The Most Overlooked Story of 2009

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Put yourself in China's shoes.

You see exploding sovereign debt and fiscal deficits in the West stretching for as far as the eye can see, and still, the root causes of the entire global crisis have merely been swept under the rug. As a result, you know that the currency at the epicenter of it all is eventually headed lower still.

What do you do?
Simply stated, you spend.

You embark upon a shopping spree of epic proportions, scooping up every strategic asset of enduring value that you can get your hands on. You buy now, in droves, the things which you know will cost more in the future. To leverage your forward-looking strategy, you direct your state-owned enterprises (SOEs) like CNOOC (NYSE: CEO  ) and China Petroleum & Chemical (NYSE: SNP  ) to scour the globe for resource investment opportunities, and encourage the private sector to follow suit with deals like Yanzhou Coal Mining's (NYSE: YZC  ) Australian coal purchase.

You sustain a dramatically increased volume of commodity imports beyond anyone's prior expectations, boosting the outlook for well-positioned suppliers like Peabody Energy (NYSE: BTU  ) . With trading partners as far afield as Brazil, you hatch plans to move away from the U.S. dollar as the default settlement currency.

Meanwhile, the sheer scale of emergency spending by your sovereign competitors has afforded you an opportunity to indulge in a stimulus package of your own. You focus the effort squarely upon the industrial sectors that form the core of your economic machine.

Recognizing the persistently toxic nature of derivative "assets" purchased from Western financial institutions, you empower your SOEs to unilaterally walk away from derivative contracts, in a bold move that will help to send gold prices higher and make shares of miners like Barrick Gold (NYSE: ABX  ) surge abruptly. Following a truly surreal silence in the global media regarding a $134 billion counterfeit bond caper, you are perhaps not a bit surprised to see that your direct challenge to the entire framework of a $600 trillion notional derivatives market became the other most overlooked story of 2009.

At the end of the day, your coffers are filled to the brim with the ingredients of future prosperity, and you have alleviated some measure of your exposure to further downside in key global currencies like the dollar. If you can pull that off, keep your economy expanding at an 8% clip, and even help to spark some recovery among your neighbors and strategic trading partners in the process, well, then you just might have done something worthy of consideration as the most overlooked financial story of 2009.

OK, put your own shoes back on
I'm sure it suits China just fine that much of the world may fail to recognize the collective enormity of these strategic initiatives underfoot. If everyone understood what was happening from a broad perspective, commodity prices could rise even faster than they have. Perhaps it is fitting, then, that we closed the year with one more rather quiet response to China's strengthening relationship with yet another resource-rich nation: Ecuador.

Chinese business interests visited Ecuador in November to explore avenues of bilateral cooperation. The result? A joint venture between Petroecuador (60%) and Sinopec (40%) to exploit a 120-million-barrel oil block in the Amazonian province of Pastaza.

Having lived in Pastaza myself, and after witnessing firsthand the destruction of tropical rainforest habitat and related impacts upon indigenous populations that have historically accompanied oil projects in the Amazon, I consider this an opportune time to remind Fools of the potential consequences of this trend. If China sets off a global stampede to secure and exploit natural resources at maximum velocity as the default response to a continuing currency crisis, our planet could become the ultimate victim of the post-Bretton Woods experiment with unbacked fiat currency.

While Ecuador is known for its oil, Canada's Corriente Resources has explored and delineated portions of an extensive copper belt in southeastern Ecuador that was originally prospected by BHP Billiton (NYSE: BHP  ) . Corriente recently announced that a joint venture between China Railway Construction Corp and Tongling Nonferrous Metals has issued a $649 million cash bid to acquire Corriente.

The ore bodies delineated from drilling to date suggest a potential resource of more than 25 billion pounds of copper. If those early resource estimates hold up over time, that pair of Chinese companies may have just grabbed the equivalent of one-fourth the entire copper stash of Freeport-McMoRan (NYSE: FCX  ) for less than $0.03 per pound. As a reminder, above-ground copper presently changes hands at almost $3.40 per pound.

Say what you will about the sustainability of China's unrelenting growth rate, but I submit that China's strategic adaptations to the global financial crisis collectively constitute the most overlooked and misunderstood financial story of 2009. The end result of these measures, furthermore, may ultimately shape the biggest stories of the decade to come.

Now that you have walked a mile in China's shoes, it's time to don your thinking cap. Vote in our Motley Poll for your choice of the most overlooked story of 2009, or nominate an alternate selection using the comments section below.

Fools interested in investing in China are encouraged to test-drive the Motley Fool Global Gains newsletter service with a 30-day free trial. The Global Gains team keeps a close eye on China for opportunities arising from decoupling.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of BHP Billiton, CNOOC, Freeport-McMoRan Copper & Gold, and Peabody Energy. CNOOC is a Motley Fool Global Gains choice. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy is brushing up on its Mandarin, just in case.

