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Hong Kong Precious Metals Conference Brings Conflicting Views.


Terrapinn of Singapore has taken on a new challenge. This week, it introduced a new three day Gold & Precious metals conference to Hong Kong. The firm has run several Asian investment conferences in the past, but this is its first to focus on precious metals for the Hong Kong market. Traditionally, HK investors have invested in property, property and, for diversification, property in mainland China. Getting Hong Kongers excited about investing in gold mining companies is a challenge which cannot be expected to bear full fruit in the first year. Yes, Hong Kong does have 5 or 6 listed Chinese mining companies, including two gold miners. But these are all cash flow generating, profitable companies, which can be evaluated on their P/E ratios. They are not the explorers and miners-in-development that one finds listed on Canadian and UK markets. And none of these Chinese companies attended the conference.


Terrapinn attracted a reasonable number of delegates. The organisers claim that about 200 were signed up, and my quick count within the conference room was about 150. Looking around, I would have happily awarded to this crowd, the title of the “best dressed” precious metals conference” amongst those that I have attended. That assessment is partly due to Hong Kong's preference for basic black in any business context, but also due to the small number of private investors. I met two. The delegate list identified only three, although there may have been others who were attending under their company names. The main attendees included banks, brokers, fund managers, exchanges, regulatory bodies, etc. The people I spoke to, said they had come to learn about a new area of investment, rather than to find new investments within a area which was already familiar. Overall, the conference represented a good start and this meeting is something Terrapinn can build upon in the future.


The speakers were impressive. Over the three days, we will see most of the worthies in the world of gold. The first day included some star speakers, such as Doug Casey, Frank Veneroso, James Turk, and Ian Gordon, amongst others. Casey's talk opened the morning session, and was not for the faint-of-heart. He spoke of the trillions of US dollars that were overseas. These would eventually be exchanged for other assets when their foreign holders dump them. And this would trigger a collapse in exchange value of the dollar, increased inflation in the US, and other headaches. He seemed comfortable talking about gold at US$2,000-3,000/oz, world war three, and the possibility of nuclear bombs being brought into New York harbour one day. Chilling, but familiar territory, for many gold bugs, I suppose. The Hong Kong audience did not seem shocked, even if it was new to them.


Frank Veneroso's talk was a surprise to me. He is not in the bullish camp. Using a more academic approach than Doug Casey, he displayed rows of figures showing jewellery and bar-hoarding demand over the past ten years. A decade earlier, he had forecast big future increases in Far Eastern demand, counting on investors in these areas consuming more jewellery, as they got richer. This has not happened. Exploding incomes in China, Hong Kong, and Taiwan, have been accompanied by a fall, not a rise in demand. And the oft-cited commodities supercycle has only brought a 2 per cent/annum rise in copper demand.


The explanation Veneroso had for the rise in prices was: Hedge Funds. He presented a chart showing a tripling of commodity derivatives on the books of US banks between 2004 and 2005. He said this big jump was due to speculative demand coming from Hedge Funds. The recent US$6 billion loss reported by Amaranth showed how huge the positions controlled by hedge funds had become. His main fear was that a future collapse in copper prices- similar to what we have seen in recent weeks in the natural gas market- would spill over into silver and gold. Ironically, he said that gold is likely to fare better than the other metals, because Central Bank intervention had kept gold prices down. In a metals slide we could see short-covering by Central Banks, and this meant that gold's fall could be limited.


Jim Turk was the most articulate of gold bulls. He entitled his talk, “Gold's Inevitable Climb to US$1,000/oz.” His charts showed that gold is in a bull market that goes back to the late 1960's, and the prices falls of the eighties and nineties are nothing more than a two decade correction to a longer uptrend. Drawing comparisons with the seventies, he said the current rally has further to go to catch up with the moves of thirty years earlier. The main problem is the excess printing of money, to cope with various financial problems. Like Casey, he sees a big fall in the dollar, and the possibility of hyperinflation, if the Fed is unwilling to take the pain of deflation. The end of reporting of M3 money supply data is a clear sign to Turk that the Fed wants the freedom to keep printing without much scrutiny by the markets.


Philip Koetse, Axel Merk, and Ian Gordon put forward generally upbeat presentations on gold. Gordon made his usual Long Wave presentation, and answered a question raised by Frank Veneroso, why has demand for gold not risen much amongst Far Eastern investors? His answer was that they are still making big money on their paper assets. The Hong Kong Stock index is hovering at just below 18,000, less than 1 per cent below its all-time high from 2000. Falling stock prices, and fear, would drive investors back into gold, he said.


