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China to invest $877m in precious metal

China furthers its way into dollar diversification business: this time into precious metal: platinum (source: FT).  It will come no surprise to me when China invests in gold miners.  

China is set to make its second largest investment in Africa outside the energy sector by ploughing $877m into South Africa’s platinum industry.

The agreement signed last week adds intensity to China’s ambitious drive to sustain its economic boom by securing Africa’s natural resources.

For the first time, Beijing will take a direct stake in the continent’s platinum reserves, the majority of which are in South Africa.

Jinchuan, a Chinese state-owned mining company, is to acquire a 51 per cent stake in Wesizwe, a junior South African platinum developer, for $227m (€185m, £158m).

The China Development Bank will then raise another $650m in project finance to develop its flagship Frischgewaagd-Ledig platinum project, near Rustenburg, west of Pretoria. After the mine is built, Jinchuan will take all of its platinum produced, according to a long-term supply agreement.

“This is a very significant strategic play because it gives China its first direct access to platinum,” said Martyn Davies, chief executive of Frontier Advisory, a Johannesburg company that worked with Wesizwe on the deal. 

“The value of the stake is particularly important because of the structure of the world’s platinum market, with the bulk of international output bought and sold as part of long-term contracts, with only about 10 per cent of the metal available on the open market,” Mr Davies said.

The entry of one of China’s largest mining companies into the South African platinum industry follows that of Eurasian Natural Resources Corp, Kazakhstan’s largest miner.

On April 26 ENRC agreed to buy a 12 per cent stake in Northam Platinum for R2.2bn ($280m, €230m, £190m), with many industry analysts expecting ENRC to increase its stake over time.

Like Wesizwe, Northam is on the smaller end of a global platinum industry dominated by three big South African producers: Anglo Platinum, Impala Platinum and Lonmin.

In recent years the main demand for platinum has come from the motor industry, where the metal is used to make catalytic converters, which remove some noxious chemicals from exhaust emissions. But last year demand for platinum jewellery surged, driven by Chinese buyers attracted to lower prices, according to a recent report by Johnson Matthey.

South Africa accounts for some 80 per cent of the world’s platinum group metal production, with Russia accounting for much of the rest. China is the world’s fourth-largest importer, after the European Union, US and Japan, accounting for about 10 per cent of global demand.

The deal’s structure – with a relatively small equity stake supplemented by a more significant project financing component and long-term supply agreements – is becoming a pattern among Chinese resource deals in Africa.