In China Gold Mining Equals Patience

by Ken Reser | January 7, 2010

In China patience is considered one of the Seven Heavenly Virtues, and lord knows being involved in every aspect of the mining game requires a lot of it whether you be of Asian, Western or any other descent. From 2005 when I first penned an editorial on Gold Mining in China http://www.321gold.com/editorials/reser/reser040805.html I mentioned that Goldfields C.E.O. Ian Cockerill had in 2003 called China the World's next major gold mining province. He also believed in the potential of major gold finds in the deep complex geological mineral structures of Shandong province and had consummated a JV with Sino Gold of Australia in that area. Since then thru time, patience, hard work, Gold production and a series of acquisitions and deal making, Sino Gold became a great investment being subsequently bought out in /09 for over $7.00 p/sh. *Note: Sino Gold listed on the ASX in /02 with it’s share price escalating from $1.00 (A), to approx $8.00 (A) in /09, so what they were doing for the prior seven years is unknown to myself, but it shows the span of time the whole undertaking went thru. Obviously they had substantial shareholder support over the last seven years of being public.

When did they first enter the Chinese Gold mining arena looking to begin the journey? In 1995 said the CEO/Pres of

Sino Gold, Jake Klein. http://www.chinamining.org:80/News/2009-04-01/1238572480d23184.html

(Excerpt from Apr/09 Article) President and chief executive Jake Klein told the Paydirt Gold Conference in Perth on Wednesday that Sino Gold, which was the first foreign entrant to China's gold sector in 1995, was benefiting from the Asian superpower's ready access to capital.

"Here's a bold prediction: Chinese gold companies and the Chinese gold industry is undergoing a revolutionary rate of change and what is going to be a major catalyst for change is access to capital," Mr. Klein said. (End)

And today? Well yes, they have achieved great successes and borrowed a lot of money from banks to get there, somewhere around $175 M (Australian$) to fund Sino’s various mine projects and kudos to them as borrowed money is often a dangerous scenario for Jr Miners at the best of times, but more on that later.

Shandong Province’s Gold production for over 30 years has been the largest of any province in China and in /08 it reached an output of just over 47 T which equaled 21% of China’s total output. The Chinese officials expect yearly growth in the realm of 12% year on year in terms of Gold output in Shandong Province alone.

Two other large Gold Miners operating in China are also making expansion plans for higher Gold output which is a further confirmation of forward thinking intent in China. Shandong Gold and Zhaojin Mining both state they plan to increase Gold output substantially. Shandong Gold produced 17 T in /08, and will have produced 20 T in /09 (est) and plans for 30 T of Gold output by 2011.

Zhaojin Mining state they produced 10 T in /08 and will have produced 13 T (est) in /09, with expectations of also producing 30 T p/yr by 2014.

In order for the Major Gold miners in China to expand Gold reserves and thus Gold output they need to make acquisitions obviously and outside of a very few small private consortium mines and some illegal mine operations to target there isn’t a lot for them to choose from in their expansion plans.

One junior miner that could and should be a future target that I have written about in past years is a small junior with a very strong foothold in China (Shandong Province, near Rushan City, specifically) by the name of Goldrea Resources on the TSX Venture Exchange. (V-GOR) http://www.goldrea.com

Goldrea Resources has been slowly and quietly forging ahead with some (as yet un-noticed by most of the investment community) very substantial advancements stemming from a $10 M financing done in 2007. Keeping in mind what the last two years has been like for junior miners I find their advancements to be very noteworthy. (some of the achievements below
are from Nov /09 News Release)

Expenditures to date: $7.5 million on Goldrea Rushan JV directly.
Achievements/Next Steps:
*57,122 Meters of Diamond Drilling completed (187,360 ft)
*235.5 Meter cement walled shaft completed (772.6 ft) with five compartments
*NI-43-101 Indicated Resource of 174,000 oz Gold
*4750 M of underground drifts and development work = 3 Miles (plus stoping work)
*22,000 T bulk sample test completed w/ 329 0z Gold recovered
*Current daily production of 50 T p/day
*Negotiations w/ 5 separate Chinese Gold companies ongoing currently for possible JV funding
*Goal of 100 to 200 T p/day from Golden Rose shaft (initial shaft already completed)
*Two more shafts in planning stages
*Reassessment of Gold reserves from drilling and 3 Miles of drifts already completed to come in 2010
*Continued exploration and development of Ludi Properties JV, adjacent to the Goldrea/Rushan claim blocks
*Continued development of Golden Rose orebody drifts and stopes already well underway

