Chinese mining: a mixed picture?
Michael Schwartz reviews recent developments in China’s changing mining sector.
When examining China’s economic growth, it is clear to see that mining has punched above its weight.
According to the US Geological Survey, China generated 455 tonnes of gold in 2016. No other country is competing – the second highest in 2016 was Australia (270t), ahead of Russia (250t), and the USA and Canada (209t and 170t, respectively).
This drive to first place is in contrast to many established national producers. For example, South Africa halved its production to 140t and ended in seventh place in the survey, due to resource depletion, falling prices and stricter safety regulations.
One belt, one road
Reflecting China’s aim of taking a larger role in global affairs is the Belt and Road Initiative (BRI), a huge infrastructure project to boost trade across Asia and beyond. Announced in 2013, BRI focuses on cooperation and connectivity among China and other Eurasian nations. Six road systems and one maritime route will result in a China-oriented trading network.
Key to BRI is the construction of the road network, when considering its potential impact on demand for construction materials. Quite how much BRI will cost is unclear, although an Economist article from June 2016 quoted the Chinese Government as committing US$4 trillion. A project of such magnitude will, of course, have implications for mining companies.
One is BHP, which has long-standing commitments to Asian projects. A company document, China’s Belt and Road Initiative, episode two: A vision encased in steel, investigates factors such as how much steel will be needed to make BRI a reality.
According to BHP’s Chief Commercial Officer, Arnoud Balhuizen, the figure is 150Mt of incremental steel demand. To put this in context, BRI includes 68 countries – or half the world’s population and one third of the global economy. BHP singles out Russia and Pakistan as two key recipients of BRI investment, and puts the number of individual projects within BRI at over 2,000.
While education, healthcare and tourism are beneficiaries, 70% of BRI is tied up in power, railways, pipelines and other transportation projects.
For all the size and scope of BRI, the Asian Development Bank has calculated that Asia needs US$26 trillion in infrastructure development by 2030, or US$1.7 trillion annually. It is clear that other organisations will have to step up to meet the region’s requirements. One of BHP’s conclusions is that BRI could be a springboard for further investment – and orders for minerals.
Lower coal output
The rise in gold production and the future opportunities from BRI are not repeated for other commodities. In the short term, and before BRI takes off, steel, coal and rare earths fall into this category, a trend confirmed by the China Mining Association (CMA).
In a report published by the national Xinhua agency, China is on course to achieve reductions in steel and coal output by 2020. This trend dates from last year – by September 2016, China had accomplished 80% of its aims for steel and coal reduction, according to the National Development and Reform Commission (NDRC).
Over-capacity is a key underlying factor behind this, with the central government ordering local administrations to step up their efforts. The Xinhua agency also states that the over-capacity has become a major drag on China’s growth in recent years.
More specifically, the target for cuts in coal output is a reduction in capacity of 250Mt. The NDRC has stated that a structural overhaul for the long-term lies behind its efforts to shed unnecessary capacity in the short-term.
Rare earth reductions
The year 2020 also features in China’s strategy for rare earths as, once again, a drive to overhaul a sector and to secure its sound development is dominant. The limit is expected to be an annual mining total of 140,000t.
The government will continue its policy of investigating and apprehending those involved in illegal mining, processing or trading in rare earth metals.
Furthermore, a rare earth development plan for 2016–2020, released by the Ministry of Industry and Information Technology, is aimed at better management of market access.
This plan comes after years of problems such as illegal mining and smuggling, but also a lack of competitiveness due to poor R&D and environmental damage from excessive exploration. Despite this, China remains the world’s largest miner and exporter of rare earths.
China is very aware of the challenge posed by environmental pollution – its pollution-reduction strategy before the 2008 Olympic Games was perhaps the best-known example of this.
At the end of September, China announced its intention to revoke around one third of its iron ore licences. Those affected are predominantly small-scale polluters and/or those practising obsolescent steel-making techniques.
The announcement had an immediate effect on iron ore prices, which fell substantially. In a mirror-image development, exports of iron ore from Port Hedland in Australia rose 2.8%. The message for the small-scale Chinese producers is all too clear – modernise and clean up, or shut down.
One of the ironies leading up to this decision is the plan by some steel-makers to shut down temporarily to avoid being penalised, precisely the policy of the Chinese Government in 2008.
Profile – Silvercorp Metals
Mining, very often on a small-scale, has taken place in China’s central Henan province, notably in the Ying mining district, for hundreds of years. Starting in 1956, major exploration, mapping and surveys were carried out by the provincial government.
Resource estimates were finally ready by 2003, and the following year Silvercorp Metals, headquartered in Canada, acquired the first of its four silver mines in the Ying district – which is roughly 240km south-west of Henan’s capital Zhenzhou. This was in accordance with the 1997 Mineral Resource Law.
Silvercorp has since become China’s largest publicly listed primary silver producer, achieving an annual production for the fiscal year of 2016 of 5Moz of silver along with 52.5Mlb of lead, 17.5Mlb of zinc and 2,400oz of gold.
At present, Silvercorp has four exploration permits over 44.29km2 and five mining permits over 26.73km2. The four Silvercorp mines include two held in Sino-foreign cooperative joint venture companies, HPG and LM, 80% owned by Silvercorp. The other two, Ying and TLP, are held by Henan Found Mining, 77.5% owned by Silvercorp and 22.5% by the Henan Non-Ferrous Geological & Mineral Resources Co (the local quasi-government-owned geological bureau).
At the time of writing, Silvercorp had completed 21.675m of underground diamond drilling and 7.989m of exploration tunneling for the first half of 2017. The tunneling exposed significant high-grade mineralised zones below current production levels.
As a whole, the 2017 programme of tunneling (comprising drifting, cross-cutting and raising) was driven along and across major mineralised vein structures, both to upgrade drill-defined mineral resources and to test for new parallel and splay structures.
To process the mineral, Silvercorp is using two flotation mills in the Ying Mining District. The first, with a capacity of 1,000t/d, was built in 2006 at a capital cost of U$6m. The second mill was completed in December 2008, with an initial capacity of 1,500t/d and cost U$12m to build. During 2012, Silvercorp expanded the second mill capacity to 2,200t/d.
To date, the metal recovery rates are 95% for lead, 90% for silver and 72% for zinc – the silver and zinc figures exceed recovery rates anticipated in the design specifications. Trucks convey the concentrates to custom smelters located approximately 70km and 190km, respectively, from the mills.
China’s mining sector is experiencing varying fortunes, from mineral to mineral. Nonetheless, projects such as BRI promise handsome returns for those willing to enter the Chinese market.