China Gold International Escapes Debt Purgatory; Operations On The Mend

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This video is a follow-up to the article I wrote in February on China Gold International (JINFF). We update investors on the impending debt-apocalypse that many felt would derail the company in 2020. We also cover the following points in the presentation:

June Debt Restructure

  • China Gold was able to refinance $300 million at 2.8% in a very favorable debt term structure through 2023;
  • The previous debt issuance from 2017 was backed up by a letter of support from major shareholder China National Gold, a Chinese State Owned Entity (SOE).

Relationship with the Chinese Government

The relationship makes clear that the Chinese government is not going to allow China Gold International to fail. Reasons for this support include the following:

  • China buys all domestic gold production, as well as more in the international market, to support its currency and its economy;
  • The Belt & Road initiative connecting 73% of the world’s economy will need all of the copper that China Gold International can produce;
  • China’s long term plan is to become a dominant player in the world economy, and will use all domestic gold and copper production to support that goal.

Operational Notes

China Gold International has improved operations significantly by:

  • Reducing costs of mining and increasing margins from production;
  • Increasing revenues for same period, YoY;
  • Increasing both gold and copper production for same period, YoY;
  • Setting more aggressive targets for gold and copper production in 2020.

Outlook and Risks

I believe that the aforementioned reasons make the company more attractive for longer-term, value investors who look at distressed companies with good remediation plans. The stock once traded above $6 years ago, but is less than $1 now.

The success of this company will depend on whether the increasing returns from gold mining due to a rising gold price will offset the falling copper prices due to a deflation in the world economy.

The risks are that the below average grades for copper and gold are too much to overcome the cost reduction and efficiency efforts that China Gold has been making. Longer term, I believe copper demand will increase substantially due to world demand for more technical society in third world countries. However, in the short term, lower copper prices could continue to put increasing pressure on the company’s financials.

In the end, the company will not fail. At worst, it would be absorbed into the SOE that already owns 39%. But the government is going to support China Gold International as long as they continue to provide strategic reserves of both metals.

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