Undervalued and Underappreciated, China Gold International Resources

The past years have been hard on mining companies and investors alike, but gold is capturing spotlight of the mainstream once again with global uncertainties, trade wars, and peaking of company valuations on the main markets. I am far from alone seeing this as a shift in the mining sector as fund and central buying inflows to ETF rose to over 1,100 tonnes, the highest levels since Q1 2016[1].

Quietly growing, passing milestones and achieving excellent growth is a half-forgotten gem of a discovery and successful operations. China Gold International Resources (CGG:TSX), formerly known as Jinshan Gold Mines (JINFF:US) is a ‘gold and base metal mining company engaged in the acquisition, exploration, development, and mining of mineral reserves primarily in China, but with ambitions to grow internationally. Many will remember that Robert Friedland’s Ivanhoe Mines owned 42% of Jinshan Mines. This company has taken that great gold asset, added a new one and looks toward the future with optimism through organic growth and Mergers and Acquisitions. The name China Gold International reflects that it is the international flagship vehicle for China National Gold, the parent company that owns 40% of the company is considered as a Red Chip company due to its listing on the Hong Kong Stock Exchange.

The Assets: Inner Mongolia & Tibet

China Gold International has a 96.5% interest in the Chang Shan Hao (CSH) Gold Mine in Inner Mongolia; and 100% interest in the Jiama Copper-Gold Polymetallic Mine in Metrorkongka County in Tibet. Two distinct producing assets together provide a portfolio of 35% gold 65% copper weighting. The Chang Shan Hao Gold Mine is entirely gold and has about a 7-year reserve while the Jiama mine, in Inner Mongolia is a copper, polymetallic producing asset with enormous growth potential. The Jiama mine is in Inner Mongolia, which is known as the Tibet Autonomous Region or simply as Tibet. This is an independent region Mongolia that is the largest subdivision of China. The main language is Mandarin. The region is under the Chinese national umbrella and would seek success for both the parent company as well as the flagship Western subsidiary.

This piece is a focus on the Jiama property as it provides enormous organic growth potential. This mine has about a 30-year life and China Gold is expanding with great operational success. The company took some time with their massive jump from producing 6,000 tons a day to the current 50,000 tons a day operation. The market has been anxiously waiting and with no news often people get worried and sell but we see a massive opportunity. Since 2015, the company has completed 32 drill holes totalling 30,096 meters. They are conducting a PEA and expecting ‘a significant increase in mineral reserves’.

But wait the debt!!!

Here we have a great undervalued stock with a solid backer, both through large institutional funds and the Chinese government who supported them in raising $1.2 billion BBB ($500 million of which is investment grade debt) at 3.25%. The company has access to a $14 billion credit facility! That is an astonishing number! When your children get older many years from now and they ask you what you did when the governments of the world were almost giving money away, what will you say? Tell your kids that you could not borrow money at those incredible rates, but you found a company with financial support and backing that were producing assets needed for financial stability as well as the electrification of the future. To put things in perspective this Standards & Poor’s (S&P) BBB investment grade debt is unlike the billions of junk bond debt that Netflix floats every quarter to create entertainment!!! China Gold International produces assets: physical gold which is on the rise and copper which is the catalyst for the electrification of tomorrow.

Buy the Numbers

More on these details in a later article but let us look at the facts:

  • A book value of $3.64 and the stock is trading at just over $1 on the TSX with 396 million shares outstanding and no options/warrants for around $400 million market capitalization
  • As of Nov. 1, 2019 the production profile on gold is 210,000 ounces gold and 121.3 million lbs copper and growing.
  • 2018 $250M EBITDA with $200M+ operation cashflow 2018 revenue of $570M – valuation at barely 1.5X one-year revenue and less than 2X EBITDA
  • 0.25 Price/Book Value versus 1.4 industry peer average
  • Over 30% Compound Annual Growth Rate growth revenue last 10 years

Aggressively looking: Merge or Acquire?

The company is not shy about its intention to enter the M&A market. Recently on a call with Jerry Xie, Executive VP for China Gold they expressed interest in deals up to $1 billion is size. This was stated recently in September 2019 at the Denver Gold Forum in a Bloomberg article:“We need more pipeline, especially in gold production. We’re currently looking for acquisition opportunities quite aggressively. We’re doing this on behalf of our parent company, not just for ourselves.”That comment was strongly reiterated in 2019 in an interview at PDAC with Small Cap Power. We have witnessed some incredible investment banking deals and mergers this year and although we are getting close to end of year 2019 there is still time left. The Financial Post reported on China Golds interest in adding to their pipeline and at that time Iamgold was the potential deal. The company can finance at incredible rates without diluting the stock leaving great value. Although the discussion with Iamgold has been tabled since oct.9th the future looks strong. The stock price is trading at a discount in part perhaps because the deal did not materialize and in part because of perception and politics.

This is not a technical issue, nor is it an operational issue or even and exploration issue and quite frankly those are the critical issues with any deal. Politics and PR are issues which can be resolved when you are dealing with a company with outstanding growth, stable funding source, and outstanding ability to generate operational cashflow.

You are not Alone

There is safety in investing where smart money is and whether I look at a junior explorer or an impressive producing operation like China Gold I want to know who is backing the deal. This company has institutional ownership with groups like 10% from Van Eck Associates, BlackRock, Morgan Stanley, and Dimension. What these reveals is that firms whom have great resources and depth of analysis see growth and opportunity in the stock. If you found out major shareholders in a junior miner has mining legends such as Beatty, Giustra, or Sprott in it, it would save you a lot of time in due diligence, as you know they have done the work and believe there is something tangible here. They represent long term money and will keep the company shares in good times and bad times. With smart money like China government and likes of Van Eck and Blackrock, this is a quality company that is quietly operating and growing.

This is a powerhouse of a company and there is a lot to consider and expand on. If you are a fundamental analyst who looks for value, market cycles and growth then you must look at this company. It is firm belief that this company suffers more from lack of marketing, awareness in the market and perception rather than any fundamental reason. The company will be releasing quarterly earnings on November 15th and this will provide further guidance moving forward but the expectations is that they will be strong. This is just an introduction piece to this opportunity but stay tuned for an in-depth look at the numbers and the details in the upcoming weeks. Stay tunes and watch for November 15th, 2019 when Q3 earnings come out!

[1] https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2019

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Securities Disclosure: I, Andrew O’Donnell, hold no direct investment interest in any company mentioned in this article. I was paid by a publisher for the piece.


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