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MINING RESEARCH:

Cailey Barker
+44(0)20 7601 6132
cailey.barker@hansonwesthouse.com

Robyn Storer UK Smaller Companies


+44(0)20 7601 6131
robyn.storer@hansonwesthouse.com
Sector: Metals & Mining

Phil Swinfen
+44(0)20 7601 6140
phil.swinfen@hansonwesthouse.com Central China Goldfields plc
SALES: Focusing on the frontline
Sanjiv Pandya
+44(0)20 7601 6130 21 February 2007
sanjiv.pandya@hansonwesthouse.com
Over the last year, Central China Goldfields has made solid progress in
Neil Hobson progressing its two principal projects, despite turbulent corporate activity. The
+44(0)20 7601 6134 Company is progressively building its gold resource base and providing a strong
neil.hobson@hansonwesthouse.com
case for a potential copper jackpot.
Simon Hodges • At the Nimu project in Tibet, Central China Goldfields has confirmed the presence of
+44(0)20 7601 6136
simon.hodges@hansonwesthouse.com
porphyry-style mineralisation and identified eight outcropping copper-molybdenum
targets. Since June 2006, the Company has assayed a total of 646 rock chip/float
SALES TRADING: samples. Results returned values up to 5.6% Cu and 0.31% Mo, with some containing
Martin Dobson elevated amounts of gold, silver, lead and zinc.
+44(0)20 7601 6135
martin.dobson@hansonwesthouse.com
• In February 2007, Central China Goldfields announced assay results from a trenching
programme at Gangjiang, which included 60m at 1.31% Cu, 0.012% Mo, 38m at
0.42% Cu and 50m at 0.35% Cu. The Company has signed a drilling contract and
Price 10.0p intends to commence a drilling programme in April 2007 or as soon as weather permits.

Ticker GGG
• At the Snow Mountain project, the Company completed a preliminary JORC standard
resource calculation for Songpanguo (“SPG”) of 2Mt at 3.22 g/t for 210,000oz Au, 3.5
Market cap (£m) 11.43
times previous estimates. Also, management reports that in-house resource calculations
Shares in issue (m) 114.30 show larger tonnages at SPG, which may be converted to additional resources with
Index AIM closer spaced drilling. Underground adit sampling at SPG discovered extensions to
12m high (p) 18.9 existing mineralised zones and may increase the resource base further. Results included
12m low (p) 5.8 4m at 9.02g/t Au, 3m at 3.87g/t Au and 17m at 1.22g/t Au.
• Preliminary metallurgical testwork indicates that the operating cost is approximately
Cash in hand (£m) ~ 4.1 US$17/t, giving a breakeven grade of 1.2g/t Au (excluding capex). This indicates that, as
Major Shareholders % Holding current grades are in the order of 3g/t, the economics should be fairly attractive for a
JP Morgan 8.8 small operation. The Company now plans to conduct a scoping study to assess the
economics for the Baima area and apply for additional licences in the surrounding areas.
Genesis 6.6
DS & Co Sheepfarming 5.8 • In December 2006, Central China Goldfields raised £3.75m at 12p/share from UK
P McGroary & Family 3.0 institutions and other investors.
Directors 3.0 • In November 2006, Central China Goldfields signed an option agreement with TSXV-
listed Majestic Gold Corp, to earn a 50% interest in its projects for C$12.25m. An initial
investment of C$1.5m (~£0.7m) was paid, which later converted to shares in Majestic.
However, In January 2007 the agreement was terminated as a revised schedule of
payments was unable to be agreed. While this is a disappointment, the funds raised put
the Company in a strong position to advance its main projects.
• Comparative analysis of gold exploration companies in China shows that Central China
Goldfields has a market cap/resource of US$26.7/oz (excluding Nimu), relative to the
market average of US$44.8/oz. Using the market average, a nominal value of US$15m
for Nimu, cash-in-hand (£4.1m) and the Company’s shareholding in Majestic (£0.7m),
www.hansonwesthouse.com we would value Central China Goldfields at £29.5m (26p/share).
Hanson Westhouse Limited is a member of the
London Stock Exchange and is authorised and HansonWesthouse acts as nomad and broker to Central China Goldfields plc and is paid fees for these services
regulated by the FSA
Registered in England and Wales No. OC305445
Please read the important information at the end of this report
Registered Office:
12th Floor, One Angel Court, London EC2R 7HJ
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Nimu : Potential jackpot
The Nimu project is located about 120km west of Lhasa, the capital of Tibet. In May 2006, Central
75% interest China Goldfields signed an agreement to enter into a JV with the Sichuan Bureau of Metallurgy and
(increasable to 88%) Geological Exploration (“SBMGE”) over the Nimu project. The Company can earn up to 75% by
for US$27m over 6
spending RMB216m (US$27m) over 6 years. The initial 30% will be vested upon nine months of
years
transfer of title and RMB32m (US$4m) in property payments. Upon earning the 75%, should SBMGE
choose not to contribute further, Central China Goldfields can increase its interest to 84% at which
point SBMGE would be free-carried.
The project consists of five contiguous exploration licences (Baorong, Gangjiang, Ronggangmen, Xiaqing
and Dubuqu) and two separate licences (Zongxun and Tinggong). It lies within the Gandese arc, which
hosts a number of substantial copper deposits including the Qu Long copper deposit (5Mt Cu) and the
Xietongmen project (1.4Bn lbs Cu, 3.0Moz Au), owned by TSX-listed Continental Minerals.

