Key takeaways:
- Zhaojin Mining’s revenue and profit both fell last year, as a safety-based clampdown caused its gold output to drop 34%
- Company is expected to rebound this year as new mines start operating and output at existing ones returns to normal
By Tina Yip
Exotic metals like lithium and cobalt aren’t the only ones with soaring prices lately. Compounded by international geopolitical tensions, the price of gold has traded between $1,700 and $1,900 per ounce over the past year and even reached a record high of $2,000 earlier this month after Russia invaded Ukraine.
Speculators aside, one group that should benefit from those gains is gold miners. But that’s hardly the case with Zhaojin Mining Industry Co. Ltd. (1818.HK), whose 2021 financials released earlier this week show its revenue actually fell 10.3% to 6.86 billion yuan ($1.1 billion) last year. As that happened, the company’s profit almost completely evaporated, falling 96.8% to 33.70 million yuan. As its business wilted, the company also decided to forgo a dividend for the year.
While lousy, that performance was within market expectations. The day after the report’s release on Monday, Zhaojin’s stock dipped by a relatively small 1.1% to close at HK$7.13, and remained stable in the next few days. In fact, the shares have been relatively stable in a range of HK$5.30 to HK$8.70 over the past year, in sharp contrast to education and tech stocks that posted huge declines over that period.
Perhaps there really is something to be said for putting one’s savings in gold as a hedge against economic bad times. But we digress. Returning to Zhaojin, the weak performance stemmed from an industrial accident that, while not at one of Zhaojin’s sites, still reflects the frequently lax safety conditions at many Chinese mines.
That incident saw an explosion rock a gold mine in Shandong province on Jan. 10 last year, shocking the whole country. The province subsequently launched a large-scale inspection to clean up irregular practices, which directly affected Zhaojin. Its gold output declined by 33.58% to 23.66 tons last year, and its copper output also fell by a similar 38.12% to 7,216 tons. Those two metals, especially gold, are the company’s main revenue source, accounting for 86.2% of its total.
Despite that, the company made up for some of the lost ground by benefiting from high gold prices – a trend that should continue into this year. Goldman Sachs believes investors, consumers and central banks will want to purchase more gold to hedge against recent geopolitical uncertainties. Asia’s post-pandemic recovery is also expected to drive up demand, prompting Goldman to forecast gold could soar to new highs of $2,500 per ounce in the next six months.
Such gains would go a long way to fixing Zhaojin’s current woes. The company said its mines in Shandong were operating at only 50% of capacity at the end of last August, but the figure rose to full capacity by the end of the year. Output should receive a further boost from production upgrades at some mines, positioning the company for strong gains this year.
New mines coming onstream
In another positive sign, Zhaojin obtained a mining license for its Haiyu goldmine project in Shandong last July. The company first invested in the mine in 2015, and holds a 63.9% stake. Following receipt of the license, the project is set to start producing by the end this year. Zhaojin has sunk 7.3 billion yuan into the project, which is the biggest single gold mine in China and is expected to produce at costs 30% lower than the company’s other gold mines.
Outside China, Zhaojin also became the largest shareholder of Australian miner Tieeto Minerals, whose Abuja gold mine in West Africa will also start producing in the fourth quarter of this year. That mine has total reserves of around 45.1 tons, and is expected to produce more than 6.22 tons annually in its first six years.
With production returning to normal at its older facilities and newer mines coming onstream, it’s no surprise the market is still optimistic about the company despite its weak performance last year. Industrial Securities points out that past experience indicates gold prices might rise as the Fed raises interest rates this year. And as the Haiyu mine starts to produce, the company’s net profit could grow as much as at an average annual rate of 29% between 2022 and 2026, it predicted. With such strong prospects, it maintained its “overweight” rating for the company and set a target price of HK$12.50, more than 70% above the current stock price.
In valuation terms, Zhaojin posted meager earnings per share last year of just HK$0.012, giving it a meteoric price-to-earnings (P/E) ratio as high as 600 times. But Bloomberg forecasts the company’s earnings could return to a more normal level of HK$0.35 per share this year after its productive capacity is fully restored, bringing its P/E ratio down to a more realistic 20 times.
By comparison, Zijin Mining (2899.HK; 601899.SH) and Shandong Gold Mining (1787.HK) have P/E ratios of 12 times and 23 times, respectively, showing Zhaojin is somewhere in the middle in valuation terms.
Rising interest rises in the U.S. are a given at this point. But inflation, caused partly by rising commodity prices, will stay high in the short run, meaning real interest rates will remain negative. Against such a backdrop, gold always offers the best protection for investors. Zhaojin has stated clearly it will work full-time to catch up in production this year, with plans to churn out a total of 27.98 tons of gold, up 18% over the previous year. And output will continue to rise in the years ahead as more of its new projects become productive.
Philosopher Friedrich Nietzsche once famously said, “Whatever is gold does not glitter. A gentle radiance belongs to the noblest metal.” Perhaps that’s true. But after a lackluster year, Zhaojin is certainly hoping for a little glitz and glitter on its financial statements as it gets back track after last year’s setbacks.
