Zijin Mining, China's largest gold producer, is being hit by a lower gold prices and a decline in the gold content of ore at its mainstay mine.
Analysts said that although the Fujian-based metals miner and refiner had a string of new projects in the pipeline to help offset a decline in output from its Zijinshan mine, which is nearing the end of its life, their high production costs meant Zijin's future profits were likely to be lacklustre.
"Beneath the Zijinshan gold belt is a layer of copper ore, which will be mined, and Zijin has other gold projects with five to six tonnes of annual output in the pipeline," said Helen Lau, a senior analyst at UOB Kay Hian.
"Zijin is expected to be able to maintain gold output at 33 to 34 tonnes in the next few years even as Zijinshan's output dries up in 2018. The concern is if metal prices stay flat, and if Zijin's production costs remain high given the nature of its new projects,its profit [growth] will likely be sluggish."
Zijin's net profit is forecast to fall 5.6 per cent to two billion yuan (HK$2.5 billion) this year, and a further 4.4 per cent to 1.91 billion yuan next year, before rising 20.8 per cent in 2016 to 2.31 billion yuan, according to the average forecast in a Thomson Reuters analyst survey.
The company posted a 59 per cent fall in net profit to 2.13 billion yuan for last year. Excluding asset-impairment losses and investment income, operating profit fell 42 per cent to 4.8 billion yuan.
The decline was mostly to do with an 18.6 per cent drop in the average selling price of the gold produced by its mines, and a 6 per cent fall in copper's selling price.
The amount of gold produced by its mines slipped 3.3 per cent to 32 tonnes, while copper output grew 17.8 per cent to 125,571 tonnes.
Its unit gold production cost surged 26 per cent last year after rising 40 per cent in 2012 as the gold content of Zijinshan's ore dropped 12 per cent over the two years and the cost of labour, materials and other overheads grew.
Still, chairman Chen Jinghe said last month that Zijin's production cost was lower than that of many international miners with much bigger output.
Zijin also refined 77 tonnes of gold from third-party mines last year, making it the mainland's largest producer of gold. But that operation had a gross loss margin of 0.3 per cent.
The Zijinshan gold mine, which accounted for 37 per cent of the firm's gold output last year, has four more years of productive life. It had 27.7 tonnes of remaining proved reserve and 39.4 tonnes of probable reserve at the end of last year, compared with its output last year of 11.7 tonnes - down from 16.4 tonnes in 2012.
The gap was plugged by the Norton Goldfields mine in Australia, which Zijin bought in 2012; it produced 5.4 tonnes of gold last year.
Lau said Norton's output would peak at 6 tonnes, meaning new mines on the mainland would have to pick up the slack from the further decline of Zijinshan.
While Norton's total production cost fell to A$1,248 (HK$8,991) an ounce last year from A$1,709 in the second half of 2012, it is barely profitable given current gold prices. This year's average gold price is projected to fall 8.1 per cent year on year to US$1,297 an ounce after a 15.1 per cent fall last year, according to the average forecast of 31 analysts in a poll.
Macquarie Securities analyst Matty Zhao, who has had a "sell" rating on Zijin for more than a year, said it was difficult to recommend buying gold shares given the likelihood of the US dollar strengthening and interest rates rising, both of which would not be favourable for the price of gold.
Other analysts are more optimistic. "We may be at the point where physical demand for gold is picking up again," ANZ said in a research report.
The price of gold has been driven by consumer demand, primarily from emerging markets like China and India, after plunging 28 per cent last year in the steepest fall since 1981.
The fall - on expectations of the ending of ultra-loose monetary policy in the United States - ended a bull run lasting more than a decade that was fuelled by investment.
"China alone is absorbing … half the world's gold mine production," HSBC said in a research report. "A possible recovery in Indian demand, should the authorities reduce gold import tariffs, is potentially supportive."
India is holding elections this month, and the main opposition party - the favourite to win the polls - has spoken against current gold import restrictions. A new government is expected to be formed around June.
Evy Hambro, chief investment officer for natural resources equity at BlackRock, the world's largest asset manager, said he expected metal prices to be range-bound this year.
He said gold miners had been trailing their base metals peers in cost-cutting and rationalising operations.
"The gold companies are really a long way behind … it's a little bit like [their] executives have been swimming in the sea and they haven't any clothes on," he said.
"When the gold price fell suddenly last year, it's like the tide has been going out and all of their mistakes have been fully exposed, so they suddenly have to act in a desperate fashion."