An African Mining Stock for Brave Investors

By: MoneyWeek

Dominic Frisby writes: The life of an exploration geologist is not an easy one.

Despite spending many years in the remoter parts of the wild with just your boots, a pick and a tent for company, you might make just one significant mining discovery in your career. If you’re lucky, you might make three or four. Plenty make none.

Once you’ve made what might be a discovery, you have to come back to town. With the aid of some rock samples and a good deal of charm (not a trait often associated with geologists), you then have to persuade someone to give you some money so you can explore your discovery with proper drills and manpower.

Many difficult years down the road, negotiating booms, busts, impatient shareholders, tricky geological challenges, alien foreign practices and all sorts of other obstacles, you’ll get somewhere close to a decision point, when you know whether or not this thing is actually going to become a mine or not.
And then some greedy government comes along and snatches it all off you. It’s a wonder that anyone decides to become a miner at all.

Central China Goldfields (LSE: GGG) is a small Aim-listed exploration company, operating in China. The group was suffering from a lack of liquidity in its stock, a lack of investor interest and had been in an inexorable downtrend since 2006, like virtually every other Aim-listed explorer. Yet it did have some promising assets and it was making decent progress with them.

But last month, the company recommended that shareholders accept a deal which values its holding in its flagship asset, the Nimu mine, at RMB71 million (about £6.5m) on which the company then has to pay 35% tax. Apparently, the company’s local joint venture partner, SBMGE, “is of the opinion that it should take full responsibility for the future development of the Nimu Project”.

This is happening despite the progress the company had made with the asset over the last two years, not to mention recent reports that the mine contains world-class quantities of copper and molybdenum as well as the strategically-important rhenium used in the manufacture of jet engines.

Shareholders are not best-pleased, judging by discussions on various bulletin boards - it doesn't seem a great deal for such a promising asset. Yet it seems Central China Goldfields has little option but to accept, as it won’t be able to progress the project on its own.

But British investors had already paid many millions of pounds to fund the exploration of this mine and others in Central China. Are the Chinese happy for British investors to take the risk of exploration, but then demand the return of the assets when the resource is proven?

There are worrying developments in China

I must say, having once been very excited about the country, I see worrying developments in China. CCG’s experience is just one small example of what seems to be a growing trend. A benchmark price for iron ore was agreed earlier this year between the major miners and the major consumers. But the Chinese were never happy with the deal and wouldn’t put pen to paper. They wanted their ore cheaper.

Tensions were growing. Last month, Australian mining giant Rio Tinto, abandoned a planned $19.5bn investment from the Chinese state-owned metals group Chinalco. This, we are told, had Chinese hackles rising. Then last week four of Rio Tinto’s iron ore sales team, based in Shanghai, were arrested on suspicion of espionage and stealing state secrets. Was this some form of retaliation for the rejected Chinalco investment and the lack of cheap ore? Many Aussies think so.

You know when it’s ‘not about what it’s about’. I know from my days as a backpacker in some of the less salubrious parts of the world how common an occurrence it is for you to be minding your own business somewhere and then you find yourself arrested “on suspicion of espionage”. I remember innocently lying on a beach in Cuba to find myself “accused of espionage and stealing state secrets.” What the officials were really saying is: “We’re going to extract money from you”.

And China is far from alone in all this. About a year ago I wrote about Madagascar and what a great opportunity it presented for the intrepid, with its vast, untapped natural resources and mining-friendly jurisdiction. Some readers bought into a company called Pan African Resources, which was bought out several months later by Asia Thai Mining, and we made a tidy profit.

But on March 8th, 2009, President Ravalomanana’s armed forces refused to obey her orders, instead siding with repressed workers and peasants who had been in a state of rebellion since January. The army declared: “We on longer respond to the orders of our officers, we respond to our hearts. We were trained to protect the people and property, not to attack the people. We are the people”.

I know very little about the rights and wrongs of this revolution. I daresay the people are right. They usually are. But I’m mighty glad that I don’t have any money invested there (and so should you be). I don’t know how Asia Thai Mining will fare out of this, but the company has my sympathy, for what little it’s worth. Some people can make a fast buck out of revolution, but you need stability for real economic growth.

Investing in risky countries

That doesn’t mean you should avoid risky countries – but you do need to go into any investment like this with your eyes open. And it always pays to take some profits when they present themselves. That way, if an unexpected, company-changing event occurs, at least you’ll have something to show for your investment.

Of all the risky places to operate, Africa remains one of the toughest for the mining business. Companies in the less desirable parts are forced to live with corrupt practices. Deals are agreed, then renegotiated further down the road as the company develops, or different officials take charge, or existing officials become more greedy.

Perhaps rather like Moody’s, some kind of rating system should be introduced. There are good countries. These include Botswana, Namibia, Ghana and Mozambique. But then there are the bad and the ugly: Zimbabwe, Nigeria, Angola, Sudan, Somalia, Congo, Eritrea and Ethiopia to name just a few. I don’t mean to upset with my nominations of the bad and the ugly but that’s how I currently see it. South Africa is teetering and Zuma needs to get it right, so that it joins the elite former group. Everyone will be better off if it does.

An African mining stock for the brave

But if you’re looking for an explorer operating in the better parts of Africa, you might consider African Queen (CVE:AQ),the spin-off from the Madagascan Pan African Resources. The company has some exciting diamond projects in Botswana and Namibia and some gold projects in Mozambique, both early stage, of course, and plenty of cash to fund its activities.

With developments in the artificial diamond industry and because of falling demand, the outlook for diamonds is unsure, but management knows this and will be looking at other properties elsewhere. Ghana is Africa’s second biggest gold producer. Perhaps that would be a good place to go. Then they’ll tick all the ‘good’ boxes.

By Dominic Frisby for Money Morning, the free daily investment email from MoneyWeek magazine.

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