Gold Bull Market: Nearly 20B Profits

Continuous high gold prices have put companies in the gold industry in different situations.

Profits of upstream mining companies continue to grow, while the business risks for downstream gold jewelry sales enterprises are increasing.

Recently, international gold prices have reached new highs again.

How is the performance of listed companies in the gold industry on the wind?

According to the financial statistics found, as of August 23, 2024, among the 12 gold mining companies (classified by Shenwan Precious Metals, including gold mining and smelting, the same below) in A shares, 10 companies have released their performance in the first half of the year (including forecasts), with a total net profit attributable to the parent company of at least about 19 billion yuan, an increase of 6.2 billion yuan compared to the same period last year's 12.8 billion yuan, an increase of about 48%.

Among them, many companies have set a new high in performance since going public.

The data from Dongfang Fortune Choice shows that among the five gold mining companies that have disclosed their semi-annual reports, four companies have set a new high in net profit attributable to the parent company in the first half of the year since going public; among the companies that have disclosed performance forecasts, two companies have set a new historical high in the minimum net profit forecast.

Especially in the second quarter when the gold price was running at a high level, the net profit of most gold mining companies continued to grow.

The data from Wind shows that among the aforementioned 12 gold mining companies, nine companies' net profit attributable to the parent company in the first quarter increased by more than 20% year-on-year, and six companies increased by more than 50%.

In the second quarter, as of August 23, among the five companies that have released their semi-annual reports, three companies' data growth rate exceeded 30%.

Among them, Zijin Mining's net profit attributable to the parent company in the second quarter set a new high since its listing on A shares for 16 years, and several other companies have released forecasts that this data will continue to grow.

Opportunities and risks coexist.

The continuous rise in gold prices has cooled consumer enthusiasm.

Affected by this, the performance of many gold jewelry retail companies declined in the second quarter.

Luk Fook Group's (00590.HK) retail revenue in the second quarter fell by more than 20% year-on-year, among which the same-store sales revenue of gold fell by more than 30% year-on-year.

Xiao Zhang, who got married at the end of July 2024, went to see gold jewelry in May, and because the price was too expensive, he wanted to wait for the price to fall before buying the gold jewelry needed for the engagement.

It was not until three weeks before the wedding that he bought the required gold necklaces, bracelets and other products.

Li Zhongliang, the investment manager of Cheese Fund, said that the performance of gold jewelry retail companies in the second quarter was low, affected by a combination of factors such as consumer behavior, rising costs, discount promotions, and seasonality.

"When the gold price rises too fast, consumers may adopt a cautious attitude and wait for the price to fall before choosing to buy, leading to a decline in demand in the short term."

Behind the big increase in the performance of gold mining companies is the recent historical high of gold prices.

On August 20, the spot gold price in London rose to $2,531.67 per ounce, and the gold price on the COMEX of the New York Commodity Exchange rose to $2,570.4 per ounce, both of which set new highs.

After the Chairman of the Federal Reserve, Powell, released the signal of interest rate cuts, on August 23, the spot gold price in London jumped to $2,518.33 per ounce, closing at $2,512.01 per ounce, an increase of 1.11%.

On the same day, the gold price on the COMEX of the New York Commodity Exchange closed at $2,548.7 per ounce, an increase of 1.27%.

Data from the World Gold Council shows that the gold price rose by 12% in the first half of 2024, and most of the time in the second quarter, the gold price was above $2,300 per ounce.

Although the rise in gold prices has improved the performance of gold mining companies, these companies are also facing some difficulties.

One of them is the slow growth of China's gold production, mainly because the easily mined resources of old mines are gradually decreasing, and new mines are facing the problem of deep well construction.

Many market insiders believe that green sustainable development and overseas mergers and acquisitions will be the main investment directions for gold mining companies in the future.

Regarding the later trend of gold prices, many international investment institutions still see more.

UBS analyst Giovanni Staunovo expects that the gold price will reach $2,600 per ounce by the end of 2024.

Goldman Sachs analysts predict that based on expectations of interest rate cuts by the Federal Reserve and other factors, the gold price may rise to $2,700 per ounce by 2025.

In the view of Citibank, the gold price will reach $3,000 per ounce in the middle of 2025, and it also predicts that the average gold price in the fourth quarter of 2024 will be $2,550 per ounce.

