Mr. Zhao has many years of experience in global mining investment and overseas EPC project management, specializing in precious metals and base metals in places such as Canada, Australia, Kazakhstan, Vietnam, Indonesia, and the Middle East. Mr. Zhao is currently the Managing Director and CEO of Zhaojin International Mining Co., Ltd which is in charge of global investment for Zhaojin Mining Industry Co., Ltd; one of the top four leading gold mining companies in China. He also served as the COO at Zhaojin-Principle Mining Funds which was established in Canada. Drawing on his extensive experience in the overseas EPC sector, Mr. Zhao integrates valuable Chinese elements (such as design or procurement) into invested projects for the purpose of lowering CAPEX and OPEX without losing quality by linking global mining investment to the other parts of the mining industry chain.
1. Leo, thanks for joining The Assay today. Can you introduce Zhaojin Mining and tell us about its history?
Zhaojin Mining Industry Co., Ltd is the parent company of Zhaojin International. Zhaojin Mining was listed on the Hong Kong Stock exchange in 2006 with an annual production of 650k oz and total resource of 40m oz. Currently, Zhaojin Mining ranks as one of the top four gold producers in China, with more than 30 gold-producing mines distributed across Shandong province, Xinjiang province, Gansu province, and Inner Mongolia.
Zhaojin Mining aims to expand its mining portfolio and increase annual production through outbound investment and M&A. We hope that Zhaojin can increase its annual production to 1.3 million oz in the next 5-8 years.
2. How does Zhaojin Mining see the gold market progressing in China in the future?
Over the past decade, four or five large gold producers in China have taken ownership of the main gold mines, and operations are comparatively stable. Junior mining companies in China are still struggling for funding because major gold producers pay less attention to early stage projects, and most alternative investors have left the mining industry.
In the past several years, we’ve struggled to find high-quality projects in the Chinese market, and have observed that only a few M&A deals have been made. Therefore, more and more major Chinese mining companies have gone into overseas markets to look for better opportunities.
3. Can you tell us about some of the recent outbound gold mining investments that Zhaojin Mining has completed? What was the criteria for those investments?
Zhaojin International is mainly focused on two markets: Australia and Canada. Since Zhaojin has not had much experience in the overseas mining industry, we set up a three-step investment strategy in order to make easier decisions and see out short-term milestones. After the first five years, I felt that our three-step strategy was successful.
In Australia, we invested in Nusantara Resources (ASX: NUS) as a cornerstone investor because the largest shareholder, Lion Selection Group (ASX: LSX), is very famous in the Aussie mining industry. It was very valuable for Zhaojin to get into the inner mining circle so we could have access to better opportunities. In 2019, Zhaojin International established a joint venture with PCF Capital Group, a well-known mining investment bank in Australia. This joint venture established between a mining company and a mining investment banker is a new cooperation model which benefits both parties.
In Canada, Zhaojin International invested in Sabina Gold & Silver Corp. (TSX: SBB) to become 9.9 percent shareholder in 2018. The investment in Sabina helped Zhaojin establish a foothold in the Canadian mining market and increase Zhaojin’s exposure to the local market.
In terms of criteria; firstly, we care about sovereignty risk, so we selected ‘safe counties’ like Australia and Canada as the regions we wanted to make investments in. Secondly, we focus on producing gold mines as our target and prefer that annual production is over 200,000 oz, total resource is no less than 3 million oz, and thirdly, average grade is 2 g/t for open pit mine and 4 g/t for underground mine.
4. Speaking more broadly, what are the main countries that Zhaojin Mining sees as holding the most promise, and why?
Zhaojin mainly focuses on the opportunities in Australia and Canada for the following reasons:
- Low sovereignty risk
- Long-term mining backgrounds with well-established mining policies and regulations
- Expertise and competent mining operation teams
- Excellent synergy between mining and capital
- Information is very transparent so it’s easy to make the right judgement based on public data
5. Where does Zhaojin Mining see the gold price going in 2020?
It’s very hard to predict the exact gold price and it’s not very professional to give a specific forecast, simply because of volatility in the market. However, I believe the gold price could be pushed up in 2020 since there is so much uncertainty in the world economy and world politics. For instance, US dollars closely correlate to the US economy. We can see that the US economy in the next few years will not be as robust as we first thought. For the purpose of stimulating the economy, the US government has recently printed USD 230 billion in new money to increase liquidity in the market. If this trend continues, a new round of quantitative easing will come into being. Enormous paper notes will trigger big inflation and people might avert financial risk by buying gold. In the meantime, we have seen political tension in Middle East push the gold price up dramatically in the past month. It’s reasonable to say that more ‘black swans’ may appear again in world geopolitics, and this could provide the momentum needed for the gold price to go up.
6. How is Zhaojin Mining coping with the cost of production in the current gold price environment?
Zhaojin Mining has accumulated a lot of experience in controlling production cost. The current average AISC in Zhaojin is around USD 730/oz which is lower than most gold producers in the world. So in the current gold price environment, our mines are very profitable. In spite of profitability in our mines, we still care about controlling production costs in the following three ways: drawing on our experience in organizing underground mining wells to increase our productivity; making use of our technological innovations created after years of practice to lower production cost; and applying automation in mining operations to decrease labor cost.
7. How does Zhaojin Mining view some of the more recent M&As, and what are the opportunities available?
It’s true that many M&As took place in the gold mining space over the last year; they amounted to around USD 38 billion. M&As in the gold market were probably motivated by the stronger sentiment of people towards the high gold price. Apart from major North American players in the M&A market such as Barrick Gold and Newmont Goldcorp, we have noticed that six top Aussie gold producers, including Newcrest Mining (ASX: NCM), Evolution Mining (ASX:EVN), and Northern Star Resources (ASX:NST), acquired gold assets in Canada more aggressively than Canadian and Chinese counterparts due to lower valuation in the Canadian market. It’s reasonable to say that Australian gold producers are becoming very strong competitors to the Chinese acquirers in the gold M&A market. I personally think there will be more opportunities in western Africa and the Belt and Road region on the assets level because Chinese elements can be more easily consolidated into the projects in these areas. Of course, if the assets in these regions are owned by ASX or TSX listed companies, it will be even more ideal.
8. Does Zhaojin Mining look beyond gold to other metals?
Yes, Zhaojin Mining also looks at copper because copper is a kind of strategic resource which is used widely in industry, livelihood, military, etc. Also, copper assets are undervalued now and China will have a strong demand for copper in the near-future.