Jinshan Gold hits major milestones in China (September 10, 2007)

When Jinshan Gold (JIN-T, JINFF-O) first entered the China market five years ago, its strategy was to build a resource-based company and it snapped up a diverse portfolio of properties in native porphyry copper, platinum-palladium and gold.

But three years later, the Canadian junior realized that it had to decide where it wanted to concentrate its efforts if it wanted to strike it rich.

“It became apparent we were unfocused,” recalls Jay Chmelauskas, Jinshan Gold’s president. “So we divested the platinum-palladium, shut down some copper properties, unwound some gold properties, and focused in on the properties we thought we could advance on.”

Success swiftly followed. At the end of July, its Chang Shan Hao (CSH 217) open-pit gold mine, in the Inner Mongolia region of northern China, produced its first 500-oz. gold dor bar. Jinshan expects to produce 120,000 oz. gold annually before the end of the year and is studying how to raise output to 180,000 oz. a year.

Initially, however, the mine will concentrate on recoverable proven and probable reserves of 66.7 million tonnes grading 0.75 gram gold per tonne in the Northeast zone of the open-pit mine.

Average cash costs of about US$250 to US$290 per oz. gold are projected over the 9-year operating plan.

For now, Jinshan’s executives are feeling good about generating cash and confident about their position as a small gold-producing company in one of the world’s largest gold-producing countries.

“We’ve hit a lot of our milestones in terms of starting up the mine when we said we would, we are on budget in terms of capital, which isn’t too common in today’s environment, and the mine appears to be performing well,” Chmelauskas says from his Vancouver office. “That’s pretty darn promising and beyond our expectation for the startup.”

The next project Jinshan will focus on is its Dadiangou property, in western China’s Gansu province. Initial drilling identified a mineralized zone that extended over 2 km with grades under 2 grams gold — a reasonable result in the first pass.

Second-phase drilling — to test the extension of Dadiangou main zone — is now under way. Chmelauskas says Jinshan will have a National Instrument 43-101-compliant resource by the end of the year.

Jinshan is also doing more regional brownfield work in the permitted area of Dadiangou. Trenching, geochemical and prospecting work have yielded good results.

“We’re finding more gold anomalies,” Chmelauskas says. “We now have some anomalies that compare quite favourably with the anomaly we just drilled. So we see this as one-hundred-per-cent exploration, but we seem to be getting some nice gold showings where we put our picks.”

‘Lottery ticket’

In China’s remote Xinjiang province, meanwhile, Jinshan holds 13 exploration permits along the prolific Tianshan gold belt.

“We’ve staked ground where we think there is the potential to host large-scale gold deposits,” Chmelauskas says. “We’ve got a couple of crews out there doing trenching and geochem, and expenditures are relatively low compared to drilling on these other properties.”

Chmelauskas refers to the Xinjiang permits as the company’s “lottery ticket,” adding “the name of the game is to find something big in China.”

Jinshan holds a 96.5% interest in Changshan Hao, with its Chinese partner, Brigade 217 of the Northwest Geological Bureau, holding a 3.5% carried interest. At Dadiangou, Jinshan has the right to earn an 80% stake in the joint venture, and the Chinese partner holds a 20% participating interest at development. Jinshan’s employees have grown to a few hundred and the company has offices in Baotou, a city in Inner Mongolia, Kunming, the capital of southern Yunnan province, Beijing, and Urumqi. About 90% of its staff of mining engineers, process engineers, surveyors, and accountants, are hired locally.

Chmelauskas gushes about China’s overall mining prospects. Last year, the country overtook Australia as the world’s third-largest gold producer, and according to a senior Chinese industry leader quoted by Reuters news agency, it will likely overtake the U.S. this year to claim the no. 2 spot.

Quoting statistics from the China Gold Association, Reuters reported in June that China’s gold output rose 14% in the first four months of the year to more than 2.74 million oz. (77.75 tonnes), a 7% increase over the same period in 2006.

What’s more, a lot of the major companies Chmelauskas says have been slightly risk-averse when it comes to China, leaving the field wide open for the juniors.

“The major gold companies aren’t there in a big way,” he says. “They have offices there and a few joint ventures with minors, but they don’t have any producing mines, so we are well positioned.”

Chmelauskas adds that because people have a sense that China is a difficult place to operate and that there are hurdles to entry, there are “opportunities for us to make hay.” Adds Chmelauskas: “There’s a tremendous amount of deal flow for us in China.”

One reason the majors may not have delved deeply into China, he says, is that there haven’t been that many world-class deposits discovered there. But he notes that Jinshan is targeting a 5-million-oz. deposit and thinks it could be a wakeup call.

“We think that any major around the world would want to take a hard look at a five-million-ounce deposit,” he says.

Ivanhoe Mines (IVN-T, IVN-N) owns about 43% of Jinshan’s shares.