Gold mining: profits continue to grow.

As gold prices continue to set new historical highs, gold mining companies have made a lot of money.

According to statistics, as of August 23, 2024, among the seven A-share gold mining companies with revenue over 5 billion yuan in 2023, five companies' net profit attributable to the parent company in the first half of 2024 (including forecasts) increased by more than 40% year-on-year.

Among them, Chifeng Gold (600988.SH) has a net profit attributable to the parent company with an increase of more than 100%, temporarily in the first place.

During the period, the company's net profit attributable to the parent company after deducting non-recurring gains and losses is expected to increase by 60% to 80%.

China's mining leader Zijin Mining (601899.SH), with a year-on-year increase of 0.06% to 150.417 billion yuan in operating income in the first half of the year, and a year-on-year increase of 46.42% to 15.084 billion yuan in net profit attributable to the parent company.

The company said that the increase in the output of gold, copper, and silver mines, and the rise in sales prices year-on-year, is the main reason for the company's expected increase in performance.

During the period, the company's gold mine output was about 354 tons, a year-on-year increase of 9.6%, and the increase was higher than the output growth rate of copper and silver mines.

Hengbang Shares (002237.SZ), which has built three sets of pyrometallurgical production lines, saw a year-on-year increase of 27.13% in operating income to 40.97 billion yuan in the first half of the year, and the net profit attributable to the parent company and the net profit attributable to the parent company after deducting non-recurring gains and losses were 300 million yuan and 500 million yuan, respectively, with an increase of 2.28% and 87.33%, respectively.

During the period, the company's loss of more than 300 million yuan due to hedging business contracts greatly reduced the growth rate of net profit.

The excellent performance of gold products has improved the company's performance.

Gold products, which account for more than 60% of Hengbang Shares' revenue, saw a year-on-year increase of 93.29% in the first half of the year, far exceeding the growth rate of silver, electrolytic copper and other products.

Shandong Gold (600547.SH), which has been included in Shandong Gold International (formerly Yintai Gold, 000975.SZ), saw a year-on-year increase of 42.27% and 46.35% in operating income and net profit attributable to the parent company in the first half of the year, respectively.

Shandong Gold International, which has four gold mines, is one of the main producers of gold in China, and its gold mine output in 2023 ranked sixth among China's gold mining listed companies.

Shandong Gold International summarized in its semi-annual report that the main drivers of performance are cost control, expansion of production capacity, strengthening of sales, increase of reserves, and focus on innovation.

In terms of products, the company's compound gold operating income increased by 22.06% year-on-year to 2.3 billion yuan during the period, higher than the growth rate of compound gold containing silver, lead-zinc concentrate containing silver and other products.

At the same time, the company's compound gold gross margin increased by 11 percentage points to 72% year-on-year.

Shandong Gold International's compound gold is mainly sold to gold refining and smelting enterprises, which are separated and refined by gold refining and smelting enterprises as standard gold and silver ingots for sale or sold to jewelry processing enterprises.

In terms of quarters, after the profit-making ability of the aforementioned seven gold mining companies increased in the first quarter, the net profit attributable to the parent company of five companies continued to grow in the second quarter.

In the second quarter of 2024, among the aforementioned companies, among the three companies that have released their semi-annual reports, two companies' net profit attributable to the parent company increased by more than 30% year-on-year.

According to the financial calculations based on the performance forecasts of the other companies, the net profit attributable to the parent company of three companies increased by more than 20% year-on-year.

Among them, Zijin Mining's performance in the second quarter was outstanding.

Compared with the year-on-year increase of 15.05% in net profit attributable to the parent company in the first quarter, Zijin Mining's net profit attributable to the parent company in the second quarter increased by 81.54% year-on-year.

In the first half of the year, the company's gold ingot sales volume and unit price both increased year-on-year, although the sales volume of gold concentrate declined, the unit price of the product increased significantly, driving the overall increase in revenue from gold mine products.

Wind data shows that in the second quarter of 2024, Zijin Mining's net profit set a new high since the company went public in 2008.

Gold jewelry: performance generally declined.

As of August 23, from the companies that have released their semi-annual reports and performance forecasts, unlike the continuous growth in profit-making ability of gold mining companies in the second quarter, the performance of many gold jewelry retail companies declined during the period.