Unfortunately I missed the afternoon presentation by Trevor Steel of UK fund managers Baker Steel. I would have liked to hear the reasons that he is forecast a new high of over US$850 in gold for 2007. And as the conference goes on, it will be interesting to see if Veneroso's bearishness is in the minority, and the conference attendees' apparent enthusiasm for precious metals spill over into their seeking of more specific recommendations in the mining sector. It was unfortunate that Lawrence Roulston was unwilling to share his stock ideas with the audience when asked from the floor.


@: October 11, 2006 : http://www.minesite.com/storyFull5.php?storySeq=3854



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Jinshan Brings Canadian Alchemy To Inner Mongolia


Toronto-quoted Jinshan Mines, which hosted a visit to its mine last week, is only months away from opening this new gold mine in Inner Mongolia. The Chang Shan Hao 217 Gold Project is a breakthrough project for foreign mining companies operating in China. It will be the fourth largest gold mine in China. And, it is also the first foreign-owned gold mine to receive a new gold mining license anywhere in China.


Other foreign miners active in China include Sino Gold, which took an existing Chinese goldmine public in Australia, and London-quoted Griffin Mining. Griffin was the first foreign miner to gain a new mining license, but it is a predominantly a zinc miner, and produces gold as a by-product. Some cynics said that China would never give a foreign owned company a license for mining gold. But Jinshan has proven them wrong as it owns 96.5 per cent of the mine, and is a joint venture with Ningxia, the so-called nuclear brigade in Northern China.


Jinshan's success has been rapid. The project has evolved quickly from early exploration to a mine-in-development. Those on a recent site visit, saw a mine which is perhaps half-way to completion with huge leach pads in place, a processing plant rapidly taking shape, with power lines erected, and a water supply pipes being laid. The initial gold pour is currently expected in April 2007. Once full production is underway, the mine is expected to produce 117,000 ounces per annum at a cash cost of US$253/oz. That would mean the mine has gone from a rough bit of exploration land to an operating mine in about three years, an achievement anywhere, but especially in China which has a reputation as a difficult environment for foreign companies.


This is a tribute to Jinshan's management team, led by its charismatic and young chief executive, Jay Chmelauskas, who was been described as fresh-faced but highly capable. Jinshan shares an office in Vancouver with Robert Friedland's Ivanhoe Group, which also owns about 51 per cent of the stock. Jinshan has made progress in China look easy. At the start, it did not look so promising. The CHS 217 deposit is now a large low grade deposit, which was passed over by various companies at lower gold prices, including a Canadian company, which gave up the deposit before Jinshan took it on.


Jinshan has transformed the caste-off into gold, through an alchemy of scale and efficiency. The company perceived that if the deposit was large enough, it could be tackled with the large scale approach used by major global miners, rather than the pick-and-shovel approach used to start many of China's 1,200 gold mines. The company’s initial mining license application raised questions from Chinese mining authorities because the grades were lower than what they were accustomed to seeing on economic mines. It took a while for Jinshan to demonstrate that the Canadian approach of using economies of scale to reduce costs was the best way to approach a deposit of less than 1.0 g/t. The deposit had to be large enough to make it work.


After some 20,000 meters of drilling, the deposit is now 2.9 million ounces at an average grade of 0.83 g/t (on a 0.5 g/t cutoff), and a further 1.2 million ounces to the Northeast Zone will probably be mined later. During this visit, Chmelauskis stood in the middle of the deposit and gestured to his right and left saying, "We will be mining about 2 kilometers in either direction." The experienced Chief Operating Officer, Mr. Calvin McKee said that the rock and terrain reminded him of Murantau, where he previously worked as Newmont's general manager of the Zarafshan-Newmont heap-leach gold mine.


Last year, Jinshan mined 100,000 tonnes from a trial pit, and found that the material crushes easily and leaches well, and they anticipate high recoveries from their leech pads, which are now China's largest, and have been built to Canadian standards, as the processing plant will be. Jinshan's alchemy was also assisted by rising gold prices, which are up 60% in three years, and a local advantage: low Chinese mining costs. They will be using a large Chinese contractor, whose winning bid was a mining price not far north of US$1.0 /tonne. On top of that, Jinshan will have its capital costs, processing expense and overhead. But with gold near US$600, which is about US$19 /g., there's a decent profit in 0.83 g/t.


Others have stumbled in China because they took on projects with legacy issues, uncertain titles, or failed to work "from the ground up." Jinshan has worked hard to get the local people onside. Strong relationships have been built at the local level, before seeking approvals at provincial and national levels in Beijing. Those visiting the mine saw evidence of local ties in an impressive banquet hosted by Baotou's Deputy Mayor under a colorful banner bidding "Welcome to Visiting Mine Inspectors." It is apparent that the local communities are supportive of the foreign influence which is helping to transform once-backward parts of Inner Mongolia into 21st century cities.


