“Chinese Gold Could Pay 100% More than US Gold over theNext Two Years”

by Travis Johnson, Stock Gumshoe | January 5, 2011 2:48 pm

If you’ve been a citizen of Gumshoe Nation for more than a
year or so, this latest teaser from Matt Badiali[1] for his S&A
Resource Report might sound a bit familiar, it’s all about buying
Chinese gold[2] miners because of China[3]’s voracious appetite for gold
— and because these particular miners have the state’s backing.
Familiar? Yes, that’s because he made a similar pitch back in 2009,
with many parts of the teaser ad being identical — but because
it’s been so long and there have been changes at the companies he
teased back then, including at least one of them being taken over
at a nice premium, I thought I should come back and see what he’s
teasing now. Here’s the lead-in, just to get the juices flowing:

“It’s no secret that China has gone crazy for
gold. “Over the past five years, the country’s gold consumption has
grown by whopping 84%. “The Standard Bank says Chinese officials
have been secretly buying massive quantities of gold from South
Africa[4], Russia[5] and South America. “And not long before that,
National Geographic Magazine reported that for the first time China
had surpassed the U.S. as a buyer of gold jewelry. “But here’s the
amazing thing few investors realize… “Behind the scenes, in a
move that has gone almost completely unreported in the Western
press, the Chinese government has helped create a gold investment
that could dwarf the returns of gold bullion, ordinary gold stocks,
or any other type of gold investment you’ve heard of before. “I
wouldn’t be surprised if you see gains of 500% or
more.”

I won’t go into all the details in the
tease and bore you, but basically what Badiali is saying is that
the Chinese are creating publicly-traded “champions” in the gold
mining business, much like they did with China Life Insurance[6],
PetroChina, China Mobile and the other industry leaders that were
formed from and with the backing of the state and state-owned
companies. And, naturally, in a shot across the Gumshoe’s bow, he
teases us about some of his faves in this new class of Chinese gold
investments. Here are the hints:

“GOVERNMENT GOLD
PARTNER #1: “The first gold company I want to tell you about has
deep connections with the Chinese government.For example, they have
a long–term deal with the China National Gold to “review third
party mining operations and exploration projects in China that may
be of interest to both parties.”Also, part of this company was
actually formed by key members of China’s National Non–Ferrous
Metals Industry Corporation, a state–owned company. “It’s no
surprise, of course, that this company is the largest gold foreign
producer in China today… and controls the country’s 2nd largest
mine. “In short, there’s no foreign company in China that can get
projects done like this firm can. I think it’s absolutely a
no–brainer to own the biggest foreign producer in the world’s #1
gold–mining country. “The important point is, this is the best gold
producer in China and among the top gold producers in the world. “I
believe very strongly that this company will become the next major
gold producer, right up there with Goldcorp, Barrick, and Newmont.
The time to get in is now.”

OK, so this one
doesn’t need to stew very long in the Thinkolator — this is
Eldorado Gold (EGO)[7], and they do indeed have that agreement with
the China National Gold Group (though the agreement dates from
2003). They operate gold mines in China and Turkey and an iron ore[8]
mine in Brazil[9], along with earlier-stage projects in all those
countries and in Greece[10]. They also took over one of the companies
that Badiali teased last time around, Sino Gold, which in turn did
own that second largest gold mine in China (the Jinfeng mine).
Eldorado has grown nicely over recent years, and is now one of the
largest gold miners in the world as measured by market
capitalization — it is not quite up there with Goldcorp, Newmont
and Barrick, but there aren’t many other miners that are bigger
(EGO has a market cap around $10 billion, similar to Agnico-Eagle
and large enough so that they each make up roughly 5% of the gold
miners ETF (GDX)). They have kept costs relatively low, claiming
themselves to be one of the lowest cash-cost producers, so they’re
experiencing some margin expansion thanks to the climbing gold
price, and they’ve also become profitable and upped their reserves
numbers considerably over the last few years — which is why the
market cap has climbed. The PE is right in line with Agnico-Eagle,
meaning it’s about twice as high as Barrick’s — which is probably
fitting, given the growth prospects of those two companies relative
to the far larger Barrick, which has a big hump to climb (either
through exploration or acquisition) to make meaningful production
growth at their size. Eldorado’s biggest single mine is in Turkey,
but Jinfeng and Tanjianshan in China together are roughly similar
in terms of annual production. They seem to be well underway at
exploring and developing some additional mines and have recently
brought a couple smaller projects on line, so there is probably
some growth potential. I don’t know EGO well, but certainly many of
the gold fans out there have also been noting that the large cap
miners in general are now undervalued relative to the gold price
and to junior, more speculative miners — largely because margins
have picked up over the past year (keeping fingers crossed on
energy prices, which are a large input cost), so these miners
should continue reporting blowout profit numbers in future
quarters. Of course, only the huge or the challenged ones look
genuinely cheap based on things like the PE ratio, but that’s
rarely the driving force in valuing a miner — heck, it’s only the
top tier miners who are reliably profitable at all. So that’s one
of the Chinese gold guys — how about another?

