Back in October of 2012, Hugh Hendry proposed a simple investment thesis: '"I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation. And if you are bullish gold why don’t you buy gold ETFs, gold futures or gold bullion." Since then, anyone who listened to Hendry has made a substantial double digit return (yes, one can make double digits returns on gold even when gold is sliding: such is the "magic" of long gold, short GDX pair trades). However, following a massive, 50%+ selloff, there comes a time when even gold miner stocks become attractive to those with deep pockets filled with reserve fiat. For someone like China, that time may be now. The WSJ reports that China's largest gold company, China National Gold Group Corp., has talked to Ivanhoe Mines "about buying a stake in or asset from the company."
It is unclear where talks stand, but, if completed, such an investment would mark another step into international markets for the Beijing-based miner and further Chinese investment in African mining. It could also entail Mr. Freidland's taking on a major international partner not long after he lost control of a major mining company to London-listed giant, Rio Tinto PLC.
The WSJ adds "on Monday, Toronto-listed Ivanhoe said it is selling $100 million worth of stock at $2 a share, a sharp discount to Friday's closing price of $2.56. The stock fell 11% as investors digested news of the dilution and analysts said that the total falls short of the money that Ivanhoe needs to raise. In a release Ivanhoe said that it is in discussions with a number of international, private and state-owned mining companies about raising further funds through investments in its projects and the company. "Ongoing talks could lead to the formation of a significant strategic corporate partnership or syndicate for continued exploration and development of the company's discoveries and associated infrastructure," Chief Executive Lars-Eric Johansson said Monday. A spokesman for the company declined to comment on whether it had held talks with China National Gold."
It probably had: while we have reported previously how over the past few years, China quietly but purposefully taken over Africa and its resources, we have still to find any indication that China was willing to spend any nominal amount of fiat to begin procuring gold miners - a step, which if and when confirmed, would rejuvenate the gold mining sector to an extent not seen in years. Suddenly China would become the buyer of first, and last, resort, and following a year long plunge in GDX, the long awaited surge would finally arrive over "fears" which gold miner would be taken over by China next.
Ivanhoe Mines has projects to mine copper and zinc in the Democratic Republic of Congo and gold, nickel and copper in South Africa.
Though China National Gold focuses on gold projects, it has looked at different arrangements with Ivanhoe, according to one of the people familiar with the matter. That included, at one stage, taking a stake in Ivanhoe or taking over one part of its operations, that person said.
China National Gold is also talking to other companies, including several who operate in Africa, another person familiar with the matter said. Last year, the company was in talks with Barrick Gold Corp. to buy its stake in African Barrick Gold PLC but pulled out in January.
China National has already bought one company from Mr. Friedland, when an earlier incarnation of Ivanhoe Mines sold a controlling stake in Jinshan Gold Mines Inc. in 2008.
The big question then, the one that everyone has wanted an answer to, is the following: is Ivanhoe the proverbial toehold that China wishes to establish in Africa, and in gold. Because the two go hand in hand. And if indeed China is finally in an expansionary phase, one which will see to acquire not only gold, but gold miners, first in Africa and then everywhere else, which other massively oversold gold miner will the likes of China National Gold go after? The answer is still unknown.
What is known is that China has and continues to important unprecedented amounts of gold. If indeed China is so intent on sequestering all the world's physical gold, surely it is only a matter of time before it begins to purchase the very miners of production. Especially since countries hostile to US-based miners, in a world in which US geopolitical influence is rapidly waning, may prove quite supportive of Chinese equity ownership in a local mine or two.
And how long before the US antitrust commission is brought to the supreme test: will the US or won't it approve a transaction in which none other than China is granted permission to purchase a US-based mining operation.
We may get the answer quite soon.