China Gold (TSX: CGG, HKSE: 2099) – Everything is Going Great Except For The Share Price!

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China Gold International
  • TSX: CGG, HKSE: 2099
  • Shares Outstanding: 396M
  • Share price C$0.46 (04.06.2020)
  • Market Cap: C$180M

Interview with Jerry Xie, Executive Vice President and Corporate Secretary of China Gold International Resources Corp. (TSX: CGG, HKSE: 2099).

We previously spoke to Xie in mid-February. It was a story that intrigued us. On paper, it looks operationally strong, but the declining share price paints an entirely different picture. We caught up with Xie to get to the bottom of the important questions.

Matthew Gordon interviews Jerry Xie, 3rd June 2020


China Gold is a gold producer that operates two producing mines: the CSH Gold Mine in Inner Mongolia Region, and the Jiama Copper-Polymetallic Mine in Tibet Region.

First, let’s cover 2019: China Gold hit its guidance numbers. Its revenue increased by 15% to US$657.5M from US$570.6M for the same period in 2018. China Gold’s total gold production remained consistent at 215,000oz: the same figure as in the previous year. This makes the company a consistent mid-tier gold producer. The company’s total copper production increased by 14% to 62,533t, up from 55,025t in 2018. China Gold has been churning out the cash: net cash generated from operating activities increased by 2% to US$158.3M, up from US$154.9M in previous year.

If investors were to judge China Gold off these operational figures alone, they’d be feeling optimistic. However, Xie is honest: the company has struggled with its net profit. Jiama is the asset that poses the problem, and the uneconomic low-grade, open-pit, at-surface ore has been the issue. To make the process more efficient, Xie and his team are trying to change things around. He is going to drill out a greater quantity of higher-grade underground ore to replace some of the existing low-grade ore. Jiama’s processing design capacity is 50,000t per day. Only 17,000t per day currently comes from the higher-grade underground resource. The remaining 33,000t comes from the surface. China Gold wants to bring the 17,000t of ore up to 20,000t. In 2H/20 to 1H/21 the company wants to increase it further to c. 30,000t. This is the number one optimisation that China Gold is looking at to resolve its issues with net profit.

The Q1/20 results are extraordinarily impressive.

Revenue increased to US$148M compared to US$145.6M in 2019. Mine operating earnings increased by 19%. Cash flow increased by a huge 129%. Total gold and copper production has also increased, going up by 18% to 51,829oz, and by 9% to 35.7Mlbs. In Q1, Jiama Mine produced 16,185t of copper, an increase of 9%. The total production cost of copper per pound after by-products and the cash production cost of copper per pound after by-product have decreased courtesy of higher recovery rates of copper.

Gold production at the CSH Mine has increased by 23% to 35,297oz. The Q1 total production cost of gold decreased to US$1,361/oz compared to US$1,373 for the three months ended March 31, 2019. However, the cash production cost of gold did increase to US$995/oz because of “fewer mine tonnes.”

These are some exceptional numbers, and Xie is confident the company will continue in this form. So why isn’t the market biting? Based on China Gold’s analysis of the problems, there are two identifiable issues. This year, the 3-year US$500M bond matures. Xie aims to renew this bond in July; this is China Gold’s first priority. While the underwriters are confident and positive, it is obvious why the market is nervous about this. Is there a backup plan in case things go wrong? I suspect China National Gold, their largest share holder and China’s largest gold producer, would step in. The current bond term is 3.25%, and Xie estimates that new bond would remain around this level.

China Gold has not been significantly hampered by COVID-19, as evidenced by the operational successes. Xie himself claims that the marketing roadshow doesn’t take place in person anyway.

In March, China Gold appointed Mr. Liangyou Jiang, Chief Executive Officer of the Company, as Chairman of the Board. Why? Xie informs us that it was a planned change to improve the governance structure. He just wants to see the company grow; so do China Gold investors! With a market cap of around 50% of the pre-COVID level, I feel that this could be a real opportunity for a quick return.

What did you make of Jerry Xie and China Gold? Comment below and we will respond to you.

Company Website: http://www.chinagoldintl.com/

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