Lots of investors consider themselves countercyclical, but Chinese conglomerates go above and beyond. The weak lithium and nickel markets are proof of that drive – supply has remained high as electric vehicle (EV) demand growth slackens off.
This is because private companies, and those directly owned by the state, are happy to put cash into unfashionable metals and unfashionable places. The most recent example is a fight over formerly Aim-traded Chaarat Gold, which was taken over by debtors earlier this month.
Charaat’s main asset is the Tulkubash gold project in Kyrgyzstan, which has a resource of around 1mn ounces (oz) of gold. Before the meeting that gave debtholders control of the business on 8 August, a ‘white knight’ arrived: China Railways. This is “one of the world’s largest companies”, an announcement said. It continued: “Through its China Overseas Engineering Group (Covec) subsidiary, China Railways is proposing to invest $42mn (£32mn), comprising $20mn for a 35 per cent equity stake and a $23mn loan to refinance existing borrowing, at lower rates.”
This is well above market rate for a company that was then worth just a few million pounds. The real coup would have been refinancing, given the creditors were due to take control of Chaarat just hours after the offer was announced. The board declined the approach.
So why all this interest in a Kyrgyz mine? China has picked out the country as just one of its targets in the ‘belt and road’ investment scheme, designed to extend its reach into developing countries all over the world. It has been very successful in Africa, building infrastructure now used by mining companies in the Democratic Republic of Congo and Zambia, for example. Official numbers say Kyrgyzstan exported 25,000 ounces of gold and gold concentrate to China in the first half, but these figures are notoriously unreliable. Gold is such a key export for the country (largely from Chinese-owned mines) that the country’s own trade data is presented with and without the precious metal included.
This latest gold intervention is not new, but it does warrant close attention, especially with bullion prices at record levels and Chinese buying driving the increase this year.
The reverberations of China’s volume-based investment style are being felt in the lithium and nickel markets, where listed miners find themselves competing against producers who care about margins on the raw materials side. “China continues to pump out [lithium] concentrate from Africa and domestic sources, likely at uneconomic levels, to boost stockpiles,” said SP Angel analyst John Meyer last week.
The capacity is there because Chinese entities kept investing while prices were weak. Prices had climbed until last year when the mismatch in supply and demand became clear.
This is a continual theme. In 2015, Zijin Mining bought into the Kamoa-Kakula copper mine in Zambia for just over $400mn. At the time, copper was trading at $6,000 a tonne – not so bad, but the price had been on a downward trend for four years, dropping 40 per cent over that period. Fast forward to 2024 and the mine is built and that $400mn stake is now worth $2.2bn. More importantly, Zijin also has a near 40 per cent stake in the Kamo-Kakula mine itself. Operator Ivanhoe Mines (US:IVN) has given the next expansion of the mine a net present value of $202bn, after a capital cost of just $1.55bn. Not a bad investment for the Chinese business.
Not all deals have gone so well. Ganfeng Lithium took Bacanora Lithium off the London market in 2021, just before the Mexican president decided to start blocking development in the country and floated the idea of nationalisation. But China Railway really would have been a white knight – shoring up crucial gold reserves while also saving Aim investors from a complete wipeout.