Quotes of the Day
The people of the scrub hills of China's eastern Shandong province have an ancient get-rich-quick formula. Just find the home of the sun god. When he tired of flying in his chariot, the legend goes, he would rest in a gold-filled cave on Mount Luo. For thousands of years people have searched for the sun god's lair, and they're still at it today. At the Dayingezhuang mine 19 miles (30 km) south of Mount Luo, workers take an open elevator car for a 21/2-minute plunge down a dark, icy shaft. At the bottom, amid swirling condensation and suffocating dankness, they enter a large hall labeled as face number 5,206. The night before, an engineer used 2-meter lengths of dynamite to blast 150 tons of rock from the roof. Now two men use an earthmover to load the rock so it can be hauled to the surface, where it is crushed and mixed in a bath of chemicals to leach out the precious metal.
The sun god's crib it isn't. But for every ton of rock pried from the earth, two grams of gold will be produced. Last year the Dayingezhuang mine turned out 78,000 ounces of gold, worth more than $78 million at the current price of around $1,000 an ounce. There's more ore where that came from. The mine's operator, Hong Kong-listed Zhaojin Mining Industry Co., expects to get 80,000 ounces from Dayinggezhuang this year. It's a story that is playing out at thousands of other Chinese gold mines that, with metal prices soaring, are ramping up production — and changing the shape of the global gold-mining industry in the process. China's gold output has climbed nearly 50% over the past five years; the total surpassed 276 tons last year, enough to make China the world's largest producer of the precious metal, for the first time supplanting South Africa, which had been No. 1 since 1905. This isn't a fluke. China's surprisingly high reserves and growing domestic demand mean the country will likely remain the industry leader in coming years. Says Paul Atherley, managing director of Leyshon Resources, an Australian mining company: "China is going to become dominant in the world gold industry as a producer, consumer and explorer."
In a way, the country is merely regaining its former glory. The Chinese have been pulling gold from the earth since the Song dynasty 1,000 years ago. But after the communist takeover in 1949, mining went dormant for decades. Personal ownership of gold was banned as a bourgeois extravagance, and production rarely broke 20 tons a year. That started to change with economic reform in the 1990s. Small wildcat operations began to proliferate, and these relatively unsophisticated outfits dominate the sector today. While countries such as South Africa, Australia, the U.S. and Canada get most of their production from a few dozen large, efficient mines, China has an estimated 2,000 mines scattered throughout the country. And because of their sketchy practices, the smaller operators are "a problem," says Zhang Yongtao, general secretary of the China Gold Association. "Their technological standards are weak, their management is insufficient and they don't make money."
The backwardness of China's gold-mining business is apparent to anyone visiting Zhaoyuan, a Shandong province city of 580,000. More than 60 mines operating in the hills around Zhaoyuan annually unearth about 15% of China's gold — enough to qualify the little city as the de facto gold capital of China. Yet even with gold prices soaring, Zhaoyuan is hardly a boom town. Beyond the sycamore-lined downtown streets, which display the modest prosperity of a midsize Chinese city, you find block after block of drab, low houses. At night, the closest thing to an entertainment district is an unlit street with two drafty karaoke bars.
Locals say the money made by the mines flows mainly to investors located in China's wealthy coastal cities. It certainly isn't winding up in the pockets of workers. An average miner makes $420 a month. That's not a bad wage for China, but the work is tough and dangerous. China's mines are the world's deadliest, and while most of the accidents occur in coal pits, the government says 2,188 died in gold and other metal mines last year. Such poor working conditions persist in China because workers' rights are weak and there are no independent unions.
Still, better days lie ahead for Zhaoyuan and for China's gold-mining industry. Beijing began reforms in the mid-1990s, encouraging the hodgepodge of small operators to consolidate and allowing foreign companies to form joint ventures so that Chinese companies could learn modern management practices, financial controls, and environmental and safety standards. China now has several publicly traded gold-mining companies, among them Fujian Zijin Mining Industry Co., Lingbao Gold Co. and Zhaojin Mining Industry Co. Their IPOs over the past several years provided an influx of investment capital — Zhaojin Mining raised $282 million from its listing — and also introduced the mining industry to shareholder scrutiny for the first time. "There is a correlation between the huge rise in gold production in China and the listings of those companies," says Auslan Ishmael, general manager of the China International Mining Group, an industry association. "This definitely put pressure on those companies to get a good return." Zhaojin Mining, for example, has seen its revenue soar by more than 100% a year for the past four years.
One big reason why diggers are excited about China's future is because of the large amount of gold that may still be in the ground. "Some of the world's biggest remaining deposits are in China, for sure," Ishmael says. Now miners are going all out to find it. Nationwide the commercial-exploration budgets for gold and other metals have climbed from $20 million in 2003 to more than $300 million last year, according to Metals Economics Group, a Canadian research firm. China's Geological Survey Bureau says that last year five new gold deposits with reserves estimated at 600 tons were found.
Could the next BHP Billiton, the world's biggest mining company, be Chinese? Observers say it's possible, given high metals prices and China's untapped reserves. But listed domestic miners have ambitions beyond China's borders. Zijin, China's leading gold miner, last year purchased a company with gold-mining and exploration rights in Tajikistan and a stake in a Philippine gold and copper project. Zijin also led a consortium that bought a majority stake in London-listed Monterrico Metals, which owns a copper and molybdenum project in Peru. "All the big mining groups started this way," says Atherley, the Australian mining-company executive. "They get a good mine and they start acquiring. It is really down to corporate fate. That's the only thing stopping Chinese groups." Says Zhang of the China Gold Association: "We can keep this up for a long time." Having passed South Africa and with its best years ahead, "China won't have any problems remaining on top for the next 20 years." The country's miners may have reached the sun god's lair after all.
- Austin Ramzy/Zhaoyuan