OREANDA-NEWS. February 24, 2014. A Chinese gold retailer agreed to acquire a Texas-based oil-and-gas producer for at least USD665 million as part of a strategy to diversify away from processing gold jewelry.

Goldleaf Jewelry Co. will finance the deal through a private placement that is expected to raise as much as 5.69 billion yuan (USD 937.9 million) from no more than 10 investors, it said Monday in a statement filed with the Shenzhen stock exchange. The company would hold 95% of Texas-based ERG Resources LLC after the transaction.

ERG Chief Financial Officer Kelly Plato said the deal would provide funds for growth and that the company would retain current management. He declined to comment on whether the deal would require U.S. government approval, a step necessary only if the transaction would affect national security.

Closely held ERG's most significant assets are oil-producing leases in Santa Barbara County, Calif. The Houston-based company also been active along the Gulf of Mexico coast in Texas and Louisiana but sold off most of its assets there in 2011. The deal includes some offshore oil-fields in shallow waters of the gulf.

By gaining a foothold in California and Texas oil fields, Goldleaf would diversify from "overly focusing" on jewelry, the company said.

The deal comes as U.S. production of crude oil and shale gas is surging, reducing U.S. dependence on foreign oil. That has put pressure on prices in recent years, although oil demand is recovering because of an uptick in the global economy.

Chinese companies, led by the state-controlled entities, have ratcheted up spending on energy in recent years. Last year Chinese companies acquired about \\$37.4 billion in oil and gas holdings outside China, according to data provider Dealogic, more than double the total for 2012.

"Those firms couldn't make much money last year as they couldn't pass on high [raw material] cost to consumers, because prices of gold jewelry are tied to prices in the global bullion market," said Jiang Shu, a senior analyst at Industrial Bank.

Chinese jewelry processors such as Goldleaf didn't fare well last year, Mr. Jiang said. The companies bought a large of amount of gold early last year when prices were well above USD 1,600 a troy ounce, but sales didn't take off until after prices dropped to USD 1,300 to USD 1,400 an ounce, Mr. Jiang said. "They had to take the losses."


Analysts said it was unclear what kind of returns Goldleaf, which is based in the northeastern Chinese province of Heilongjiang, might pocket from the ERG deal.

"It is understandable to want to have a bit in the oil-and-gas sector," said Sang Yongliang, an analyst at Guotai Junan Securities. "But to be a 95% owner, I doubt [Goldleaf], being a jewelry processor, will have the capacity to operate ERG's oil and gas assets in the U.S."

ERG has been buying and developing fields in Texas, California and Louisiana since 1996. An affiliate of a Texas bank this month said it would provide ERG with up to USD 450 million in financing to refinance debt and to fund further development of an oil field in southern California.

Goldleaf said it posted net profit of 127 million yuan (USD 20.9 million) for the first three quarters of last year, while revenue reached 6.25 billion yuan.