“GOVERNMENT GOLD PARTNER #2: “The next China gold
company I recommend you own signed a 30–year joint–venture
agreement with the provincial mineral resource agency Qinghai
Geological Survey Institute in 2003. “It spent the next six years
exploring and drilling what will soon become a very profitable new
Chinese gold mine. “The company also received a 35–year business
license from the Chinese government (which allows it to work in
China through 2033) and recently signed a deal with China’s largest
national gold producer. “This company is likely to skyrocket in the
next few years, as production takes off. It will probably take
about 9 years to get the full 1.5 million ounces of gold out of the
ground. Early investors have the opportunity to make an absolute
fortune during that time. ”

This one, according
to the ruminations of the mighty Thinkolator, must be Inter-Citic
Minerals (ICI in Toronto, ICMTF on the pink sheets) — a new one to
me, and not one that was part of my article for Badiali’s last push
along these lines. They do have the largest Chinese gold producer
as a major shareholder (19% — that’s Zijin Mining), and a couple
big Hong Kong families own about a third of the shares, so there is
some strong local connection and backing. Their main asset is the
Dachang project, which incorporates a few different target zones
and has 43-101 compliant resources estimated (1.8 million ounces of
measured and indicated resources so far, though they think they’ll
be increasing that number with additional exploration). They do
indeed have a business license extension, which brings them out to
2033, and they say their exploration permits are all up to date,
though I have no idea when they propose to actually build the mine
— their investor presentations talk much more about their
strategic shareholders than about their development timeline, so
I’d infer that this means there’s a bit of waiting ahead, though I
didn’t look closely enough to tell you for sure. And that’s because
there’s yet another stock teased, and I’m but one Gumshoe —
intrepid or not, we must keep moving.

“GOVERNMENT GOLD PARTNER #3: “The third gold company I recommend
you buy immediately is a direct spin–off of China National Gold… a
state–owned enterprise. “In fact, the government still owns nearly
40% of this small company, and the company can leverage[11] the
government’s ‘engineering, operating, and financing capabilities
globally.’ “In short, the Chinese government plans to turn this
small operation into one of the world’s largest gold producers… and
I believe early investors have the chance to make 2,000% or more
over the next five years, as this all plays out.
“

This one, like Sino Gold/Eldorado, was part of
the original teaser back in 2009 — though it had a different name.
Formerly known as Jinshan and indeed 40% controlled (almost) by a
state-owned enterprise (China National Gold), this one changed
names over the Summer and is now called China Gold International
Resources (CGG is the new ticker at home in Toronto, but they kept
the old pink sheets ticker of JINFF). CGG’s main asset is the
producing Chang Shan Hao gold mine in China, which has seen big
increases in production since coming online a couple years ago, and
they have a still relatively small producing copper[12] mine in Tibet
called Jiama that they’re trying to dramatically increase in size
in the near future (they issued new shares recently to take over
the remainder of Jiama from their partner, Skyland). They do also
say repeatedly that they are partnering with China National Gold to
leverage that parent’s access to international deals, with a mind
to adding projects outside of China, but they don’t say anything
specific about where those projects might be (other than that they
might be in neighboring countries, like Russia or Mongolia[13], or not,
like Africa or Australia[14]) — so that part is apparently quite wide
open. So what do you think? Any interest in these three Chinese
miners? Worried about a gold bubble? Any other thoughts to share?
Let us know with a comment below.

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