Golden opportunities in China if you know where to look

One company has been drilling for gold in some of China's remotest mountains - and the prospects of success are looking good for Central China Goldfields.

There's gold in the mountains of China, and this company is drilling the hills. This is definitely one to watch.

It was two years ago that I first met Dr Jeffrey Malaihollo, the geologist and Managing Director of Central China Goldfields (GGG). Then he described to me the five mining projects, all in China, upon which his company was working.

Last week, when I met him for the second time, the number had been reduced to two. Judging that two of the original five had been insufficiently promising to be worth the struggle with local Chinese bureaucracy, Malaihollo gave up on them. He has also withdrawn from a project at Snow Mountain, but this time was able to walk away with a £1m profit having sold out to its Chinese partner.

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This has boosted Central China's bank balance to about £3.4m, useful ammunition for its two remaining projects. Defying the company's name these are anywhere but in Central China.

One of them, Dong Mao Huo, is in Inner Mongolia in the far north of the country, while the Nimu project is in Tibet. The two projects are quite different. Dong Mao Huo is a small gold mine that could be quickly brought into production. Nimu, on the other hand, is at an earlier stage. But it could become a very large copper and molybdenum mine - and the one that could really see shareholders hit the jackpot.

The Dong Mao Huo gold mine has a history of sporadic production, with as recently as 2005 70,000 tonnes of ore being mined and sent to local refineries. Central China got involved in April 2006, when it entered into a joint venture with the Shandong Zhengyuan Geology & Resource Company.

Eighteen months later it had completed a thirty-four hole exploratory drilling programme which suggested that there may be more gold than previously thought. Further drilling is now underway to define the extent of the resource and Central China intends to release an estimate of the total resource by the end of the third quarter of this year.

All being well it expects to be mining 7,000oz of gold per annum from an open pit mine starting early next year, in which it will have an 80% share, with the potential to extend the resource and ramp up production later on.

This will provide some useful cash flow, much of which no doubt will be directed to the Nimu project. This is where the real excitement lies because Nimu, which is at an altitude of some 5,000 metres, lies on a range of mountains that have geological similarities with regions of mineral wealth such as the Andes.

Higher grades in prospect

At Nimu Central China has seven exploration licenses covering 135 sq kilometres, the most promising of which to date is the Gan gjiang license. Here exploratory drilling has encountered fairly consistent copper grades of about 0.5%, but results from trenching suggest that there is potential for much higher grades.

According to broker HansonWesthouse the copper and associated molybdenum grades found so far are about average for this type of system and in order to be economically attractive, a large tonnage deposit will be required. Nimu certainly has the size to fulfil this requirement and now just needs an increase in grade.'

This month Central China is starting a new drilling programme that will throw further light on the potential at Gan gjiang, while further work will be undertaken on the other six licences.

In twelve months time Central China could be producing gold at Dong Mao Huo and will have a much clearer idea of the quality of the Nimu project. Although it is early days, there is no doubt that Nimu could be a real company-maker.

At present Central China is valued at just £8m. But in a peer group comparison it lists fourteen other projects from around the world that have an average copper grade equivalent to that at Gangjiang. They have market values of anything from £1bn to about £15m depending upon their location, the size of the resource and their stage of development. This certainly tells us something about the potential for Central China Goldfields, although it does not necessarily indicate that the shares are undervalued at the moment.

Central China must first define its resource, and then it will have to cut deals with Chinese partners in order to bring in the necessary capital for mine development. A railway line that is being built in order to connect Tibet's capital Lhasa to China's heartland will pass within some thirty kilometres of Nimu, but still the region is remote.

HansonWesthouse has declined to put a value on Central China at this stage, preferring to wait for the first resource estimate for the Gangjiang license expected towards the end of this year. A good result here could start to get the ball rolling for a share that has so far flattered to deceive. This is definitely one to watch.

This article is taken from Tom Bulford's free daily email, Penny Sleuth'.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.