This article was originally published on the members-only Irregulars site on July 31, 2009, it is being reproduced here but has not been updated or significantly revised.
Now that Matt Badiali’s S&A Oil Report has renamed itself the S&A Resource Report, it shouldn’t be any surprise that he’s looking not just at the energy companies that have been a big part of his focus over the past several years, but at gold.
Lately, I’ve been seeing a lot of his ad that talks up a potential 500% gain from some Chinese gold miners …
Now there’s a promise, eh? Gold and China, probably the two most-teased investment themes of the past two years, and here we are combining them together. Not bad!
The promise this time is that Chinese state sponsorship is about to help investors in some specific miners reap incredible rewards.
Here’s how the ad launches:
“China Govt’s Secret New Gold investment could pay 500% over next 2 years …
“The specifics of this opportunity have NEVER been written about in The Wall Street Journal, The New York Times, or any other U.S. newspaper or magazine.
“Yet this could be the easiest way to make a fortune over the next few years. The last time the Chinese Gov’t created a similar investment (2002) it returned 1,084%.
“Princeton University investing legend Burton Malkiel says: ‘With the government in control, [this type of investment] will never fail.'”
That quote from Dr. Malkiel, by the way, is from his 2007 book, From Wall Street to the Great Wall. And it is, of course, not about the specific stock teased here — the full quote is “Those who favor SOEs [state-owned enterprises] point out that with the government in control, these companies will never fail.”
He goes on to present the counter-argument on that same page, by the way — noting that many investors think the smaller, entrepreneurial companies without state ownership are more potent growers … but more importantly, he goes on to say that diversification in all kinds of companies in key, and “most should consider only diversified portfolios of Chinese stocks rather than individual companies.”
But where’s the fun in that?
The ad goes on to tell us that China has gone gold-crazy, with the government adding to its gold reserves — and that, while it’s all very secretive, the theory essentially can be summed up thus: They’re trying to spur successful gold mining so they can buy it at home and not have to deal with the global markets. At least, that’s how I read the tease.
Here’s a bit more of the pitch:
“Behind the scenes, in a move that has gone almost completely unreported in the Western press, the Chinese government has created a gold investment that could dwarf the returns of gold bullion, ordinary gold stocks, or any other type of gold investment you’ve heard of before.
“I wouldn’t be surprised if you see gains of 1,000% or more.
“I realize that may sound impossible, but consider…
“This is not the first time Beijing leaders have secretly created such an opportunity:
“In the late 1990s, the Chinese government created two similar investments. One (to help the local insurance industry) went up more than 625% in just a few years… the other (to aid the energy sector) has gone up about 1,084% over a similar period.
“But this is the first time Chinese officials have intervened in this way in the gold markets—and I expect the result will be a windfall for savvy investors over the next few years.
“After all, gold is one of the only “buy and hold” investments in the world right now. It is also the only investment in the world that has gone up EVERY YEAR for the past five years straight. And, remember, China remains the fastest-growing economy on the planet, with the wealthiest government on Earth.”
Now let’s be clear, if we’re working from these examples — China Life and CNOOC (they do disclose what they’re talking about with those two examples) — then we should also note that Chinese officials have created way, way, way more than two “similar investments.” The Chinese economy is still overwhelmingly dominated by state-owned enterprises, many of which are actually owned/controlled by regional and local governments, and I expect it’s still safe to say that more of them have remained corrupt enclaves of cronyism than have become world-beating national champions, or even than have gone public … but that’s neither here nor there — the claim of the ad, of course, is that the company we’re looking for today is a potentially explosive investment.
Here’s a bit more about the specific opportunity they’re pitching:
“For essentially the past 50 years, no one was allowed to touch gold in China… except for the government.
“But today, that is changing… and in a hurry…
“In short, the Chinese government wants more gold.
“They realize gold is one of the only buy-and-hold investments in the world right now. And they’ve got a lot of money to spend… nearly $2 Trillion according to a recent report in The New York Times.
“So the Ministry of Land and Resources has completely rewritten the country’s mining laws (known as the Minerals and Resources Law) to encourage local and foreign companies to explore for and produce more gold.
“The government has also recently created the Shanghai Gold Exchange, to allow anyone to trade gold, on the open market, without government interference.
“But most importantly for you and me, the government has quietly gotten behind a handful of publicly traded gold companies.
“I believe these deals could make you extraordinary amounts of money over the next few years.”
So — as you can imagine, Badiali believes that he’s got the best investments to capitalize on these themes and trends. He particularly teases two companies (a third one that he teases, a low-cost silver miner, is SilverCorp Metals, one I’ve written about before on the Irregulars site and here on the free site, so I won’t go into that one again here).
“Investment #1: Gold Partnering with the government
“When it comes to gold mining in China, it’s a whole different world than what we’re used to in America…
“There’s no such thing as a NI43-101 disclosure form for mining companies, like we have here at home. And instead of a handful of giant companies running the industy, like we’re used to, it’s basically thousands of small operations scattered across the country.
“In short, it’s like the American Wild West.