Figure 1: Location of licences Figure 2: View over Nimu

Source: Central China Goldfields

Source: Central China Goldfields


1.8Bn lbs Cu
contained with an The Nimu project has total inferred resources, reported to various Chinese standards, of 1.3Bn lbs of
in-situ value of contained copper oxide at an average grade of 1.1% Cu. There is also 467Mlbs of contained copper
US$4.6bn
sulphide at grades of 0.29% Cu with molybdenum grades between 0.02-0.08%. This represents an in-
situ value of US$4.6bn, at current prices of US$2.60/lb Cu.
The Chinese standard resource has been defined by soil and rock sampling, trenching and drilling over
the licences by SBMGE. However, this is not to JORC standard and a significant amount of drilling will
have to be undertaken by the Company to substantiate the resource.
The deposits are still open on all sides and further exploration is needed to delineate the size of the
deposits and to identify additional targets within the tenements. The Company has interpreted that
most of the previous work undertaken by SBMGE focused on the leached zone and potentially missed
the supergene enriched zones, which is often the most prospective area of the secondary copper
mineralisation model (see below). This interpretative ability is one of the key strengths of Central China
Goldfields’ technical team.

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Figure 3: Secondary copper mineralisation model

Source: Central China Goldfields

Recent developments

Eight Cu-Mo targets In August 2006, Central China Goldfields confirmed the presence of porphyry-style mineralisation with
delineated geological mapping and grab sampling. In October, it was announced that ASTER (Advanced Spaceborne
Thermal Emission and Reflection Radiometry)-aided geological and alteration mapping had identified
eight outcropping porphyry-related copper-molybdenum targets. In November 2006, Induced
polarisation and ground magnetic surveys over Tinggong and Gangjiang delineated 10 geophysical
anomalies, which could potentially point to copper oxide/sulphide ore bodies, some with possible
supergene enriched layers.

60m at 1.31% Cu Since June 2006, Central China Goldfields has assayed a total of 646 rock chip/float samples. Results
from trenching returned values up to 5.6% Cu and 0.31% Mo, with some samples also containing elevated amounts of
gold, silver, lead and zinc. In February 2007, the Company announced assay results from a trenching
programme at Gangjiang, which included 60m at 1.31% Cu, 0.012% Mo, 38m at 0.42% Cu and 50m at
0.35% Cu.

Drills ready to roll! In January 2007, Central China Goldfields signed a drilling contract with Sichuan Huafeng Drilling Co to
provide two drill rigs. The Company intends to commence a drilling programme in April 2007 or as
soon as weather permits. Central China Goldfields has been building up a strong case for a potential
jackpot at Nimu and we wait with eager anticipation for the results of the drilling.

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Snow Mountain : Building ounces
The Snow Mountain project is located approximately 370km northwest of Chengdu in a mountainous
Business licence area of the Sichuan Province. Central China Goldfields will earn 75% interest (increasable to 85%) in
issued to JV the project from its Chinese JV partners, SBMGE, by spending US$6.8m over 6 years. The business
licence was issued in December 2004, with all exploration licences held under the JV.
The project lies in the Qinling Fold Belt, a major regional structural trend which hosts a number of
multi-million ounce deposits, similar to the 200Moz Carlin-trend in Nevada, USA. It occurs in close
proximity to a number of multi-million ounce gold deposits, with typically refractory gold mineralisation.

