Eritrea Resource play (ERP)

[Ed Monton]

China Seeks To Control Supplies of Metals And Minerals At Source, And Eritrea Fits The Bill.

http://www.minesite.com/storyFull.php?storySeq=263

Just before Christmas the western mining world was reminded yet again by the proposed merger between APAC and China Gold that China will remain pivotal to demand for metals and minerals in 2005 and that Chinese funded companies will be making use of US dollars earned from exports to acquire advanced stage mining assets. None of the cases so far has been to a pattern, and most have yet to mature, but that is the thrust, and it makes a lot of sense. China is accumulating massive reserves of fast depreciating US dollars and wants to make best use of them. If ten years’ supply of a vital commodity can be acquired in a single transaction, with more to come in the years ahead as further resources are confirmed, the Chinese will prove to have been very shrewd.

The classic example so far has been the proposed acquisition by China Minmetals of Noranda which is one of Canada’s leading copper and nickel companies with investments in fully integrated zinc and aluminium assets. The current state of play on the Minmetals bid is that it has run out of the original period of exclusivity granted in September as due diligence is taking longer than expected. Discussions are still going on and both Noranda and Brascan, which is a 42 per cent shareholder are in favour of a deal. Minmetals is one of China’s leading traders in metal and minerals and was responsible for 50 per cent of the alumina and 40 per cent of the copper imported in 2003.

Now it wants to transform itself into a broadly based resource company and Noranda is an ideal target with its mining and metallurgical expertise, leading edge technology and world wide operations. The betting has to be that the deal will go through and this could have some very positive implications for little Australian listed Apex Minerals as Noranda is already carrying out the wishes of what it regards as its future master with the alliance recently announced with Apex to explore for giant porphyry copper projects in the east of China’s Xinjiang province. Two applications have already been made for prospective acreage containing two targets and these are said to be moving steadily through the system.

Questions as to how Noranda will be managed under the control of China Minmetals will be answered over time. What is in little doubt, however, is that production will take precedence over profitability and the first clue to this is the timing of the purchase when metal and mineral prices are close to multi-year highs. Only by controlling its sources of supply can this fast growing country iron out all the problems of price and demand which are endemic in a free market. For instance it has invested US$4 billion in Sudan, most of which is directed at oil. To secure its investments in a volatile part of the world China has a large number of soldiers on the ground - a point that the bellicose Blair might consider when threatening action from an EU force around Darfur.

The other point worth remembering is that Sudan lies next to Eritrea and some strange things happened in Eritrea in 2004. Foremost among them was the decision by the Eritrean government to halt all exploration by a group of Canadian juniors early in September. So far there has been no explanation as to why Nevsun Resources, Northern Mining Resources, Sanu Resources and Sunridge Gold were told to halt all activity despite visits by the miners' executives to government officials in Eritrea's capital Asmara.

Eritrea is a small, poor country on the banks of the Red Sea between Djibouti and Sudan and with a history of being bullied by Ethiopia from which it gained independence in 1993. The last border skirmishes were in 2000 and it is this history that has ensured minimal exploitation of its mineral riches. Mining could be its salvation and the Bisha project looks like being big on a world scale with comparisons made to the Iberian pyrite belt.

Three explanations for the government’s actions are now going the rounds. One version says that realisation has dawned as to how valuable Bisha and its extensions onto ground held by Northern Mining and Sanu may be. The government only has a 10 per cent holding and wants more. Another is that the US may be considering a pre-emptive move against the government of Sudan. Most of the opposition is apparently holed up in Eritrea and it could be embarrassing if mining companies find themselves in the middle of troop movements. Certainly a very senior US general has recently visited the country.

The third explanation looks more likely. The country needs arms to keep Ethiopia at bay. The Chinese may have suggested that they could supply these arms on advantageous terms ie free, if they were awarded rights to most of the mineral wealth of the country. The implications are very attractive. The ever-present spectre of unemployment would be reduced, the government could generate cash from royalties on projects brought into production, and Ethiopia would be a problem no more. Quite a coup for China and a situation worth watching in 2005.