Time to improve China’s mining act

The following is an edited version of a speech recently delivered by Placer Dome’s chairman at the annual general meeting of the Canada China Business Council in Toronto.

Since 1997, Placer Dome has been pursuing exploration and mine development opportunities in China. Currently, the project we’re most excited about is our co-operative joint venture with the Shandong Zhaojin Group, a leading gold producer in China. We’re working on an exploration project in the Zhaoyuan region.

The goal of our co-operative joint-venture in China is to progress from exploration through mining and development of a world-class gold mine producing in excess of 300,000 oz. per year with a total investment of some US$300 million.

In the weeks and months preceding my first visit to China [a 6-day tour in November], I’d read much about the country and talked with several people about what was happening in the national economy.

I thought I had a good, basic understanding of the tremendous growth that is occurring in China, but nothing had prepared me for what I witnessed: the growth and expansion in China is absolutely phenomenal. No other economy in the world has experienced comparable growth. The impact is far-reaching and definitely causing global change.

One fundamental lesson my Canadian hosts in China stressed was that doing business in China is mostly about relationships. It takes great effort, patience and care to establish those relationships, but it is essential if you want to be successful in China.

For us as Canadians, China represents a very different paradigm. In fact, in my estimation, it is unique. China is a country of contrasts: it is both capitalist and communist. Somehow it works with great efficiency and effectiveness, but it is done in a totally centralized, bureaucratic structure.

My exposure to China is limited, but I have a sense of a country comprising one-seventh of the world’s population going through the most rapid change and significant economic change ever experienced. The mobilization of the Chinese population into a highly productive and extremely competitive global economic force is both awesome and a little frightening.

One cannot help but be astonished by the amount of construction occurring in Shanghai and Beijing, among other cities. Huge amounts of material are being consumed in new buildings, not to mention the airports, railroads, ports, roadways and power-generation facilities under construction. For example, I was told that 50 airports were being constructed simultaneously.

Economic growth in China is affecting virtually every industrial commodity. The Chinese market is adding the equivalent of the Canadian steel industry’s capacity every year. The Chinese labour pool expands by the equivalent of the Canadian labour force every two years.

Young people are becoming well-educated. They express tremendous confidence in their future, and there seems to be a universal sense that China will quickly become the world’s dominant economy.

From my perspective, I’ll make the following observations on China as a place to do business:

There are significant challenges for securing opportunities in China, but Canadian companies should not be deterred from trying to participate in this fast-growing market.

For the extractive industries, a foreign company does not have secure title at the exploration stage, and currently there is no assurance that successful exploration will lead to a development permit. To date, no foreign company has succeeded at developing a mine in China.

In its approach, China is committed to observing and abiding by the rules of the World Trade Organization, but in the case of the gold industry, there are obstacles.

China has a permitting process that provides for spending of up to US$30 million on exploration and evaluation of a project on a regional basis. Then it is necessary to apply to the central government for a permit to develop and exploit the project.

In the case of gold, the central government has a policy that allows discretionary power to deny a development permit if, in the government’s assessment, the project is “high-grade.” The definition of high-grade is not stated, and there is no policy to deal with compensation for a foreign entity to recoup the value of its discovery.

These may sound like daunting issues, but the Chinese government is encouraging foreign investment in mining and professes a commitment to change their practices.

China’s mining act is being amended, and we hope the process will address the challenges for a foreign-owned company mining in China.

Canadian Prime Minister Paul Martin and International Trade Minister James Peterson plan to visit China in January, and that could provide an excellent opportunity to draw attention to the need for change to the mining act at the most senior levels of the Chinese government. We hope they will do so in the context of reciprocity.

The Chinese, as my colleagues have expressed, have an interest in acquiring Noranda through China Minmetals. They are also reportedly interested in acquiring Alberta-based Husky Energy.

Personally, I have no objection to the flow of capital to acquire these assets, in either country, but I think the rules should be reciprocal. There are no restrictions on Chinese companies owning and operating assets in Canada, with unfettered legal right to the assets they acquire. The same should be true for a foreign company operating in China. The Chinese government must be made aware of this situation and amend their laws to permit equal treatment of Canadian resource companies operating China.

I’m hopeful that, through our co-operative joint venture, we will succeed in finding and developing a major gold reserve in China. But, as is the case with gold exploration anywhere, the risks are high.

Fortunately, there is a long history of gold production in China, and the geologic potential in the area of our joint venture is excellent.

Officially, China produces some 200 tonnes of gold per year. Unofficial estimates suggest that another 120 tonnes are smuggled out of the country annually.

China has not built large-scale gold mines; in that area, Placer Dome could provide valuable expertise. Also, sustainable development is becoming more of a common expression in China.

I have heard China’s commitment to the rule of law, to transparency, and to openness. China’s commitment to those principles has attracted large investment in manufacturing and other sectors of its economy. It is beginning to attract investment in mineral exploration.

I look forward to the day when a major investment in mine development will occur in China. That day — with reasonable amendments to their mining act — is drawing near. China will then witness the full contribution mining can make to sustainable development.