Government support is also apparent in the improving infrastructure. A 30 kilometer power line is being built from a new local substation to join Jinshan's own 10 km line. And one of the three main routes to the mine is a brand new four-lane highway for most of the 5 hour journey. The quickest route was closed for some repairs, so on the return journey to Baotou, we tried an alternative, winding three-and-a-half hour dirt road through the mountains. Nevetheless, this demonstrated that transport to the mine can be arranged in various ways.


Successful start-up will confirm the economics, and help shrink the current discount due to perceived "China risk" and the usual discount for a mine-in-development. Jay Chmelauskas has also said during a recent visit to Hong Kong that he may seek a listing for the company on the Hong Kong stock market. It would likely become the 4th or 5th gold miner listed on that exchange, after giant Zijin, Lingbao, and one or two others who have announced an intent to list such as Sino Gold. Jinshan's own shares were upgraded from the Venture exchange to a full Toronto listing about two weeks ago.


@: October 25, 2006 : http://www.minesite.com/storyFull5.php?storySeq=3885


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Feature Story Date: November 16, 2006


Some Controversial Views From The GaveKal-Dragonomics Seminar In Hong Kong


Hong Kong-based GaveKal and Beijing-based Dragonomics join forces once a year to bring controversial topics to clients in Hong Kong. On November 9th. I got a taste of their independent perspective at the Foreign Correspondents' Club, a place which has witnessed millions of conversations about China. Appropriately enough, this year's topic was “China’s energy and resource efficiency”.


Those who attended for the first time may have walked away feeling that China is certainly the driving force that everyone talks about, but its great growth does not necessarily guarantee that the commodities supercycle will continue indefinitely. Reading between the lines, there was a clear message that China's growth may continue, even while commodities prices slide back. According to some of the speakers it would be wise to treat with healthy scepticism any assurances that we can rely on Chinese demand to keep oil prices constantly rising and copper prices as high as they are..


Jim Brock, an independent energy analyst based in Beijing, knows his subject. Some will have been surprised to learn that only 11 per cent of China's aggregate energy demand is imported energy. If anyone had given me that figure before the conference, I would have thought, "That is small, but so what? China's growth is huge, and its oil imports are sure to skyrocket." Brock provided some powerful counterarguments against this supposition. Chinese oil demand will keep increasing, but perhaps not as fast as some of the bullish pundits have forecast. China is in the midst of a powerful move towards substitution away from oil, he says.


Ten years ago, China used only four primary types of energy. With 26,000 coal mines, China has the world's highest production of coal, and that continues to grow. In oil, it is the sixth biggest producer, although it now imports about 40 per cent of its oil needs. The remaining two historical fuels were hydropower and biomass, and the latter is used predominantly in agricultural regions, where crop waste is burned. These four continue to be important, but oil usage has been on a different growth curve than the rest of the world- a faster one- as China moves towards urbanisation.


Fortunately, the move to substitute away from oil has gained force as crude oil prices shot up. China now has 16 different forms of energy fueling its economy. Two new feedstocks, Methanol and DME (dimethyl ether) , are gaining importance in China. Policy changes have helped. Moves to give the buyers the choice of energy sources are mostly complete, and the pricing mechanisms are gradually loosening up, and are most responsive when oil prices rise. Consequently, the substitution trend will continue if the rising oil price trend remains in place.


Oil is the principal fuel for powering automobiles, and car ownership is rising fast in China, so alternatives to oil are needed. In this regard, China is seeking to import or develop gas-to-oil technology, and these initiatives will be backed by big capital commitments. Brock estimates that by 2012-15, 15 per cent of coal will be used as an oil substitute. Nuclear and wind will also benefit from a big push by government. Hydro power has just shown a huge increase, as the Three Gorges Dam project is completed. Brock forecast that China would be the world leader in alternative energy technologies within ten years.


On the negative side, he feared that air pollution and global warming would not get the attention they deserved until the attitude of the Chinese public changes. Growth remains the top priority for virtually everyone. Despite noises from government about improvements before the Olympics, national enforcement remains lax. Perhaps if China is labelled as the world's largest polluter by 2009, as some have forecast, then China would no longer be able to hide behind the US, and the attitude will change.


Tom Miller of the China Economics Quarterly, a Dragonomics publication, spoke about the rapid pace of windpower development. Many projects are under construction, and China is expected to hit its target of 30 Gigawatts by 2020, requiring an expected RMB 200 billion investment. But this has not yielded the bonanza that some foreign wind power developers had been hoping for. The main problem is that China relies on a tender process, and due to competition, the successful bids keep falling, from RMB 0.73 several years ago when projects were first opened for tender to a recent RMB 0.46 per kwh. With developers needing to use a minimum of 70 per cent locally-produced content, and because no Chinese manufacturers is yet able to deliver the more efficient large turbines, over 1 MW, the returns are in the region of 6-9 per cent, which is hardly exciting. And this is in areas like offshore east coast, Inner Mongolia, and Xinjiang, where the winds are strong and provide the most economic areas for windfarms. An answer to boost returns may be carbon credits. But carbon credits are only approved slowly, usually after the capital expenditures are committed, and must be part financed, which makes project financings a big challenge.




