mining stocks, commodity investing

Why so many Chinese in Toronto?

12.03.2008

by Dominic Frisby

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I’ve just come back from one of the most important mining conferences of the year, the PDAC (Prospectors and Developers Association of Canada) conference, in Toronto.

There were all sorts of things going on there, and in this week’s issue of MoneyWeek (out on Friday) I’ve written about the one theme I reckon could make you rich over the next 12 months. But another very interesting thing was the number of Chinese delegates.

There are always a few, but this year there were more than ever before. And they were all taking it very seriously indeed – hanging on to the every word of every speaker and scribbling away in their notebooks. So what were the noteworthy remarks they were jotting down?

During one of many talks on gold, I found myself sitting next to a big wig from the Chinese Ministry of Land and Resources. Using a technique well honed in my school days (when sitting next to a school mate called James Harding who is so clever he is now editor of the Times at only 39), I read his notes over his shoulder. He was – rather impressively, I thought, writing in English.

The gist was as follows. ‘Bull markets in commodities typically last 15 to 20 years’; ‘this bull market only is only seven years old - we are in the early- to mid-stages secular bull market’; ‘Chinese demand for metals is increasing’ (!); ‘there is an industrial revolution taking place’; ‘her infrastructure is being completely rebuilt’; ‘growing Asian middle–class expecting the same things we take for granted in the West’; ‘US debt is out of control’; ‘US money supply growth is out of control’; ‘inflation is out of control’; ‘the dollar is in freefall’; ‘no fiat currency has ever survived’; ‘gold maintains its purchasing power’.

In short, this man - and many hundreds like him - was taking on board everything Moneyweek readers already know about commodities, about the commodities supercycle and about precious metals in particular. He was getting it. After that I spoke to quite a few of the Chinese at the conference and to the CEOs of some of the Western companies operating in China. What on earth were so many doing at the PDAC? And why the interest in junior mining?

Too much money, not enough nickel

The answers all pointed in the same direction. Ivy Chong, CEO of Dynasty Gold which is developing gold assets in China summed it up with: ‘China has the largest cash reserves in the world. They are coming outside China to look for assets. They want all assets: financial assets, real estate, resources. They have money. They don’t have enough nickel, they don’t have enough iron, steel copper.’

Garry Stein, MD of Quam Private Equity, agreed. ‘The Chinese are here for three reasons,’ he said. ‘To secure assets; to look for deals and investment opportunities; and to learn.' Looks like they are learning fast. According to another contact - Michael Hampton, a prominent private investor from Hong Kong - 'at least three new private equity funds are being set-up in Hong Kong to specialise in natural resource investments.' At the same time CIC, China's giant sovereign wealth fund is also investing in private equity funds, in resource stocks, and in the banks that finance resource projects.

So what does this mean for the mining juniors that we like? Maybe nothing – for a lot of Chinese bureaucrats, says Ivy Chong, conferences are just a good reason to 'visit countries outside China.' They’re a jolly. But maybe quite a lot. Roger Walsh of Jinshan Gold Mines, a gold producer in China, thinks the main impact of Chinese interest in the kind of companies presenting themselves at conferences like this one is going to be on the mid sized companies that are already producing all sorts of commodities: he thinks they will soon be the subjects of Chinese bids. 'They want copper,' he says 'and they want zinc. You’re going to see deals in the mid-tiers and above.'

But this interest in the mid caps doesn’t mean the Chinese might not then move down the food chain, says Mike Hampton. And even if they don’t end up actually buying into early stage exploration companies, if Chinese money keeps rolling into the major miners 'it will eventually trickle down into the juniors.' And, what’s more, the Chinese are buying so much metal that it is forcing the Japanese and the Koreans to develop their own strategies and get metal exposure and production by buying into juniors.”

How fashion drives markets

It’s all good news. But there’s more to come – or so I am told. Part of the soaring demand for precious metals in the last few years has come from the newly rich middle classes in China buying precious metals as a way to display their status. But now I gather they are taking things further. The Chinese head of exploration for a leading gold miner, who preferred to remain nameless, said to me, ‘In China it has become very fashionable for the very rich to own a mine. Even the tech companies suddenly now have a resources department. If you are very rich, but you don’t own a mine, you are not fashionable.’

The smaller miners haven’t moved much in the last few years – we look at why in this week’s Moneyweek, out on Friday (if you're not already a subscriber, click here to sign up for a 3-week free trial) – but this surge in interest from the Chinese might be just the thing they need to get them off the ground. They should move upwards for fundamental reasons – they are cheap and the prices of their products are rising fast. But whether they start going up for that reason or just because rich Chinese get a kick out of taking them over and boasting about it over dinner doesn’t really matter – either way anyone buying into the gold stocks now is very likely to make money.

Turning to the stock markets...

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Stocks surge on central bank aid plan

London's FTSE 100 rose 61 points to close at 5,690. However, the index was off an earlier high of 5,783 seen as stocks surged 154 points on the announcement of a $200bn injection of bank loans from the US Federal Reserve and other central banks designed to prop up financial markets. For a full market report, see: London market close.

On the Continent, the Paris CAC-40 added 60 points to end the day at 4,627. And the DAX-30 closed 76 points higher, at 6,542.

On Wall Street, stocks also soared in the wake of the Fed's proposals, taking the major to their largest one day percentage gains in over five years. The Dow Jones gained 416 points to end the session at 12,156. The tech-laden Nasdaq added 86 points to close at 2,255. And the S&P 500 was 47 points higher, at 1,320.

Asian markets took their lead from the US today, with financial stocks making the best gains. The Japanese Nikkei rose 202 points to end the day at 12,861. And in Hong Kong, the Hang Seng added 427 points to close at 23,422.

Crude hits new record ahead of Fed news

Crude oil futures hit a fresh record of $109.72 just before the Fed's announcement yesterday, subsequently falling back and trading at 108.81 this morning. Brent spot was at $105.71 in London.

Spot gold hit an intra-day low of $964.35 yesterday, but was trading higher at $970.50 today, just off an earlier high of $974.90. Silver had fallen to $19.46.

Sterling had risen to 2.0124 against the dollar this morning and was last trading at 1.3081 against the euro. And the dollar was at 0.6498 against the euro and 103.16 against the Japanese yen.

And in London at noon today, Chancellor Alistair Darling delivers his first budget. A Bloomberg news survey out today suggests that Darling may raise borrowing in order to increase health and education spending without resorting to tax cuts.

Tune in to BBC2’s budget coverage at lunchtime today to hear MoneyWeek editor Merryn Somerset Webb’s reaction to Darling’s plans.

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