Chifeng Jilong Hitches A Ride On Market Gold Rush

Key Takeaways:                                                   

• Chifeng Jilong’s revenue rose nearly 17% in the first quarter and profits more than doubled to 202 million yuan 
• The company’s production costs fell 12% last year, enabling a rise in profit margin  

By Ken Lo

It could be described as a golden opportunity to raise extra cash. After inflation-wary investors sent gold prices to record highs, a Chinese miner of precious metals is hoping the red-hot bullion rally will add some sparkle to its IPO plans.

Global inflation soared over the past two years, boosted by pandemic disruptions and policy responses, followed by a severe energy shock from the Russian action against Ukraine. Sought as a safe-haven asset, gold has repeatedly hit record highs in an ascent to $2,500 an ounce on global markets, nearly 70 percent above its pre-pandemic level.

For financial planners at Chifeng Jilong Gold Mining Co., Ltd., the gold fever was a strong incentive to seek fresh funds through the equity market.

The Shanghai-listed mining firm applied on Aug. 30 to launch its shares on the Hong Kong Stock Exchange with Citic Securities as the sponsor, saying the money would be used to upgrade or expand existing mines, as well as pay for potential acquisitions. A report on IFR, a subsidiary of Reuters, put the miner’s fund-raising target at up to $200 million (1.43 billion yuan).

The company currently owns and operates seven mines in China, Southeast Asia and West Africa, where it extracts gold, industrial metals and rare earth elements, according to the prospectus. Gold is produced at six of the sites, four of them in China plus the Sepon mine in Laos and the Wassa mine in Ghana. The company also operates a polymetallic mine in China’s Jilin province and processes rare earth elements at its Laos site. Aside from mining, Chifeng Jilong operates a recycling business for electronic waste.

The company’s revenues rose steadily in the last three fiscal years, from 3.78 billion yuan in 2021 to 6.27 billion yuan a year later and 7.22 billion yuan in 2023. In the first quarter of 2024, turnover rose nearly 17% to 1.85 billion yuan from the year-earlier period.  

Over the same timeframe, annual profits were 582 million yuan, 451 million yuan and 804 million yuan, with 202 million yuan logged in the first quarter, 166% more than in the first three months of last year. The profit margins worked out at 15.38%, 7.2% and 11.1% for the three years, followed by 10.9% for the first three months of this year.

A glittering gold price naturally benefits the miners, whose shares tend to track the bullion market. However, the metal price is just one of many factors feeding into a mining company’s finances and market value, such as extraction technology, the scale of production and industrial polices. These can moderate or boost the correlation with the gold price. 

For example, the gold price has jumped 29% in the past year while Chifeng Jilong’s stock climbed a less lofty 10.7%. But over a five-year period, the gold price soared 66% while Chifeng Jilong’s stock more than doubled. 

Industry Ranking 

According to an industry analysis from Frost & Sullivan, Chifeng Jilong expanded its gold output at a faster pace than its Chinese listed peers over the past three years, with production growing at a compound annual growth rate of 33.1%. In terms of output, the company ranked fifth, producing 461,500 ounces of gold last year. It also placed fifth among China’s publicly traded gold miners for the scale of gold resources, at 14.6 million ounces.

The report cited in the prospectus also found that the cost of producing gold at Chifeng Jilong’s mines fell 12% to $1,179.1 per ounce last year, helping to boost the miner’s net profit margin by nearly four percentage points to 11.1%.

Meanwhile, the revenue share from overseas mines has risen, boosted by the launch of gold mining operations in Ghana in 2022.  Mining within China made up 28.1% of total revenue in 2023 but the proportion fell to 23.6% in the first quarter of this year, while the contribution from Laos and Ghana rose from 71.9% to 76.4%.

The prospectus noted that Chinese mines denominated their finances in renminbi. But the company’s big revenue stream from overseas mines adds foreign-exchange effects into the equation, as gold sales from Laos and Ghana are made in U.S. dollars and operating costs are mostly denominated in local currencies. The Laotian Kip and Ghanaian Cedi have tumbled against the dollar over the past three and a half years, to the company’s benefit. But if the currencies strengthen against the dollar in the future, Chifeng Jilong could face foreign-exchange losses.

Cash flow conditions have also risen along with the buoyant gold price. As of the end of March, the company could draw on 1.32 billion yuan in cash and cash equivalents, 2.46 billion yuan worth of gold-based inventory, 1.01 billion yuan of short-term loans and 1.32 billion yuan in long-term lending. By the end of June, cash and cash equivalents had increased to 2.19 billion yuan.

Currently, Chifeng Jilong is worth about 28 billion yuan on China’s A-share market. If the first-quarter profit of 202 million yuan was sustained through the year, the company’s forward price-to-earnings (P/E) ratio would come in at 34.7 times. That would place it between fellow gold producers Shandong Gold Mining (1787.HK) at 22 times and Zhaojin Mining(1818.HK) with a ratio of 45 times. On that basis, Chifeng Jilong should be able to persuade some investors to get on board its listing and take a ride on the gold market.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.