This is the last report of three I've done on my recent trip to Asia. While I can't claim to have found the burial place of Ghengis Khan and can't prove his Mongol mob mined the gold deposit now owned by Jinshan, you can't prove it's not. We can always dream. For certain, there was a major city located in the hinterlands of Inner Mongolia a thousand years ago and today it is no more than some empty walls. But the gold mine goes on.
The flagship property of Jinshan Gold Mines is the Chang Shan Hao (217) open pit gold project located in Inner Mongolia, China. The project is the end product of a joint venture between Robert Friedland's Ivanhoe Mines and Jinshan. Last November, Jinshan acquired Ivanhoe's interest in the CSH 217 gold project in exchange for shares. As a result, Ivanhoe owns just over 52% of the shares in Jinshan.
While Jinshan Gold has a number of interesting gold projects the first one to go into production will be the CSH 217 project. It is located in the world class Tianshan Gold Belt running some 2000 km between Mongolia, through western China into Kazakhstan, and hosting over 130 million ounces of gold and some of the biggest gold mines in the world.
The permits for the 217 project are held in a Chinese-Foreign Joint Venture where Jinshan holds a 96.5% interest and their local partner holds the remaining 3.5% share. The feasibility study indicated a production rate of 117,000 ounces of gold per year at a cash operating cost of about $253. Jinshan is in the final permitting and construction phase with production scheduled for late 2006. Based on a gold price of $600 per ounce, the project has an IRR of 87% and a Net Present Value of $212 million at a 5% discount. Gold obviously is much higher and it makes the return on investment pop right off the page.
Under the terms of the agreement, Jinshan was obligated to pay $750,000 to their Chinese partner and to contribute $250,000 to the joint venture company. The transfer of interest was made in April of 2005. The Chinese partner is also due two payments of $1 million each, the first when the mining license is obtained and the second, thirty days following the start of commercial mining operations.
Jinshan has proved about 2.9 million ounces of gold in measured and indicated categories and an additional 460,000 ounces of gold in the inferred category. Naturally with $660 or higher gold, they will be using a lower cut-off grade and that will add both ounces and mine life.
Management plans to heap leach Run of Mine ore (ROM) without crushing for the first two years. They believe they can leach the near surface oxide ore with a recovery rate of about 80% which indicates the ore is highly leachable. With the addition of a three stage crushing circuit after two years, the company saves money during the initial stages of production and when entering the second phase of production can achieve production rates of 85% recovery from the crushed oxide ore and 70% from the crushed deeper sulfide ore.
I really like the plan. The capex for 2006 for the 217 heap leach project is about $32.3 million dollars. The company had about $15 million on hand at the end of 2005 and anticipates either debt or equity financing to complete the CSH 217 project and to get it into production. The companies going into production just as gold has begun its liftoff will get the most attention and benefit from investors.
I made a quick visit to the property last month as the guest of Cal McKee who has been hired to get the project into production. He has done the same thing in Nevada and while Jinshan has a very aggressive 7 month from here plan to begin production, it's achievable. Watching the price of gold increase nearly every day adds additional incentive to get cranking.
Cal's mine plan calls for a production rate of 20,000 tonnes per day. The near surface oxide ore will be mined for the first two years and as they get into the deeper sulfide ores, they will add the crushing plant. Naturally, it will be paid for out of operating cash flow which lowers the initial capex required.
Jinshan is not a one trick pony and as Cal McKee and his staff concentrate on getting CSH (217) into production, Jinshan President and CEO Jay Chmelauskas is proceeding on developing the next great project. Jinshan holds a 99% share in four Xinjiang mineral tenements in western China in the Tianshan Mineral Belt which are highly prospective for either copper or gold. Jinshan has commenced a field program in early March with the intention of identifying drill targets for a summer drill program.
Jinshan also is prepared to launch a two drill 5000-meter drill program at their 80% owned Dadiangou gold project in Gansu Province. Once a business license is received they expect to commence drilling.
Jinshan keeps a dedicated team of geologists in Kumming for the purpose of generating new projects in addition to the two already in the pipeline. They have submitted applications for an additional eight Exploration Permits.
Companies such as Jinshan are at the sweet spot of today's gold market. As they get into production, they will suddenly appear on the radar scope of investors and the price will go up accordingly. I'm not thrilled with the number of shares, fully diluted they have about 156 million shares outstanding. With Ivanhoe representing such a large percentage of ownership, I think it would make sense to do a roll back and get the number of shares down to something reasonable and get the price of the shares up.
Most American stock brokers are not allowed to recommend shares with a price under $5. It would help every mining company to add to the pool of prospective buyer by maintaining a price of above $5 but few even think about it. With $680 and $14 silver, it is beginning to sink into the tiny brains of under-age-40 brokers that maybe gold and silver aren't such terrible investments. Jinshan has the kind of perfect story with sizzle as well as steak but it will remain forever off the screen of such brokers until the price goes above $5.
I think an investor could use Desert Sun as a model for Jinshan when determining an appropriate price. With almost 120,000 ounces of production in a politically stable country, Jinshan will be in the radar screen of majors right now. Desert Sun, with slightly smaller gold production, attracted a $700 million dollar buy out. I expect much of the same for Jinshan but investors should think of the higher gold price as well.
Basically Jinshan is a slam dunk. They have experienced people putting an attractive mine into production just as gold starts getting attention and more buyers. In addition to their core project, they are proceeding full steam ahead with similar projects in a country where they clearly understand the rules. I expect them to be selling at a much higher price between now and when they actually pour dore.
If there is any flaw in the ointment, it's in promotion and that's surprising in any company associated with Bob Friedland. If I owned a big piece of this company, I'd be standing on the tallest hill I could find screaming at the top of my voice, "Buy me, Buy me." Jinshan hasn't and they need to.
I was going to be slick and wait for the price to come down before buying and got caught out at the airport when my ship came in. This stock was available under $1 as recently as six weeks ago. It's up 50% since then and I lack the guts to chase it even as I know I should. But patient investors should be rewarded and at any pullback, the stock is very attractive.
I own no shares but Barbara's going to spring for some Tues. morning. And much to their loss, Jinshan is not currently an advertiser. They contributed to my airfare and expenses to go to China but have not in any way paid for this piece. Naturally, investors should do their own due diligence before the purchase of any stock. I really like the management and business plans of Jinshan. This model is exactly what investors should be looking for in a stock today.
We were in the hinterlands of Inner Mongolia on this trip. I flew from Beijing into the capital, Baotou and we drove to the site from there. It was cold and windy and the lack of ground cover means there is a constant blanket of dust over the entire region. But about five miles from Jinshan's gold project there is a big dirt wall around what had to have been a 2 km by 2 km city which must have housed tens of thousand of people 800 years ago. Only the cold wind blows through the fallen walls today but what a story that city could tell. We can't know if the gold from CSH (217) financed Ghengis Khan but it might have.
I got into deep doodoo with Barbara after this Far East trip. Amongst other stuff I brought back two new things for her. Wonderful [old] Gold from Vietnam and a Horrible New Cold from Inner Mongolia.
Jinshan Gold Mines