“That’s why having the government on your side can make all the difference in the world…
“For example, there are two very small gold mining companies with government connections that have a very good chance at making you several times your money in the next few years… ”
Ah, now here we go — some companies to sleuthify. What are those “two very small gold mining companies?” Let’s look at the clues …
“GOVERNMENT GOLD PARTNER #1: Recently, the Chinese government helped create, and took nearly a 50% ownership stake in, a very small gold mining company, in order to develop a handful of the country’s most promising gold projects.
“Already, the company has two producing properties, and exploration permits for two of the countries most gold-rich, untapped areas.
“What makes this investment so appealing is that normally, when you deal with investments in China, there are certain political risks.
“Will the government approve your projects? Will you be allowed to explore and develop the most potentially lucrative territories?
“But for this small company, the political risks are virtually non-existent. After all, the company is nearly half-owned by the government, so obviously it will have huge advantages.
“That’s why I believe there’s a very good chance this company will eventually become one of the world’s ‘major’ developers. And if that happens, you could easily make 2,000% on a small investment stake today.
“We saw what happened when the Chinese government got behind several promising oil companies. Investors made more than 1,000% gains over a several-year period.
“Well, now I believe there’s a very good chance the same thing is going to happen to this company in the gold business.
“Consider that right now, this company sells for well under $5 a share. It was formed just a few years ago… and now has several projects in production, and several more on the way.
“What’s incredible, is that this company has never been written about in the The Wall Street Journal, Barron’s, or any other U.S. newspaper or magazine.”
OK, so this one must be Jinshan Gold Mines (JIN in Toronto, JINFF on the pink sheets).
And though Badiali tells us that Chinese companies don’t have to worry about NI43-101 filings or other technical reports about reserves, Canadian companies do — and this is a Canadian company operating in China, so they do have reserve estimates, etc. filed with SEDAR (the Canadian version of the SEC’s EDGAR database). And the Chinese do have “nearly a 50% stake” in Jinshan, through the 41% shareholding owned by China National Gold, the government controlled group that is still, I think, China’s largest gold miner — they bought that stake from Ivanhoe Mines, which is also still active in China, up North, but is primarily focused on some big potential properties in Mongolia that are being treated as a political football there right now (not that this has anything to do with the current teaser, just thought it was interesting).
So … let’s find the other one, shall we?
“GOVERNMENT GOLD PARTNER #2: The second company I want to tell you about was formed by key members of China’s National Non-Ferrous Metals Industry Corporation, a state-owned company.
“In other words, several Chinese government employees got together, and used their power, influence, and connections, to create a company that is now the biggest foreign gold producer in China (they also have a local Chinese partner, which maintains an 18% interest).
“It’s no surprise, of course, that this company (created by former government employees) became the first local-foreign company to develop a gold mine in China. Or that they are the largest gold producer in China today… and control the country 2nd largest mine.
“In short, there’s no foreign company in China that can get projects done like this company can. I think it’s absolutely a no brainer to own the biggest foreign producer in the world’s #1 gold-mining country.
“Keep in mind, this is still, relatively speaking, a tiny, tiny stock. It costs less than $7 a share… and is much less than 1/10th the size of Barrick Gold, the world’s biggest gold producer.
“I believe this tiny company with China operations could return many times your money over the next few years. And I’m not the only one who thinks so…
“A Canadian firm just bought 20% of the outstanding shares. And I believe they are probably willing to pay at least 50% more than the current share price for the rest of this small Chinese miner.
“A buyout could quickly double your investment. But the truth is, I’d rather hold this company for the next few years and potentially see 500% gains or more.”
This one must be Sino Gold, a Sino-Australian company that trades down under at SGX and on the pink sheets at SIOGF. And at 1862 in Hong Kong, if you want to be thorough. They do control the second-largest gold mine in China, Jinfeng, and last year they started producing at White Mountain, and they have a third mine approved for development. And it was started by the National Non-Ferrous Metals Industry Corporation, though back then it was mostly focused on aluminum and its gone through a few corporate changes since.
And yes, a Canadian firm did just buy 20% of the company — that was Eldorado Gold, they bought the shares that had previously been owned by Gold Fields, the South African miner. I don’t see that they report any 18% ownership by Chinese partners, but it’s certainly possible … their ownership of their biggest mine is an 82% stake, so that other 18% of the Jinfeng mine might be what they’re talking about, I’m happy to assume that it’s owned by the local government or local bigwigs.
And Sino Gold is a small firm relative to many of the gold majors, but it’s not tiny — the shares have gone up enough that they’re now included in the ASX 100 index in Australia. Right now the shares are around $4.50 on the pink sheets, which if we do the math on 292 million shares means the market cap is in the neighborhood of $1.3 billion.
Sino Gold is a producing miner that’s also doing continued exploratory work — the Jinfeng mine is a consistent producer and is by far their most important property, overall they expect to produce between 210-230,000 ounces of gold this year at a cash cost of just a hair under $400 an ounce … so they’re far from being the lowest cost producers in the world, but that ain’t bad with gold trading for $930.
I’m sure there are many among you who own one or both of these firms, since they are among the highest profile miners who are focused on the world’s biggest gold producing country — I know very little about them other than what I’ve noted above, so if you’ve got info to share, please do so.
Full disclosure: When this article was first posted on the Irregulars site I owned shares of SilverCorp Metals, I no longer own those shares (for personal portfolio reasons, unrelated to the stock’s prospects). I do not own shares of any other investment noted above.