Stock Information

1

TICKER SYMBOL: SHSE: 600547 / SHA:600547

MARKET CAP: RMB 54.2 billion (June 2017)

INDUSTRY: Basic Materials / Natural Resources

Business Overview

Shandong Gold Mining Co., Ltd., better known as Shandong Gold, is a state-owned company that is involved in the exploration, mining and smelting of gold. The Company is also engaged in the purification, processing, manufacturing and distribution of precious metal, nonferrous metal products and gold jewelry. In addition, the Company is also engaged in the smelting of outsourcing gold.

The company was formed in 1996 and went public in 2003 on the Shanghai Stock Exchange. Today it is headquartered in Jinan city, located in Shandong province. It has 23,000 employees. In 2016 it produced 1.2mn ounces of gold, making it the second largest gold producer in China.

The company obtains nearly all of its revenues from gold products. Of its roughly RMB 50bn in 2016 revenues, approximately RMB 31bn was derived from the smelting of third-party gold; the rest was derived from gold that it mined itself, which carries a higher margin. 80% of its products are sold on the Shanghai Gold Exchange.

2016 revenues increased 28.9% YoY to reach RMB 50.2bn. Operating income grew 52.5% to reach RMB 1.99bn. Net profit grew 200% to reach RMB 1.29bn.

Peers include Zijin Mining Group (RMB 72bn market cap), Zhongjin Gold (RMB 35bn market cap), and Zhaojin Mining Industry Co. (RMB 20bn market cap).

Key Strengths

Strong balance sheet aids acquisition financing

The company has the lowest gearing level amongst peers at 14%; this allows the company to gain more favorable terms when obtaining equity or debt financing for acquisitions or development of new projects, such as the pending Veladero mine acquisition in Argentina.

Adept at cost cutting

Gross margins improved quarter on quarter in 4Q16 by 260 basis points to 10.2%, despite the declining price of gold. The company is taking efforts to improve efficiency. Since revenues are dictated by the market price of gold, cost efficiency measures are important to improving margins, as it helps distinguish itself from its peers.

Key Opportunities

Joint venture with Barrick Gold

In April 2017 Shandong Gold announced that it was planning to purchase a 50% interest in Barrick Gold’s Veladero mine in Argentina for US$960 million and also forming a partnership to explore joint development of the Pascua-Lama deposit. The Veladero mine has proven and probable reserves of 6.7mn ounces of gold, and indicated gold resources of 3.3mn ounces. It is expected to produce 770,000-830,000 ounces of gold in 2017. For comparison, Shandong Gold produced just 1.2mn ounces of gold in 2016. This indicates that the joint venture could substantially increase the company’s annual output.

Xiling mine in Shandong province

Shandong Gold in March announced that it had discovered 382 tons of gold reserves at its Xiling mine in Shandong province. The company notes that the volume could reach over 550 tons, pending exploration over the next two years. This would make it China’s largest gold mine; it would have a life of over 40 years.

Key Risks

Volatility of gold prices

The company’s revenues are dependent on gold spot prices, which can fluctuate in the short run. Prices are often heavily influenced by macroeconomic factors, such as the raising of interest rates. Gold is often seen as a defensive asset, or a safe asset that investors flock to during bear markets.

Slower than expected progress on acquisitions

There is the risk that the acquisition of the 50% stake in the Veladero mine falls through, which will impact future revenues. There is also the possibility that progress on other mining activities slows down due to unexpected reasons.

Valuation

The company is trading at 35x trailing earnings, whereas its competitor Zhongjin Gold and Zijin Mining Group are trading at 89x and 26x trailing earnings. On a price-to-book basis, Shandong Gold is trading at 3.5x book value, whereas Zhongjin Gold and Zijin Mining are trading at 2.6x and 2.6x book value respectively.

Shareholding Structure

State-owned Shandong Gold Group owns 44.8% through different entities. The next largest private shareholder is First Seafront Fund Management Co., which owns 3.08% of shares outstanding.

Financials for 2016

Income Statement

2016 revenues increased 28.9% YoY to reach RMB 50.2bn. Operating income grew 52.5% to reach RMB 1.99bn. Net profit grew 200% to reach RMB 1.29bn.

Balance Sheet

Shandong Gold has a total debt-to-assets ratio of 28.3%, on par with that of the previous year.

Cash Flow

Net operating cash flow was RMB 2.72bn, up from RMB 2.36bn in 2015.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ker Zheng’s personal capacity. It does not in any way represent those of his employer and other related entities. Ker Zheng does not own any companies mentioned.

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