Wednesday, 15 January 2014

China, gold and the boy who cried wolf

You must know the story of the boy who cried wolf.  When the wolf doesn't arrive two or three times after the boy's excitable but false alerts, the villagers in the story - rationally - don't listen to him when the wolf actually arrives.

Chinese entities with some interest in buying gold companies have got to stop acting like the boy who cried wolf because otherwise people are going to stop taking them seriously. Maybe we will never know the precise details behind why China Gold Stone Mining Development Ltd., announced a near US$800m offer (a near 60% premium to the then share price) for U.S. miner Allied Nevada Gold yesterday and then - less than 24 hours later - said the statement was published in error and was retracted.  Whatever the reality from the Chinese side it was a shocking sequence of events and I am not surprised Allied Nevada have contacted the SEC.  

I would not mind so much, but China have some form here.  At least a year or so ago China National Gold's interest in the London-listed African Barrick Gold did not come to fruition.  At least in this case some element of due diligence was undertaken, although I remember ABG complaining at the time about the lack of interaction with the China National Gold representatives.  The similarity though between a previously unknown (but state-backed) Chinese name looking to spend serious money in buying a 'Western' listed gold name...but ultimately not following through shares some similarities with yesterday's debacle. 

I have talked before about China's continued accumulation of physical gold, as shown below, and to me it would make huge sense to complement this by buying gold producing assets, especially at prevailing equity prices and spot gold price. 

West East gold ditribution 2013

Buying companies successfully though requires a credible approach.  China has the available monies but, so far, it does not have the requisite discipline.  Don't be surprised that if and when a Chinese entity bids again for a Western listed gold asset, scepticism reigns...and in deals that means wide spreads, reluctant shareholders and skewed media and social media commentary. 

China has quickly become a global leader in many areas.  It has to sharpen up in its gold equity M&A actions. 

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