The Central China Goldfields of 2007 was all about two projects - the Snow Mountain Gold Project and the Nimu Copper Project - with expenditure split approximately 20% and 80%, respectively, during the course of the year. Can investors expect "more of the same" in 2008? The answer is "No".
Central China Goldfields started life as an exploration company, and as such, relied on the stock market to continually fund its plans to prove up and either sell on, or develop, assets. Exploration is a tricky business to be in, but the rewards for shareholders can be very rich if a deposit of commercial size can be identified. The hard part for many investors is to gauge when a company really does have a project that is a 'goer'. Unfortunately, Central China Goldfields hasn't yet reached a level of confidence in any one project that would allow it to boast of finding the next big project in China. However, the company has made steady progress in the last twelve months, and this looks set to continue in the year ahead.
Since listing back in 2005, one of the company's strong points has been the depth of experience of its management in China. Many companies have attempted to discover and develop mineral projects in China, and along the way there have been some high profile failures. It is reassuring to see that Central China Goldfields has maintained the directors who originally brought the business to the market, and who will, no doubt, have added to their already considerable experience in the industry and the country, during the past two and a half years. Jeff Malaihollo, Managing Director, brings a wealth of experience working as an exploration geologist for Rio Tinto, Newcrest and BHP Billiton in the FSU and South East Asia. Probably the jewel in the crown is company chairman, Nigel Bruce a former exploration geologist, who lives in Beijing and has built up considerable experience and contacts in China as Chairman of the China International Mining Group - an association of mining companies promoting western interests in China. He is also a former ambassador for the British Chamber of Commerce to China and once held the position of General Manager for BHP Billiton in China.
Central China Goldfields came to the market as a pure grass roots exploration company. However, since 2005, pure exploration companies have fallen out of favour with investors and the emphasis has switched towards nearer term producers who are about to turn current robust metal prices into cash flow and profits. The outlook for new exploration companies seeking a London listing has become considerably more difficult, with brokers/nomads preferring to focus on fewer initial public offerings which require larger fundraisings rather than on smaller companies seeking to raise smaller amounts of capital. The level IPO's in 2007 cooled considerably compared to 2006 and secondary fundraising on the Alternative Investment Market in 2007 was lower than the previous year - so raising capital isn't as easy as it was 12 or 18 months ago.
This shift in the size and type of fundraising desired by investors in London has put pressure on companies already listed to adapt their business models. Central China Goldfields is no different. Whilst exploration at Snow Mountain and Nimu made progress in 2007, with both projects returning positive data - neither project is at a development decision stage, and development, is what the market prefers to fund! Snow Mountain, which has a small JORC compliant resource, and larger resource to the Chinese standard, now looks likely to be offered out to joint venture or sold outright to a local partner.
Nimu, on the other hand was the subject of considerable drilling during 2007, and while drilling and geophysics did confirm the presence of multiple copper-molybdenum mineralised zones, a project the size of Nimu demands a capital intensive exploration programme to get to grips with the amount of geological modelling needed. This would be used to conceptualise the ore body for later planning, testing and development work. There is no doubt that Central China Goldfields intends to carry on at Nimu, and in December it confirmed that a business licence had been awarded to Lhasa Tian Li ('Tian Li'), the joint venture company in which Central China has a right to earn up to 75% by expending US$27 million over six years.
Now Central China is also focusing on sources of possible near term cash flow and two projects that will receive attention in 2008 are the Dong Mao Huo Gold Mine and the Nileke Copper Mine. These projects are similar in that they are both producing small amounts of ore, but are under capitalised and poorly designed, and could benefit substantially from western expertise. The Chinese government is very keen to see small mines like Dong Mao Huo and Nileke receive investment to bring them up to higher health and safety and environmental standards ? and, of course, to boost their production levels, helping the country meet its insatiable hunger for natural resources. So they are an attractive proposition for companies like Central China which desire a more balanced portfolio of projects that includes cash flow.
Central China initially optioned Dong Mao Huo in 2005, but it was late in 2007 that the project really started to kick into action. Previous mining at Dong Mao Huo concentrated on near surface oxide ores which were treated on site with a heap leach operation. Central China can earn up to 85% by spending US$4 million over three years, and can increase its stake to 90% if its Chinese partner opts out of further investment in the project. Central China employed a two-pronged approach at Dong Mao Huo. First and foremost was increasing the confidence in the near surface mineralised material, to try and build a sturdier mining model. The second endeavour was step out drilling, and deeper drilling, in order to test the strike and depth of the sulphide ore zones. Results have been encouraging, with the most recent hole, CH04, returning 45.7 metres grading 2.71 grams per tonne gold, 0.43% copper and 19.82 grams per tonne silver from 107.5 metres down hole. The previous operation was solely focused on gold extraction, so the possibility of silver and base metal credits add a bit of spice to the potential of the project. In total, 2000 metres of drilling will be completed at Dong Mao Huo over this winter, and Central China has stated that its ambition is to move the project back into production by the first quarter of 2009. Suddenly Central China can argue that it is, in fact, moving towards production much faster than most people realise.
The Company has also signed a joint venture to acquire a 60% interest in the Nileke Copper Project in western China. Central China will earn its stake by investing around £1.2 million over two years, in upgrading the mill and processing plant, plus additional exploration and drilling. Nileke is currently under utilised, operating at approximately 300 tonnes per day despite having production capacity for 500 tonnes per day. Central China intends to move production back to full capacity, and then look at the possibility of doubling production again to 1,000 tonnes per day. Resource estimates for Nileke are patchy, with Central China stating that the ore is currently sourced from a number of small mines in the surrounding area that could contain in excess of 43,000 tonnes of copper, with reported grades varying from around 0.9% at the Qunjisayi Mine to as high as 5% at the Kezikezengnan Mine. Chinese data suggests there are 22 mines in the region, and Central China has identified over 60 targets which require further investigation. Drilling of new targets will begin shortly and investors can expect more news flow on how the joint venture will increase the throughput and recoveries of the current mine. There is also the potential for further acquisitions in the region as the joint venture seeks to consolidate its position in line with the Chinese Government's desire to see the amalgamation of small operators.
Shares in Central China have been hit pretty hard in the second half of 2007 ? which appears to have been caused by a mix of disappointment that Nimu didn't deliver a definitive headline catching drill core, plus the wider rout of exploration companies in general. However, Central China appears to be one step ahead of the game, and has quickly positioned itself as a near term gold and copper producer which could have two producing assets under its belt in the next 12 months or so. That's a pretty decent step, and whilst the share price chart doesn't reflect this, progress certainly has taken place ?and Nimu continues to be the wild card that could transform the company.