China’s Overseas Gold Grab Set to Stumble 山东黄金海外掘金或遇政府阻拦

By newsdoug on November 17, 2011

China chases overseas glitter I have to admit I was a bit surprised to read this morning that China’s Shandong Gold (Shanghai: 600547) is crafting a $1 billion bid for Brazilian gold miner Jaguar Mining (Toronto: JAG), as gold doesn’t really seem to fit the trend of recent Chinese purchases of overseas resource assets. (English article) Sure, gold is a popular metal, especially for people who don’t like to put their investments in currencies like the US dollar that could fall in value, although gold has been known to do that too. But more importantly, most of China’s recent overseas resource purchases in the last couple of years have been for strategic things like oil, gas, iron ore and coal, all of which can be used to feed China’s fast-growing economy as it depletes its own natural resources at home. Gold, on the other hand, is more like an extra that’s nice to have if you happen to have some in your backyard, but certainly isn’t necessary to keep your factories running and industry humming. Investors seem to have taken the same view and are somewhat skeptical, at least based on the reaction by Jaguar’s New York-listed shares after the news came out. Its stock jumped a nifty 45 percent to $7.80 in Wednesday trading, but was still 16 percent below the reported offer price of $9.30 per share, which has yet to formally come. That relatively high discount reflects a big degree of investors doubt that this deal will ever close, and for good reason. For starters, Shandong Gold wants to make the purchase in cash, meaning it will have to find $1 billion in cash somewhere at a time when Chinese banks are sharply curbing their lending under orders from Beijing. But perhaps more importantly, I see very small chance that China’s regulator will approve the deal, which it will view as a frivolous use of capital with only a small chance of success as Shandong Gold probably has little or no experience running an overseas mining operation.

Bottom line: Shandong Gold’s $1 billion cash bid for Brazil’s Jaguar Mining is likely to be rejected by Beijing, which will see the purchase as frivolous and likely to fail.

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