China Gold International (CGG) is a gold, silver, lead, copper, zinc, and moly producer based in China. The company’s largest shareholder is China National Gold Group, a Chinese state-owned gold producer. About 47% of the stock is owned by this group and other institutional investors. The stock trades on the Toronto and Hong Kong Exchanges.
The company accounts for about 20% of Chinese production and holds about 30% of China’s gold reserves. China buys all of its internal gold production, so the company has no issue selling its precious metal at market prices without having to worry about changes in world gold supply and demand. Combined with its massive base metal reserves, CGG is key to the success of Chinese mining, whose production is crucial to the Chinese economic engine.
The close relationship between the government and China Gold International ensures the company’s production goals will be meet with local Chinese demand. Two major factors ensure that CGG will find ready local buyers: a) China’s middle class is growing and constantly demand more base metal resources and b) The Belt & Road Initiative connecting 75% of the world’s economies needs a ready supply of materials to support its planned massive infrastructure expansion.
The company recently created over $1 billion in financing through a bond issue and credit facility to finance expansion the Jiama (35 year mine life) and CSH mines. The company has steadily increased production of its two main products, gold and copper. Revenues have increased substantially over the last several years. The company has expanded drilling at the Jiama mine property in search of additional mine-able resources. The district has considerable expansion potential. The company notes in a recent news release:
Selected Production and Financial Highlights: Q3 2019 Compared to Q3 2018
Revenue increased by 17% to US$186.4 million from US$158.8 million for the same period in 2018.
Mine operating earnings decreased by 25% to US$26.3 million from US$35.1 million for the same period in 2018.
Net loss after tax decreased from US$4.6 million for the 2018 period to US$0.3 million for the same period in 2019.
Total gold production increased by 24% to 63,113 ounces from 50,860 ounces for the same period in 2018.
Total copper production increased by 11% to 18,347 tonnes (approximately 40.4 million pounds) from 16,515 tonnes (approximately 36.4 million pounds) for the same period in 2018.
Selected Production and Financial Highlights: Nine Months 2019 Compared to Nine Months 2018
Revenue increased by 21% to US$495.1 million from US$407.6 million for the same period in 2018.
Mine operating earnings decreased by 37% to US$48.8 million from US$77.4 million for the same period in 2018.
Net loss after tax increased from US$2.2 million for the 2018 period to US$27.8 million for the same period in 2019.
Total gold production increased by 7% to 162,640 ounces from 151,502 ounces for the same period in 2018.
Total copper production increased by 32% to 49,306 tonnes (approximately 108.7 million pounds) from 37,313 tonnes (approximately 82.3 million pounds) for the same period in 2018.
The cash cost of copper is $1.43 per pound, net of by-product credits from the other metals. The cash cost of gold per ounce is $820 net of by-product credits. The AISC of gold production is $1119 per ounce, per the company.
CGG’s mine grades are mostly middle of the road but have large reserves. Lead and copper resources are above the world mine averages, while gold and the rest of the metals are found at below average per ton of rock mined. CGG is able to mine profitably due to tight controls on costs and the aforementioned consistent support from local state government on demand. The recent financing put pressure on profits with an eye to future growth in production and revenues.
The market has discounted the stock based upon its massive debt load and lack of recent profits for investors. The optimist might opine that now is the time to buy this stock at depressed prices. What is the stock worth? Let’s take a look at a few recent financial metrics.
Book value per share is $3.62 and the stock is trading at $1.14 right now, suggesting investors are heavily discounting the stock based upon the recent debt load and subsequent operating losses during CGG’s phase of expansion.
Right now the stock is cheap considering the mine expansion and recent increases in revenue. The debt load will reduce profits in the short term but provide needed boosts in profits in future years. Therefore, CGG is a stock that will be attractive more to long term investors, and not commodities traders. The stock could reward the patient investor handsomely, especially those with an eye to increases in either the gold or copper price, or both.
China Gold International has positioned itself to take advantage of growth coming from within China and with China’s business partners constructing the world’s largest trade route connecting most of the world’s major economies. Coupled with China’s lust for gold in recent years which will ensure production is gobbled up at market prices, the company looks well positioned to realize the increased revenue targets envisioned by management.
The main risk factors for this company are economic deflation, negatively impacting base metal demand and prices. However, in such a scenario gold is very likely to increase significantly in price, bolstering revenues for one of the company’s core products. By product credits, even at depressed prices, are likely to positively affect profits on the gold mining in a rising gold price environment. But negative cost pressures on the Jiama base metal mine might cause revenues to fall in future periods.
The price for the stock is depressed below what the book value says it is worth, which presents investors with a buying opportunity. Whether or not the stock performs in line with the company’s projects will determine whether the market accepts the risk and rewards the company with stock value that more accurately reflects the resources the company has developed.
Chris Marcus at Arcadia Economics recently spoke with CEO Jerry Xie to discuss China Gold International’s plans for expansion and what the future for the company holds.