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China goes for gold with overseas mining projects

A secure supply is seen as critical to the country's economic and strategic goals

Canada's Barrick Gold sees significant benefits in a partnership with the cash-rich Chinese firm Shandong Gold.   © Reuters

TOKYO -- Chinese gold miners are on the hunt for mines overseas, spurred by robust prices of the precious metal. Already the world's largest gold producer, China's sees overseas mines as part of the country's long-term strategic goals of expanding its economic influence and building up its manufacturing might.

Part of this agenda involves working with foreign partners. In early July, Canada's Barrick Gold, the world's largest bullion producer, said it would expand cooperation with China's Shandong Gold Group in developing gold mines. 

"This agreement will allow us to take our partnership to the next level," said Barrick Executive Chairman John Thornton about the "enhanced strategic cooperation agreement" with Shandong Gold.

The two companies are building on a deal struck in April 2017 under which Shandong Gold acquired 50% of Barrick's Veladero mine in Argentina.

The latest move is a clear signal that the Canadian miner has a strong interest in working more closely with the cash-rich Chinese company. It seems likely that Barrick will want to expand the scope of its partnership into areas such as the joint acquisitions of mines.

Since 2013, when gold prices plunged 30% in a year, China has been ramping up overseas gold mining investments. According to state-controlled media, Shandong Gold aims to expand overseas operations to become one of the world's top 10 gold miners.

Such expansion of gold mining operations abroad could significantly increase supplies, causing prices to fall. But Beijing seems to believe high-quality gold mining projects abroad are essential to ensuring it can weather periods of low prices.

Gold prices are currently hovering in a range of between $1,200 and $1,300 per troy ounce, up nearly 30% from a decade ago.

Developing gold mines is a long-term, risky process that requires years of planning, research and infrastructure development. Miners must conduct extensive analysis on how much gold a ton of ore actually contains.

For its part, Barrick can "spread the risks of developing mines by using Chinese money," said gold market analyst Itsuo Toshima.

Yoshiyuki Kita, a senior executive in charge of metals at Japan Oil, Gas and Metals National Corp., an independent government agency, says China's stricter environmental regulations are a factor in the desire to expand abroad.

"As the authorities take stronger environmental policy measures to reduce the use of mercury in gold mining and smelting, it is becoming increasingly difficult for Chinese miners to maintain operations of small mines which account for most of the gold mines in China," Kita said. 

Mercury and cyanide, which are used to separate gold from the ore, are highly polluting.

Chinese miners are raising their chances of earning high investment returns by improving their mine evaluation and refining skills, Kita added.

Domestic gold production in China fell 7% in 2017 from the previous year.

Beijing also seeks secure future gold supplies for strategic reasons. Under President Xi Jinping's "Made in China 2025" initiative, the country aims to become a global technology and manufacturing powerhouse in key sectors such as robotics and health care.

Gold, which is used in electronic substrates, is strategically important for this effort. Beijing has tight controls on taking gold out of the country.

China's central bank, the People's Bank of China, holds the world's sixth largest gold reserves, with 1,843 tons. While the central bank has not bought gold since 2017, China plans to increase its gold reserves to back its currency, the yuan, over the long term as it seeks to internationalize it, said Takahiro Morita, chief of Morita & Associates, a gold and platinum market research company.

China is also the world's largest consumer of gold, mainly through jewelry purchases.

"As the world's leading gold consumer, China wants to gain the power to set gold prices in the future," Morita said.

China's Belt and Road Initiative, announced in 2013 to develop a network of international trade routes, targets wide areas of Eurasia, including such major gold consuming countries as India and Kazakhstan.

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