Read/Post Comments (2) | Recommend This Article (31)

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  • Report this Comment On January 05, 2010, at 1:54 AM, rmfcan wrote:

    Ok, here is an overlooked story for all you gold bugs out there in Fool's Country, which barely surfaced late in 2009. This comes straight from a Canadian company doing business in China, go figure:

    VANCOUVER, BRITISH COLUMBIA--(Marketwire - 12/22/09) - Jinshan Gold Mines (TSX:JIN - News) is pleased to announce that, in consultation with its largest shareholder, China National Gold Corporation, it is proposing to change its name to China Gold International Resources Co. Ltd. The name change has been approved by the board and the BC Corporate Registry, but remains subject to approval of the shareholders of the Company.

    China National Gold Corporation is the largest gold producer in the PRC and 100% owned by the State-owned Assets Supervision and Administration Commission of the State Council of the PRC. China National Gold is a fully integrated gold company and its business covers exploration, mining, engineering, construction, gold smelting, refining, processing, and gold sales.

    The name change demonstrates China National Gold's full commitment and support to Jinshan to serve as its international vehicle.

    The Company is also actively discussing with partners potential cooperations in gold and other precious metal projects in Russia and Mongolia. Further updates will be forthcoming in future news releases on the status of these developments.

    About Jinshan

    Jinshan is a mining company whose principal property is the CSH Gold Mine. Jinshan began producing gold at the CSH Gold Mine in July 2007 and (is actively advancing its portfolio of gold exploration properties in China). Jinshan's shares are listed on the TSX under the symbol "JIN".

    There it is. But wait, there's more:

    Jinshan Enters Into Memorandum of Understanding to Develop Gold Business With Monnis International Inc.

    Thursday December 31, 9:30 am ET

    VANCOUVER, BRITISH COLUMBIA--(Marketwire - 12/31/09) - Jinshan Gold Mines Inc. (TSX:JIN - News) is pleased to announce that it has entered into a memorandum of understanding with Monnis International Inc. to jointly explore and develop gold projects in Mongolia. Monnis International Inc. was established in 1998 as an official distributor of one of the world's leading car manufacturers, Nissan Motor Co., Ltd in Mongolia. The company has now expanded its activities and has gained particular position in the fields of geology, mining, energy, construction, international freight forwarding, foreign trade, automotive service, communication, banking, and air industry, with over 600 employees. Jinshan and Monnis shall have 51% and 49% equity interest, respectively, in the acquired projects. Jinshan will control and manage the acquired projects. Jinshan believes its partnership with Monnis will allow Jinshan to build and grow strong business in Mongolia.

    Oh yes, and in case you are wondering about the financial end of things for Jinshan, soon to become China Gold International Resources Ltd., things have suddenly taken a turn for the better:

    VANCOUVER, BRITISH COLUMBIA--(Marketwire - 12/15/09) - Jinshan Gold Mines Inc. (TSX:JIN - News) is pleased to announce that the US$40 million loan facility from its largest shareholder, China National Gold Group Corporation, has been used to redeem CDN$30 million of Jinshan's 12% promissory notes (Note A) originally issued in December 2006 maturing December 14, 2009. The terms of the new loan facility is non-revolving and will bear a very favorable interest rate of 6% per annum as opposed to the 12% per annum on the promissory notes, and is unsecured, with accrued interest payable quarterly. Subject to prior repayment, the outstanding balance of the loan will become due and payable in December, 2011.

    The balance of the proceeds from the loan facility will be used to redeem on January 11, 2010, ahead of the maturity date of June 26, 2010 its CDN$12.5 million of Jinshan's 12% promissory notes (Note B) originally issued in June, 2007, maturing on June 26, 2010. The remaining CDN$7.5 million of Jinshan's 12% promissory notes (Note C) originally issued in June 2007, and maturing on June 26, 2010, are owned by China National Gold Corporation.

    So there you have it. It's a takeover (almost) of a Canadian junior miner, about to become China's main vehicle for expansion in the gold mining area internationally. Plus, the company gets a sweet break on its debt position, with its interest obligations being cut in half.


    Yep, I have some shares of JIN.TSE

  • Report this Comment On January 05, 2010, at 2:26 AM, ozzfan1317 wrote:

    China is an overhyped bubble just like Brazil and India. Has anyone made a trip to these countries and researched these businesses? With the accounting standards in these countries how do we know these earnings arent either inflated or imaginary? Exactly this is why I wont invest anywhere but Europe and America plenty of good small companies in both that are a lot less likely to be able to scam you.

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