Why you should buy this Chinese gold miner

The junior mining sector is coming alive: commodities expert Dominic Frisby reveals one stock in particular with some exciting news, which has enormous wider ramifications for the industry...

Well, I said immediate upside potential, but I didn't realise it would be that immediate. My goodness.

Last week I recommended the Canada-listed Pan African (CA:PAF) at $2.25 as a junior mining play on Madagascar. It's virtually doubled since.

This week it was announced that their Madagascan assets are being taken over at $4 a share for which you'll get cash - while their other Southern African assets are being rolled into a new company, for which you'll get a share.

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If you bought, and I hope some of you did, you can treat yourself to a new frock

Pan African's story shows the enormous possibilities that lie in the junior mining sector, even in this bear market. But the takeover, which came from Asia Thai Mining, has wider implications, which I'll come to in a moment. You can't argue with a quick profit, but, given the breadth and depth of Pan African's assets, I think Asia Thai have got themselves a bargain.

Another exciting opportunity - for the whole mining sector

Meanwhile, Jinshan (CA:JIN), another junior mining company I have been recommending (and which I own shares in myself), has had some exciting news, which also has enormous wider ramifications.

Jinshan is a Canada-listed gold producer in China. After several years of exploration and development, its mine finally went into production last summer. By the end of this year it should be producing at a rate of just over 100,000 ounces a year at a cash cost of between $350 and $400 per ounce. It's a very nice little junior mining story, thank you very much.

Then last week it was announced that China's largest state-owned gold mining company, the imaginatively-named China Gold, had bought a 42% position in the company.

Why have the Chinese done this? And what is the significance for Jinshan?

Firstly, it gives Jinshan access to a great deal of money the same money, ultimately, that made the 12% purchase of Rio and now is building a stake in BP - and Jinshan will be making serious acquisitions. Previously these would have been limited by Jinshan's $450m market cap. Not anymore. Deals can be done for cash now, meaning less dilution for shareholders, and for much larger companies than would previously have been possible.

If any such acquisition happens and I hear they want to have made one by autumn surely a listing in Hong Kong will be on the agenda, which will significantly raise the company's profile.

Are the Chinese trying to create a new reserve currency?

The Chinese, on the other hand, want access to Jinshan (for that, read Canadian) mining expertise. China is the largest gold producer in the world. The country has hundreds of mines, but, astonishingly, Jinshan's modest 100,000-150,000 ounce producer is one of the biggest.

In other words, despite being the world's largest producer, China's mines are underexplored and underdeveloped. Jinshan president Jay Chmelauskas reckons they could be operating at as little as 10% of their potential. Jinshan head of exploration, Keith Patterson, feels that China has as much exploration opportunity as anywhere. This is a man who not so long ago went out into Argentina with a pick and a notepad and helped make the Navidad discovery, now regarded as the biggest undeveloped silver deposit in the world.

China is a great sponge. The Chinese will hoping that they can learn from Jinshan. They will be refining, if you'll forgive the pun, their gold mining expertise. For Jinshan it means they will gain access to many of China's existing gold mines and no doubt acquire some of the better ones.

This is yet more evidence, if you needed it, of China's unquenched thirst for resources. But Jinshan is a gold miner. Why would the Chinese want gold? Do the Chinese govt all want new earrings? What could possibly interest the Chinese about gold mining?

Richard Russell, the veteran US newsletter writer, observed a few weeks back that China is the largest gold producer in the world and the largest holder of dollars. As the dollar implodes, could it be, he suggested, that the Chinese have designs on global reserve currency status? If so, they will have the dollars and the gold to back it. This Jinshan deal might be further evidence of Chinese monetary aspiration.

Can you imagine our glorious Labour government doing anything similar?

The good times are ahead for junior miners

The deal also has ramifications for the junior mining sector. Admittedly, the Chinese are buying a stake in a Chinese gold mine. But all the same, Jinshan is - or was - a junior. This is a first, and it could open the floodgates. Don't forget the Asian takeover of Pan African. It's possible that we are seeing the early stages of a wave of cash-rich Asian takovers of undervalued junior miners. The junior mining sector is coming alive, my friends - enjoy the ride.

You are not going to see the fireworks you saw with Pan African. But Jinshan is in a nice steady uptrend. It is now making the transition from junior to significant player, and I would expect to see the stock some 50% higher within 12 months, possibly more. I recommended it as a buy below $2.50 and I maintain that recommendation. If you're impatient or you think it won't make it back down to $2.50, you may want to start accumulating here. I'll leave that to you. But if you believe in gold and you believe in China, you should own some Jinshan.

Turning to the wider markets

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Hopes that the Bank of England is set to intervene in the mortgage markets took bank shares higher, while credit checking company Experian was the top riser after its results beat City hopes. The FTSE 100 gained 139 points to close at 6,046.

Across the Channel, the Paris CAC-40 closed 74 points higher to end the day at 4,855. And in Frankfurt, the DAX-30 gained 117 points to 6,702.

On Wall Street, US stocks took off as decent results from both technology giant Intel and financial group JP Morgan lifted spirits. The Dow Jones gained 256 points to end at 12,619. The broader S&P 500 rose 30 points, to 1,364, while the tech-heavy Nasdaq climbed 64 points to close at 2,350.

In Asia, Japanese stocks headed higher, with the Nikkei 225 closing 240 points higher at 13,386.

Crude oil was trading at around $114.80 this morning, after hitting a fresh record (yet again) of $115.21 yesterday, while Brent spot was trading at $112.16.

Spot gold was trading at around $945 an ounce this morning. Platinum was also higher, at around $2,036, while silver was trading at $18.44.

Turning to forex, sterling was trading at 1.9727 against the dollar, and at 1.2358 against the euro. The dollar was last trading at 0.6265 against the euro and 101.79 against the Japanese yen.

And this morning, insurance giant Prudential beat analysts' forecasts for its first quarter. Sales rose 14% as better-than-hoped Asian growth offset weakness in the US. Asia now accounts for more than half of the company's new business.

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