In a reversal of the recent trend that has seen Chinese companies buying into the Canadian resource sector, Vancouver's Eldorado Gold Corp. is about to become the biggest gold miner in China.
Eldorado said yesterday it will take over Sino Gold Mining Ltd., an Australian company with extensive gold plays in China.
Eldorado already holds about 20 per cent of Sino Gold, but the proposed $1.6-billion stock swap will give the Canadian company full ownership. Sino Gold shareholders will receive 0.55 of an Eldorado share for each share they own.
In absorbing Sino Gold, Eldorado will get three key gold properties in China, two of which are already producing. Eldorado already owns the Tanjianshan mine in western China.
When added to Eldorado's other properties in Turkey, Greece and Brazil, the Sino Gold properties boost the company's 2009 production to 550,000 ounces from 330,000 ounces.
By 2011 total production will hit 850,000 ounces, and by 2013 the company will hit a key milestone for gold miners - pulling one million ounces of gold a year out of the ground.
Because Eldorado and Sino Gold were already the only significant foreign players in the Chinese gold mining business, "the new Eldorado is the unequivocal leader among international gold producers operating in China," chief executive officer Paul Wright declared on a conference call yesterday. He noted that China is now the largest gold producing country in the world.
John Ries, a professor at the Sauder School of Business at the University of British Columbia, said the acquisition is a switch from the more common takeover model which has seen Chinese companies attempting to purchase resource companies in the West, including Canada.
"This really shows that the international merger and acquisition market is a two-way street," he said. "This will take a little bit of political pressure off Chinese companies when they try to acquire Canadian resources assets."
Eldorado's Mr. Wright said his company does not need any approvals from China to complete the purchase of Sino Gold, since the target company is actually an Australian entity. Regulators in Canada, Australia and the United States will have to give the nod, however, along with Sino Gold's shareholders.
Mr. Wright said China is currently a "mining friendly" country, with supportive governments at all levels. At the same time it is relatively unexplored, he said, and there is room for expansion. "China is an open book," he said. "I wouldn't rule out any province."
He noted that both China and the Aegean region in the Mediterranean, where Eldorado is also active, are not "cluttered" with many other miners - the way parts of the United States and Australia are. That gives Eldorado a leg up, and a better chance at expansion, he said.
Once the Sino Gold deal is complete, Mr. Wright said Eldorado will likely look for its next major expansion to take place in the Aegean region or South America.
"We're going to be looking to balance production from the three regions," he said. However, that doesn't mean it might not make other acquisitions in China, he added.
John Ing, president of investment dealer Maison Placements Canada Inc., said China is a "magnificent" place for gold mining growth, and Eldorado's deal is a "marvellous acquisition."
Sino Gold has generated significant intelligence on gold deposits in China, and that will be extremely useful to Eldorado, he said.
"What they get is a very solid base, together with management who can work with the Chinese," Mr. Ing said.
Other international gold companies, including Canada's Barrick Gold Corp., have tried to make forays into China in the past, but without success, he said.
China, which has historically been lacking in sophisticated mining technology, will also benefit from the newfound strength of Eldorado, Mr. Ing said.
The relatively low cost of the Chinese mines means Eldorado will generate gold at about $340 (U.S.) an ounce, while the price of the precious metal is now in the $945 range.
The combined company will keep the Eldorado name, and its headquarters will remain in Vancouver, with an office in Sydney, Australia.
ELDORADO GOLD (ELD)
Close: $11.38, down 58¢
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Eldorado's China play
The deal
The $2-billion agreement between Eldorado Gold and Sino Gold will create a global gold producer with market capitalization of $6.4-billion and "establishes Eldorado as the unequivocal leader among international gold producers in China," the companies said.
About Eldorado
Vancouver-based Eldorado is a gold-producing, exploration and development company with operations in Brazil, China, Greece and Turkey. In June it acquired a 20-per-cent stake in Sino Gold, which operates China's second-biggest gold mine.
About Sino Gold
Sydney-based Sino Gold is the leading gold exploration and gold mining company in China with a market capitalization of $1.46-billion (U.S.). It holds an 82-per-cent stake in Jinfeng Gold Mine in Guizhou province, the country's second-largest gold mine with production of 151,000 ounces in 2008. It also owns 95 per cent of White Mountain Gold Mine in northeast Jilin province, and is developing its Eastern Dragon Project in northern Heilongjiang province.
Virginia Galt
© The Globe and Mail
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