Figure 1: Location of licences Figure 2: View over QQS deposit

Source: HansonWesthouse
Source: AIM admission document, Company presentation

1Moz in resources The Snow Mountain project consists of six licences with total Chinese-defined resources of 962,800oz
(Chinese standard) Au (375,500oz to international standards).
The Qiaoqiaoshan (“QQS”) licence, in the western portion of the project contains a Chinese defined
resource of 610,000oz gold, of which 147,000oz (2.1Mt at 2.21g/t Au) has been defined to international
standards. It has a strike length of 1.5km with stratabound gold mineralisation.
The Baima area in the eastern portion tends to show gold associated with structurally controlled quartz
veining and graphitic shears. The Songpanguo (“SPG”) deposit (HJG licence) contains a JORC standard
resource of 210,000oz gold (2Mt at 3.22g/t Au). The Shuiniujia (“SNJ”) deposit contains a Chinese
defined resource of 142,800oz gold (0.2Mt at 4.9g/t for 18,500oz to international standards).
Previous work undertaken by SBMGE from 1985 to 1997 included mapping, soil sampling, trenching and
underground development. At the QQS prospect 41 holes were drilled, along with underground
development, and a programme of heap leaching was conducted from 1990-1991.
Since April 2005, Central China Goldfields has undertaken extensive confirmatory exploration including
underground adit sampling and 1,200m of drilling. The Company has carried out fire assay on samples,
which has produced more reliable results than the previous wet assay technique. Initial metallurgical
testwork has also been undertaken and shown that the ore is refractory and will require roasting or bio-
oxidation.
A high resolution Induced Polarisation (IP) survey identified potential lateral extensions of known
Results provide resources at the QQS prospect. Soil and adit sampling has extended areas of gold mineralisation and
confidence for identified new gold zones at QQS, SNJ and SPG. Although confirmatory trench and adit sampling by
Chinese defined Central China Goldfields have been mixed, generally results has confirmed work previously reported by
resources SBMGE and identified a number of additional zones, particularly at SPG.

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Recent developments
In September 2006, Central China Goldfields announced that it had dropped one of its licences,
reducing it from seven to six, as it was located close to a nature reserve and major tourist road.
In October 2006, the Company announced that a new ‘zone 6’ had been discovered at SPG. While of
lower grade, the zone has potential to add more to the deposit if it is proven to extend laterally and at
depth. Results included 1m at 1.37g/t Au, 15m at 0.59g/t Au and 42m at 0.46g/t Au.
Also in October 2006, Central China Goldfields reported results from its drilling programme at SNJ,
which increased the apparent width of mineralised zones and encountered new zones. Results included
30m at 1.05g/t Au, 6m at 1.42g/t Au and 9.5m at 1.38g/t Au.
JORC standard In February 2007, based on its drilling programme, the Company completed a preliminary JORC
resource of standard resource calculation for SPG of 210,000oz Au. This is 3.5 times previous estimates. Also,
210,000oz Au with management reports that in-house resource calculations show larger tonnages at SPG, which may be
potential to grow converted to additional resources with closer spaced drilling.
Underground adit sampling at SPG returned encouraging results, discovered extensions to existing
mineralised zones and may increase the resource base further. Results included 4m at 9.02g/t Au, 3m at
3.87g/t Au and 17m at 1.22g/t Au.
Breakeven grade of Using a gold price of US$500/oz and a recovery of 88%, preliminary metallurgical testwork indicates
1.2g/t Au, well that the operating cost is approximately US$17/t, giving a breakeven grade of 1.2g/t Au (excluding
below the current
capex). While this is not a definitive costing, it does indicate that, as current grades are in the order of
3.3g/t Au
3g/t and capital costs likely to be low, the economics should be fairly attractive for a small operation.
The Company now plans to conduct a scoping study to assess the economics for the Baima area and
apply for additional licences in the surrounding areas.

Figure 4: SPG mineralisation showing new gold zones

Source: Central China Goldfields

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Dong Mao Huo : Developing production
The Dong Mao Huo (“DMH”) gold mine is located about 210km west of Hohhot, the capital of Inner
80% interest earn-in Mongolia, China. The project includes a small-scale gold mine and two exploration licences. In
for US$4m December 2006, Central China Goldfields entered into a JV with the Shandong Zhengyuan Geology &
Resource Co. Ltd. to earn an 80% interest by spending RMB25m (US$3.125m) over 3 years and
RMB7m (US$0.875m) as property payment.