Arthur Kroeber, managing editor of CEQ, looked at the question of whether or not China would be able to improve its energy efficiency, by reducing its energy use -to-GNP ratio. The official target is for a 20 per cent improvement in five years. Of course, if the dollar weakens and currency moves grew dollar GNP, then the ratio would fall. But that isn't a fair measure, said Kroeber. If you look at this ratio in terms of local currency, improvements will prove difficult. The easiest way is through rapid economic growth, where the GNP increases even faster than the rising energy input. Kroeber said that the evidence of the past six months or so, showed no improvement in the ratio. And even if it fell by 20 per cent over five years, the pace of GNP growth was so fast, that China's energy use, and presumably its carbon emissions too, would be far higher in five years. Jim Brock had spoken of the Chinese economy doubling every 7-8 years. A 60-70 per cent increase in energy used over the same time frame is not impossible. With the push towards substitutions, no wonder Brock saw China as the future leader in alternative energy.


Matthew Flynn spoke about shipbuilding in China. An interesting point he made was that the capacity of shipbuilders in China may be under-estimated by many, particularly by shipbrokers who are eager to broke shipbuilding contracts. He said that Chinese capacity to build ships was rising fast. Small yards are building bigger and bigger ships. And at the other end of the market, where China built its first VLCC supertankers only a few years ago, the jump is dramatic. Recently, there were only six berths large enough to build VLCC's. Enlargements planned, would add 16 berths within a few more years. Flynn's mesage to those considering ordering was caution. The current favorable supply demand balance, with near record freight rates, would probably look very different when ships ordered today are delivered.


Over lunch, we heard from Simon Hunt, "Mr. Copper" as he was called, with decades experience monitoring the copper market. For anyone who had attended both this seminar and also the recent Hong Kong Gold conference, they would have heard a similar bearish message from Frank Venerosa. This is not surprising since Hunt and Venerosa have an association and talk regularly. Overall, Hunt was very bearish on copper. He believes the current price of US$3.15 per pound, or just under US$7,000 per tonne, is not the result of strong demand from China, as is widely believed, but rather was due to the concerted action of "3 or 4 large speculators" who have managed to buy up physical copper and remove it from inventories.


Hunt believes that the price manipulation is beginning to unravel, and indeed copper fell steeply the week of the seminar. Those wanting to sell into China are finding that the market is oversupplied, and a jump in Chinese inventories has just been reported. This is partly because market analysts typically under-estimate China's own production. Production from smaller mines, and copper by-product is not being captured in the official statistics. Hunt estimated that copper is now in a growing monthly surplus. Thanks to substitution, and some slowing in economic growth, he could see as much as one-quarter of Chinese demand disappearing. Globally, demand may continue to rise at perhaps 1.2-1.3 per cent per annum, but this was against production which he sees rising at 7.8% annually. The likely result was falling copper prices. He could see prices sliding to US$4,000 /tonne within months. Longer term, he could see the cyclical bottom being as low as US$2,000/tonne.


The last presentation from John Richardson, on the petrochemical business in China, also spoke of emerging excess supply. Richardson said that China was "going crackers" with over 10 large naptha crackers under construction, or in the approval process. This compares with three currently onstream. The existing plants are JV's with established multinational companies. But now that China has access to the technology and the capital, they are happy to go it alone. The only exception was two plants which were JV's with foreign oil producers who could guarantee supply of imported oil or naptha. Richardson said that experts from within the petrochemcals industry were advising those who had not already implemented a China strategy that they were "too late", and it was pointless to jump into a market that was headed towards a glut.


The presentations in the seminar were all from independent analysts based in China (including that part of China which is Hong Kong.) Unlike some of the more rosy forecasts coming from the West, a common theme was talk of gluts, oversupply, and excess capital investment. Certainly, no one was talking about growth going negative, but the scale of current investment is so great, it will take some truly heroic growth to give these investments a reasonable return. The Chinese banks, which had just cleaned up their balance sheets, and bolstered them in a wave of IPO's on the Hong Kong stock market, may soon be seeing their non-performing assets climbing once again.



GaveKal : http://www.gavekal.com

Dragonomics : http://www.dragonomics.net


@: Nov. 16, 2006 : http://www.minesite.com/storyFull5.php?storySeq=3935

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