As I understand it, one of the key points in working in China is the fact that it costs approximately 80% less to do the same amount of work as it would cost in NA. Goldrea’s bulk test with a certain percentage of inevitable waste material at this early stage yielded approximately $350,000 US in Gold. Now specific stopes (sections of tunnels) are being developed for higher grade material. It is easily foreseeable that 200 T p/day (and more) is achievable from the first shaft already in production. Quite possibly even before more shafts are completed and the over-all Gold Resource is recalculated, Goldrea could be a prime target for a takeover. I believe the reserve estimates will climb very substantially in due course and with a paltry market cap of roughly $6 M and some ore zones assaying in as high as: (grams per ton as follows)

6 grams over 48 ft,
5.98 grams over 52 ft,
29.25 grams over 6.6 ft,
5.67 grams over 45.9 ft,
4.12 grams over 4.12 ft,
14 grams over 6.6 ft,
6.46 grams over 32 ft,
18.25 grams over 5.9 ft.

There seems to be much to gain here for GOR shareholders in the foreseeable future. Assay reports from previous GOR news releases show multiple ore zones with substantially much higher Gold grades than what was achieved from the bulk test thus far. As I mentioned before, there is waste material in the bulk sample as the ore milled was taken as the drifts were developed to block out ore reserves, so the 22,000 T bulk sample does not actually reflect true values of actual ore zones to be mined in future. I can only imagine what the costs would be in NA to complete 3 miles of drifts and cross-cuts, and then factor in the shaft cost coupled with over 187,000 feet of diamond drilling. I would say shareholder money invested to date has gone a long ways already.

With Goldrea’s 90% ownership of this JV project and the Rushan City’s (10%) also owning the Daye Gold mine, being adjacent to all of Goldrea’s claim blocks there is no need for any expensive Capex to construct a mine facility. With contracts in place for mining and milling of ore by the partner Rushan City owning the Daye Mine and Goldrea’s costs p/T based on actual costs by the Daye Mine for their own open pit ore over many years, it would appear that GOR is in a win, win situation in many ways. Toll milling by their partner will be at a much lower cost as per oz of Gold relative to that of any western based operation. Rushan City’s Daye Mine has been operational for over 20 years and has a capability of 1750 T milled per day with an Assay lab and other extensive facilities on site.

As GOR management have already openly stated, they are currently in discussions with five Gold companies in China.

These talks could well lead to a funding partner for expansion of operations w/o extensive share dilution. With two more shafts they could possibly achieve 700 to 1000 T p/day. It would appear readily apparent that Goldrea could quite easily be another China success story over the next year or two. Remember earlier I spoke of junior miners taking on debt and how it can backfire? Well they have NO outstanding debt-load, so all of the extensive work that has been done is already paid for and the stock is trading at 9 to 10 cents p/sh. Sounds like an awful cheap entry point into what is already (albeit small scale) an operational mine, with some substantial milestones already achieved and in place.

It seems self evident to me that with Goldrea Resources long and well established focus, land position, work already completed, strong relationship w/ Daye Mine (owned and operated by Rushan City Municipal Gov’t, their Chinese counterpart and partner) and a bit of the aforementioned supply of “Patience” coupled with a few shares of Goldrea Resources an investor could well see substantial gains over time. Check the 5 year chart and you will see (when the market was hot) Goldrea traded at 6 to 7 times the current value and that was when they were just in the early stages of this project in 2006, 2007. Food for thought when one considers where they are now in terms of achievements and where they seem to be headed! It has been known for some time now that China wants to privatize Mines and expand their national Gold production with the implementation of western mining methods, expertise and mine safety measures.

This appears to be one western junior miner with a lot more than a foot inside the door to China’s wealth of Gold as yet untouched by modern mining methods. A bright future? You be the judge, I just relate the facts as I see them.

Best Wishes to all of us for a “Prosperous New Year”…

Note: In Chinese Astrology, 2010 is “The Year of The Metal Tiger”

As Always: Thanks for reading; Ken Reser

Email me to be added to my free editorial subscription list or to pose questions: ykgold@telus.net

*Disclaimer: I am not an accredited financial adviser and as such this is not a solicitation to own or purchase any of the aforementioned stocks. As an investor you must do your own due diligence before buying any stock. This editorial is strictly informational from my personal point of view. No fees were paid for the writing of this commentary. KR.

Contact Information

Ken Reser | 403-844-2914 | Email