Rally in Chinese gold miners draws attention, stokes hopes of further gains

The prospects for Chinese gold miners are looking up if bullion prices can continue higher

PUBLISHED : Thursday, 14 April, 2016, 1:22pm
UPDATED : Thursday, 14 April, 2016, 1:24pm

China’s gold miners are expected to see higher profits this year on the back of higher gold prices, production cost reduction efforts and acquisitions, but analysts are selective on making “buy” recommendations given some stocks have already run ahead of fundamentals and the sustainability of the gold price rally is uncertain.

Gold prices have been ticking higher far this year although the risk of its moving lower has not been removed.

“Affected by easing expectations of an interest rate hike in the United States, the US dollar has been on a weakening trend, fuelling a rebound in the gold price,” Founder Securities’ analysts said in a note.

“But before the current US rate hike cycle ends, the gold price still has plenty of downside risks.”

Gold has rallied 16 per cent so far this year, amid heightened risk aversion among investors and lingering uncertainties over the global outlook.

The rally was also helped in recent weeks by easing expectations of a US interest rate hike this month, after Federal Reserve chairman Janet Yellen delivered dovish comments in March on the global economy and rate hike possibilities.

Analysts at China International Capital Corp (CICC) and BNP Paribas have both forecast the yellow metal will rise 7.8 per cent rise to US$1,250 per troy ounce this year this year. Spot gold was at US$1,252 per ounce in London early Wednesday.

Analysts expect Chinese gold miners to post higher profits this year, providing a rare bright spot among commodity producers.

Shanghai-listed Shandong Gold Mining is expected to report a 49.3 per cent rise in net profit this year to 876.23 million yuan (HK$1.05 billion), reversing a 29.4 per cent fall last year, according to an average of 8 brokerage analysts polled by Thomson Reuters.

The miner is in the process of buying 4.47 billion yuan worth of mining assets from parent Shandong that will boost future output.

Hong Kong-listed Zhaojin Mining Industry is tipped to post a 53 per cent jump in net profit to 471.5 million yuan this year.

Shangahi and Hong Kong-listed Zijin Mining is expected to report a net profit gain of 16 per cent to 1.92 billion yuan, reversing a 29.4 per cent profit slide last year.

Zijin is looking to raise gold output by 15 per cent this year thanks to acquisition of overseas mines last year.

An 8.4 per cent fall in last year’s average gold price from 2014 spurred Chinese miners to trim production at higher cost operations while allowing ushering cost-efficient new projects into production this year.

Shandong Gold is aiming for bullion output from its own mines to fall 1 per cent to 27 tonnes this year.

Output grew 1.23 per cent to 27.3 tonnes last year despite ore processing volume easing 1.68 per cent, thanks to higher grades of ore being processed.

The miner said in light of lower gold prices, it decided to cut processing throughput of ores from mines with lower grades and raise that of higher-grade ores.

Zhaojin, Shandong province’s largest gold miner, aims to produce 57.96 tonnes of gold from mining operations, down slightly from the 58.31 tonnes produced last year.

“This year we will not chase after higher output for the sake of growth, we would only go ahead on new projects that will be profitable,” chairman Weng Zhanbin told the South China Morning Post in an interview on April 6.

Zhaojin last year recorded a 32.3 per cent fall in net profit to 308.14 million yuan.

Excluding gains and losses that are non-recurring or unrelated to its core business, pre-tax profit fell 9.6 per cent to 460.2 million yuan thanks to a 7.7 per cent rise in output and a 4.7 per cent reduction in total per ounce gold production costs.

Similarly, Shanghai-listed Shandong Gold Mining is aiming for gold output to fall 1 per cent to 27 tonnes this year.

Eight out of 11 analysts polled by Thomson Reuters have “hold,” “underperform,” and “sell” recommendations on Zhaojin after its shares rallied 54.5 per cent from its yearly low in February.

The share closed Wednesday at HK$6.29, or 34.4 times this year’s forecasted earnings per share.

“Due to [Zhaojin’s] higher price-to-earnings valuation, we have raised our [6 to 18-month] target price to HK$4.9, but cut our rating to ‘reduce’,” said Guotai Junan International analyst Kevin Guo Yong in a note.

Five of 8 analysts recommend investors to buy Shandong Gold shares, which have risen 84.5 per cent from their yearly low in late January.

Ten out of 13 analysts gave Zijin a “buy” rating. Its shares have gained 46 per cent from the low in early February.