The area is underlain by a series of copper-gold Figure 5 : Dong Mao Huo gold mine
Chinese standard deposits with enriched supergene oxide gold.
resource
Zhengyuan reported that the mining area has a
of135,000oz Au
total inferred gold resource of 135,000oz at 3.3g/t
Au to various Chinese standards. While this
resource estimate will need to be proven to
international standards, it is only tested to a depth
of 70-150m and provides a good indication of the
potential of the orebody.
The small-scale mine is exploiting oxide gold
resources hosted by a 60m wide quartz porphyry
dyke. Oxidation extends to a depth of 40m. The
ore is crushed and treated by heap leach on site
and the loaded carbon is sold to local refineries. Source: Company presentation
Similar In December 2006, CSA Australia completed an
characteristics to independent geological evaluation of the mining and exploration potential of the DMH mine. The study
WA concluded that mineralisation demonstrates similar characteristics to shear-hosted gold deposits of
Western Australia. CSA was unable to provide a resource estimate but highlighted potential for
additional resources and recommended a drilling programme to test the open pit potential.

De Ming Ding : Porphyry potential in Tibet


The De Ming Ding licence is located about 60km east of Lhasa, the capital of Tibet. The area of interest
extends over 1,789km². In April 2006, Central China Goldfields signed an agreement to explore and
First right of refusal apply for exploration licences with a subsidiary of the Hubei North East Geological Team (“HNEGT”).
for JV agreement Central China Goldfields has the first right of refusal to negotiate a JV over any new licences in the area
of interest and the right to match any other offer for a JV over new licences within the area, should a JV
not be reached. In February 2007, this agreement was extended until 30 June 2007, and may be
extended further if required.
The area of interest is part of the copper-gold-moly belt in Tibet, surrounding the Qu Long porphyry
deposit. The Qu Long deposit (which is not part of the agreement) is reported to host a large porphyry
copper deposit containing 5Mt Cu, 35,000t Mo and 3,200t Ag.
HNEGT is currently conducting a grass root mineral exploration survey in the area, including stream
sediment sampling and geological reconnaissance. Central China Goldfields has the right to evaluate
available data and, together with HNEGT, will identify targets and apply for exploration licences within
the area.

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Corporate Developments
Placing
Cashed up and In December 2006, Central China Goldfields raised £3.75m at 12p/share from UK institutions and other
ready to roll! investors. The Company currently has no debt, £4.1m cash-in-hand and 7m warrants outstanding at a
10p strike price, exercisable up to 30 April 2007, that could potentially raise up to £0.7m.
Majestic agreement
In November 2006, Central China Goldfields signed an option agreement with TSXV-listed Majestic
Gold Corp, to earn a 50% interest in its projects for C$12.25m. The Company also had the right to
purchase the remaining 50% for not less than C$20m for cash/shares. An initial investment of C$1.5m
(~£0.7m) was paid, which later converted to 3m shares in Majestic.
In January 2007, it was announced that Central China Goldfields were unable to agree a mutually
agreeable revised schedule of payments with Majestic. Subsequently, the agreement was terminated and
Moving on and re- the proceeds from the recent placing were diverted to the Company’s other projects. We believe this is
focusing on the main a disappointment as it would have advanced Central China Goldfields towards production. However,
projects funds raised may have stretched the Company’s finances beyond its means and given revised payment
terms were unable to be agreed, management of the joint venture may have presented difficulties.
Hubei
In December 2006, Central China Goldfields announced that it will not proceed with the development
of the Xiang Shui Tan project in Hubei. This was part of the Company’s project rationalisation as it
wanted to focus on projects which may provide greater shareholder return. We believe this is a sensible
use of funds, demonstrating the Company’s ability to maintain a detached, unemotional view of its
projects and drop them if necessary.

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Valuation
Comparative analysis of junior gold exploration companies in China shows that Central China Goldfields
has a market cap/resource of US$26.7/oz, relative to the market average of US$44.8/oz. This includes
all of the Company’s gold resources to Chinese reporting standard, as significant confirmatory work has
been undertaken, but excludes the copper resource at Nimu.
Using the market average would give Central China Goldfields a valuation of around US$31.9m. The
copper resource at Nimu is difficult to value as it is to unconfirmed Chinese reporting standards, split
between a number of deposits and will need verification. We have valued Nimu at a nominal US$15m,
equivalent to approximately 1% of the potential in-situ value (attributable; at a long term copper price
CCG valued at of US$1.25/lb).
£29.5m (26p/share)
Therefore, including cash-in-hand (£4.1m) and the Company’s shareholding in Majestic (£0.7m), we
would value Central China Goldfields at £29.5m (26p/share).

