Investment in China's mining sector has never been an easy business, and recently, more prospects have dried up for foreign   investors   following   legislation   changes  and  the development  of  a  capital  market.  It  seems the tide is changing and Chinese  companies  in  the sector are beginning to come into their own, spurred on by a rapidly developing economy.

This time last year, there was much optimism about the future of foreign investment  in  China's  mining  sector.  A few early birds were already feasting on juicy joint-venture worms, while many more were preparing to swoop as  anticipation of more watertight legislation on prospecting and mining rights grew.

However,  China's  developing capital market has diminished the need for foreign  investment  as  Chinese  companies become savvier about raising their own  equity.  While global markets are entering a downturn period, China's economy still remains robust, with excess liquidity being poured into domestic stock markets.

Over the  last  30  years,  China  has  developed  as a commodity market economy  with  private or state-owned companies, which has led to direct mining taking   precedence   over   in-depth  exploration,  Xu  Hanjing, executive  director of Sino Gold Ltd., said in a presentation he gave at the Antaike-organized  Nonferrous  Metals  Mining  Forum  2008,  held in Nanning on Thursday.

Xu said that while this method generates daily profits, it is limited in scale and  wastes  resources,  not  even managing a resource utilization rate of 30 percent.

But over  the  next 20 years, China will become a capital market economy with publicly-listed   companies,   which  will  guarantee  capital  for in-depth  exploration  and  improve  the resource utilization rate to as much as 70 percent, Xu said.

In this  light,  Chinese companies will depend less on foreign investors for equity.  Xu  gave  the  example  of Australian-listed Sino Gold as a Chinese  company  making  good  use  of  capital  markets. Sino Gold has increased  its  annual  gold reserves by over 1 million ounces (about 30 tons) each year since its listing in 2002. It has also carried out about 90 kilometers  of  drilling and run up annual exploration costs of about RMB 100  million  ($14.31  million),  without returning a profit. It has been able  to  do  this  as  its  listed  value  and equity capital have increased with each new resource discovery, Xu said.

A mature  mining  market  depends  on  public companies, Xu said. Such a shift will coincide with government and company interests over long-term supply and  revenue.  This  model  would  also  allow  ownership  to  be distributed  to  the  public,  who  may be negatively affected by mining activities.  Moreover, it will also increase transparency in the country and help strengthen property rights, market regulation and environmental protection.

In addition,  recently  released sweeping regulations by China's central government  limiting  foreign  investment  in  a range of industries, of which the mining sector is one, are beginning to take effect.

This has  resulted  in  relatively  slim  pickings for foreign companies looking to get involved in China's mining sector.

While China asserts foreign companies that can introduce high-technology and aid Chinese companies in increasing efficiency and cutting emissions are still welcome, newcomers may have a tough time making headway.

"You won't see many new foreign mining projects in the next five years," Wernher  Stapelberg,  chief representative of South African-based mining group Exxaro, said.

The regulations  for  foreign  investors  were  released by the National Development  and  Reform  Commission  (NDRC)  on  Nov. 7, 2007, and took effect on  Dec. 1. The guidelines state that foreign investors should be encouraged   in   the   recycling  and  renewable  energy  sectors,  and specifically  in  technological  developments in ore tailing utilization and ecological  recovery  of  mine sites. However, foreign investors are prohibited   from   exploring  and  mining  molybdenum,  tungsten,  tin, antimony,  rare  earth metals, fluorite and radioactive ore resources in China, and  are  restricted  from developing precious metals mines. They are also   prohibited   from   holding   controlling  stakes  in  mining operations.

The guidelines  supersede  those  issued  in  2004,  under which foreign investment  and  ownership  was  encouraged  in  copper,  lead, zinc and bauxite  mines  in western China, which boast abundant undeveloped metal resources.

However,  persistence on the part of foreign companies wishing to invest could still pay off, according to some.

In reality, if a foreign company is willing to spend the time and effort persuading Chinese companies that they are looking for a long-term "win-win situation"  instead of a fast buck, then there will be more interest and Chinese companies may even come to you, said Harry Mustard, chairman and senior  geologist from Blackwatch Resources China Ltd., a subsidiary of Indochina Minerals Ltd.