Golden China claws its way to production

A little known company that traces its roots to Hong Kong, is listed in Toronto, and is about to merge with an Australian firm that holds Chinese assets, has ambitions to become the largest foreign producer of gold in China.

By the end of the year, Golden China Resources (AUC-V, GCRFF-O) expects to be generating its first cash flow when it merges with Sydney-based Michelago (MLHFF-O, MIC-A), 99%-owner of a bacterial oxidation plant in Shandong province that processes third-party concentrates at a rate of about 150,000 oz. gold per year.

And by 2008, the company plans to be producing more than 350,000 oz. per year, roughly half from third-party processing and half from its own gold deposits in Guizhou province and Inner Mongolia.

Investors have heard variations on this promise as China has creaked open the door to foreign mining companies over the past decade. But few foreigners have been rewarded with tangible results because of the difficulty of navigating the complex Chinese regulatory environment.

One of the few exceptions is Sydney-based Sino Gold (SIOGF-O, SGX-A), which recently became the first foreign-owned gold company to secure a mining licence from the Chinese government for its Jinfeng project in Guizhou province, expected to produce about 180,000 oz. gold per year starting in December.

Golden China’s own road to production has been “unbelievably painful” as the company tries to satisfy several regulatory bodies, admits Garry Stein, vice-president of corporate development.

And the hiccups are not over yet. In mid-August, Golden China had to amend its merger deal with Michelago to reflect a $12.1-million writedown in the carrying value of the gold inventory at Michelago’s processing facility. The amended terms require renewed approvals from both Golden China and Michelago shareholders and the applicable regulatory bodies and stock exchanges.

“Putting together deals to merge North American companies and Australian companies with assets in China brings tremendous regulatory and governance issues to the table, and has tried the patience of the market,” Stein says. “But we have very strong corporate finance and investment banking skills and we’re marrying those with the exploration expertise we picked up from Apac Minerals (acquired by Golden China last year) and the operating expertise we’re picking up from Michelago. That makes us unique for China.”

Only two years old, Golden China has already spent about $60 million on exploration and acquisitions in the country and expects to spend at least that much again proving up resources, expanding the bio-oxidation plant and potentially building a second plant near one of its deposits. Its shares trade at about 20.

The company’s self-described “China knowledge,” which may turn out to be the most significant key to production in a country where business connections are essential to success, comes from its ties to the Kingsway Group, a Honk Kong-based financial services provider, and the personnel it will inherit from Michelago.

Douglas Betts, chairman and CEO of Golden China, is also CEO of Kingsway Canada and chairman and deputy CEO of Kingsway International Holdings (KIH-T, KIHYF-O). The board of directors includes David Paterson, founder and former managing director of HSBC Private Equity Management, the largest private equity manager in the Far East outside of Japan, and Radcliffe Latimer, former president of CN Rail and Trans Canada Pipelines.

Peter Secker, one of the founders of Sino Gold, who helped build Michelago’s bio-oxidation plant for the Chinese government and subsequently bought it back from them, will provide technical expertise to the post-amalgamated company along with Martin Jacobsen, former COO of Australian gold producer Emperor Mines (EMP-A, EMPMF-O), who has more than 35 years operational experience.

Michelago advantage

Apart from the processing facility in China, Michelago holds the only foreign seat on the Shanghai Gold Exchange and has a 4.5% interest in Mundoro Mining (MUN-T, MMNGF-O), which is advancing the multimillion-ounce Maoling gold project in China, and a 35% stake in AIM-listed Solomon Gold (solg-l), which is completing a bankable feasibility study on the 2.3-million-oz. Gold Ridge mine in the Solomon Islands.

Stein says Golden China is halfway through a prefeasibility study on the Nibao deposit in Guizhou province, which contains a National Instrument 43-101-compliant inferred resource of 5.45 million tonnes grading 2.47 grams gold per tonne (432,000 oz.) near surface.

A 17,000-metre resource delineation program is expected to increase the size and confidence of this resource considerably. Metallurgical test work, as well as preliminary pit design, mine planning and detailed environmental monitoring are also under way.

The drawback of the Nibao mineralization is that it is refractory and cannot be processed using conventional milling techniques, a motivating factor behind Golden China’s merger with Michelago, which owns 10-year rights to the BacOx technology for refractory ore in China.

If warranted by the results of a feasibility study expected to begin next year, Golden China will build a standalone BacOx plant for Nibao that could also process third-party ore if any of the intense exploration along the “Carlin-like” trend that hosts Nibao bears fruit. The company has an exploration licence and is in the process of applying for a mining licence for Nibao.

Golden China’s other deposit is Beyinhar, a highly oxidized shallow epithermal gold deposit in Inner Mongolia. Golden China will release a NI 43-101-compliant resource calculation for Beyinhar this fall based on a recently completed 9,000-metre drilling program and expects to complete a preliminary feasibility study on the deposit next year.

Preliminary metallurgical test work indicates a 77-81% gold recovery from direct cyanidation and the potential for a seasonal, low-cost heap-leach operation at Beyinhar.

“With Peter Secker’s experience of building mines in China, we expect to be able to get Beyinhar into some kind of preliminary production by late 2008 or early 2009,” Stein says.

In the meantime, Golden China will be working to close the Michelago deal at long last, come up with new resource estimates for Nibao and Beyinhar, and find the financing to fuel the next leg of expansion.

— The author is a freelance writer specializing in mining issues, and principal of Toronto-based GeoPen Communications (www.geopen.com).