Market Resource Attributable In situ Market cap /


Market:
Company Province Project cap Au Eq Resource value Att. resource
Ticker
US$m (Moz) (Moz) US$m (US$/oz)

Mundoro Mining Liaoning Maoling TSX:MUN 58.3 9.2 7.3 6,164 8.0

Majestic Gold Corp Shandong, Xinjiang Sawayaerdun, Song Jiu Gou TSXV:MJS 18.8 1.9 1.6 1,282 11.8

Tianshan Goldfields Xinjiang Gold Mountain AIM:TGF 55.6 2.8 2.6 1,905 21.7

Dynasty Gold Corp Xinjiang Hatu TSXV:DYG 17.9 0.9 0.7 611 24.5
TSX:MMM,
Minco Mining & Metals Gansu, Guangdong Changkeng, Fuwan, Anba 73.5 6.4 2.9 4,265 25.1
AMEX:MMK
Central China Goldfields Sichuan Snow Mountain AIM:GGG 21.7 1.1 0.8 727 26.7

Continental Minerals Tibet Xietongmen TSXV:KMK 173.7 9.3 5.6 6,235 31.1

China Gold Mines Hunan Guanzhuang AIM:CGM 36.6 1.2 1.0 804 38.2

Inter-Citic Minerals Qinghai Dachang TSXV:ICI 97.5 1.5 1.4 1,030 70.5

Jinshan Gold Mines Inner Mongolia CSH (217) TSXV:JIN 266.9 3.4 3.3 2,265 81.8

Leyshon Resources Heilongjiang Zheng Guang AIM/ASX:LRL 115.3 1.2 0.9 817 135.1

Average 91.4 3.8 2,538 44.8


Source: Fidessa, company websites. Prices as of 19 February 2007. Gold price of US$670/oz, Copper of US$2.60/lb, Silver of
US$12/oz. Exchange rates of US$1.90 to £1 and C$1.05 to US$1. Average excludes Central China Goldfields.

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Financials
Profit and Loss Account (£) 6 months ended 6 months ended Period from
30-Jun-06 30-Jun-05 3 Nov 2004 to 31 Dec 05
Group Turnover - - -
Administrative expenses -289,480 -337,458 -532,127
Operating Loss -289,480 -337,458 -532,127
Interest receivable and similar income 30,597 26,803 61,616
Loss on Ordinary activities before taxation -258,883 -310,655 -470,511
Tax on loss on ordinary activities - - -
Loss for the financial period -258,883 -310,655 -470,511

Balance Sheet (£) 30-Jun-06 30-Jun-05 31-Dec-05


Fixed assets
Intangible assets 1,143,921 638,255 638,255
Tangible assets 537 727 727
1,144,458 638,982 638,982
Current assets
Debtors 74,689 14,245 14,245
Cash at Bank 2,816,718 1,399,611 1,399,611
2,891,407 1,413,856 1,413,856
Creditors: Amounts falling due within one year -23,595 -25,285 25,285
Net current assets 2,867,812 1,388,571 1,388,571
Total assets less current liabilities 4,012,270 2,027,553 2,027,553
Capital and reserves
Called-up equity share capital 799,549 522,450 522,450
Share premium account 3,942,115 1,975,614 1,975,614
Profit and loss account -729,394 -470,511 -470,511
Shareholders' funds 4,012,270 2,027,553 2,027,553

Cash Flow (£) 6 months ended 6 months ended Period from


30-Jun-06 30-Jun-05 3 Nov 2004 to 31 Dec 05
Net cash outflow from operating activities -320,827 -269,017 -517,992
Returns on investments & servicing of finance
Interest received 61,616
Capital expenditure
Payments to acquire intangible fixed assets -505,666 -240,547 -640,938
Payments to acquire tangible fixed assets -1,139
Net cash outflow from capital expenditure -505,666 -240,547 -642,077
Cash outflow before financing -826,493 -509,564 -1,098,453
Financing
Issue of equity share capital 2,243,600 1,881,750 522,450
Share premium on issue of equity share capital 2,226,996
Share issue costs -251,382
Net cash inflow from financing 2,243,600 1,881,750 2,498,064
Increase in cash 1,417,107 1,372,186 1,399,611

Reconciliation of operating loss to net cash outflow from operating activities


Operating loss -532,127
Amortisation of goodwill 2,683
Depreciation 412
(Increase) in debtors -14,245
Increase in creditors 25,285
Net cash outflow from operating activities -517,992

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