenzhen, our last stop, was a sleepy village of about 30,000 in 1982. Now, it is a thriving metropolis of 2.4 million people. The city is a giant construction site as it is accommodating on average 250,000 new inhabitants every year.

Today, China is at the beginning of its long wave economic cycle with 1.1 billion people on the move. As the president of the China National Gold Corp. (CNG) pointed out to us, if every Chinese woman buys one gram of gold per year, it would require some 600 tonnes, which as we found out, is not out of the question over the next few years. CNG representatives reminded us on several occasions that gold is special to the Chinese. It is hard currency, an alternative financial asset to the remembi (the local currency). — Pierre Lassonde is president of Franco-Nevada Mining and Euro-Nevada Mining.