Check on China: China Shen Zhou Mining & Resources Inc.
China's warp-speed industrialization and huge manufacturing machine have created a voracious appetite for metals and mining commodities. The almost insatiable demand has driven the country to hunt for natural resources in almost every corner of the globe. China has a dominant presence in several resource-rich African countries, and it has also managed to secure access rights to significant reserves of mineral resources in Latin America and Southeast Asia. Chinese officials have also expanded bilateral scientific and research cooperation in the field of mining with countries such as Iran and Russia. And Chinese companies are eyeing investment opportunities in large mining concerns in Australia, Brazil and India.
But the resource-hungry nation is scouring not only the far reaches of the planet for mineral wealth. It is looking within its borders. As a world leader in reserves and production of several metals and minerals (it is the world’s largest producer of coal, gold, aluminum and copper), China has thus far only scratched its mineral surface. A study by London-based Business Monitor International suggests that increased exploration and mining of its substantial identified resources could potentially make up for the shortfall and provide China with resource security. The Ministry of Land and Resources is doing its part to make China's mining industry more competitive, and the industry is growing by leaps and bounds as metals and mining interests are geared up to tap the country's vast natural wealth.
One small player hoping to cash in on China's mining boom is China Shen Zhou Mining & Resources Inc. (AMEX:SHZ), an outfit engaged in the exploration, mining, processing and distribution of fluorite ore, copper, zinc, lead and other mineral products. The company operates mines in both the Inner Mongolia autonomous region and Xingjiang Uygur autonomous region, areas well-known for their high-grade reserves of copper, zinc, lead and fluorite. Its refined fluorite (ores and powder) is sold mainly to chemical companies that use the products in everything from flux — which is important in steel and aluminum production — to Hydrofluoric acid, a substance used, among other things, in the manufacture of pharmaceuticals, Teflon and to etch glass.
China Shen Zhou had a rough first quarter. Net revenue fell to $744,000, from $3 million in the same period in 2007, attributed to raw material shortages at the company's Inner Mongolia-based subsidiary, Qianzhen Mining, and a decline in fluorite powder production due to water-quality issues at its Xiangzhen operation. In turn, gross profit took a hit, dropping off to $192,000, from $1.8 million in the year-ago quarter. The company posted a net loss of $3.4 million, compared with a net loss of $1.1 million in the first quarter of 2007.
But the company hasn't lost its luster. The top brass pointed out that the first quarter is typically flat in production and sales due to the annual Chinese New Year slowdown. To address supply issues, China Shen Zhou has been actively seeking out zinc ore suppliers in Inner Mongolia, is pondering the prospect of partnerships and acquisitions to gain access to large-scale mines and is, as a last resort, considering retooling its Qianzhen facilities for other mining-related operations. And despite setbacks in fluorite production, chairwoman and CEO Jessica Yu said she expects to have the water issues at the fluorite processing plant resolved during this quarter. The company anticipates the continued expansion of its flourite business this year. When its Xiangzhen plant reaches full capacity in 2009, it is projected to produce somewhere in the neighborhood of 100,000 metric tons of flourite powder annually and extract some 300,000 metric tons of fluorite ores every year.
In December 2007, China Shen Zhou acquired Kichi-Chaarat, a company that owns a large-scale gold and copper mine in western Kyrgyzstan. The company is in the pre-development phase and plans to begin construction at the property by the end of this year. Production is expected to come online by 2010. At its new nonferrous plant in Xinjiang, which opened at the end of April, trials have produced high-grade zinc and copper concentrates, and the company is exploring the possibility of extracting other metal ores (tests indicate the presence of gold, silver and lead).
While there are concerns that a supply glut will continue to drive zinc and copper prices lower this year (zinc recently hit a two-and-a-half-year low while copper slipped to an 11-week low on June 5), analysts view the slump as short term. Alex Heath of RBC Capital Markets recently told Reuters that base metals are taking directional cues from moves in oil, gold and the dollar. He also said the summer slowdown is playing a role in the bearish short-term sentiment.
In the longer term, Chinese demand for zinc, copper, lead and other metals is expected to be strong, given rising domestic consumption. Moreover, many pundits predict the long-term trend of rising base metals prices will continue, and that a sustainable commodity super-cycle has been created (by ever-increasing demand from emerging economies) that could last well into the next decade. This, coupled with the China's mining industry's current expansion to meet surging need, should make for attractive growth opportunities. China Shen Zhou could ultimately become a hot commodity and a strong play in China's metals and mining sector.
Shares, which have traded between $2.25 and $9.85 over the past 52 weeks, closed at $3.48 on Wednesday.