Data from the China Gold Association shows that in the first half of 2024, China's gold consumption was 523.75 tons, a year-on-year decrease of 5.61%.

Among them: gold jewelry 270.02 tons, a year-on-year decrease of 26.68%; gold bars and coins 213.635 tons, a year-on-year increase of 46.02%.

"Planning to get married in 2025, the price of gold jewelry is too expensive now."

Huang Xing (a pseudonym), who works in Beijing, told the financial that he was preparing to buy gold bars after the price fell, and then find someone to process jewelry, which could save some money.

The China Gold Association said that the huge fluctuation of gold prices at high levels has increased the production and operation risks of gold processing and sales enterprises, reduced the purchase of wholesale and retail enterprises, and the processing volume of jewelry processing enterprises has decreased significantly.

The above impact has been reflected in the performance of gold jewelry retail listed companies in the second quarter.

Cuihua Jewelry (002731.SZ) is expected to have a net profit attributable to the parent company of 78 million yuan to 98.9 million yuan in the first half of the year, a year-on-year increase of 30.57% to 65.55%.

In the first quarter, the company's data was 60.2 million yuan, a year-on-year increase of 65.28%.

Based on this calculation, the company's net profit attributable to the parent company in the second quarter is about 17.8 million yuan to 38.7 million yuan, compared with 23.32 million yuan in the same period last year, with a year-on-year growth rate of about -24% to 66%.

Laisheng Tongling (603900.SH) is expected to have a net loss of 30 million yuan to 43 million yuan in the first half of 2024.

In the first quarter, the company lost 19 million yuan, which also means that the company continued to lose money in the second quarter.Laisen Tongling stated that in the first half of the year, the company continued to increase its efforts in expanding its gold business, with a year-on-year increase in operating income of more than 40%.

The proportion of gold business revenue increased significantly, but the gross margin of the gold business is relatively low, leading to a noticeable decline in the company's overall gross margin and failure to achieve profitability.

The performance of Hong Kong-listed gold jewelry retail companies was also affected, which was quite evident.

In the second quarter of 2024, Chow Tai Fook (1929.HK) saw a year-on-year decline of 20% in retail value (calculated based on the final retail price of products sold to customers), with Mainland China declining by 18.6%, and Hong Kong, Macau, and other markets declining by more than 20%.

During the same period, the same-store sales of Chow Tai Fook's gold jewelry and products (retail value of directly operated retail outlets opened before April 1, 2023, and still in existence as of June 30, 2024) declined by 27.9% year-on-year in Mainland China, and by more than 30% in Hong Kong and Macau.

Chow Tai Fook said that the continuous impact of the macroeconomic environment on consumption, coupled with the high gold prices, affected the demand for gold jewelry in the second quarter, which is a phenomenon across the industry.

Luk Fook Group's retail revenue in the second quarter of 2024 declined by more than 20% year-on-year, with same-store gold sales declining by more than 30%.

The company said that the increase in gold reserves by central banks of various countries and the ongoing international geopolitical tensions have led to a surge in gold prices since March 2024, reaching new highs repeatedly.

"This situation intensified in April, and coupled with the high base effect, it further affected the sales performance of gold products."

Looking at the regions, Luk Fook Group's same-store gold sales in Hong Kong and Macau declined by 35% in the second quarter, and by 19% in Mainland China.

Another Hong Kong-listed gold jewelry sales company, Chow Sang Sang (0116.HK), announced that the company's net profit for the first half of 2024 was between 500 million and 550 million Hong Kong dollars, a decline from the 827 million Hong Kong dollars in the same period of the previous year.

"The historical high gold prices and the challenges faced by the macroeconomy, leading to weak consumption, are one of the main reasons."

Li Zhongliang said that the low performance of some gold jewelry sales companies in the second quarter, apart from the high gold prices affecting consumer sentiment, the increase in raw material costs, and promotional activities, all directly compress the operating profit margin.

"The second quarter is the off-season for gold sales, and the rise in gold prices will also intensify this seasonal demand reduction."

How to deal with resource shortages?

Although gold prices continue to rise, the depletion of global gold resources remains a serious issue.

Therefore, the future investment direction of the gold industry has become a focus of attention for companies.

Green sustainable development and overseas investment are the two major directions that companies in the industry are concerned about.

According to data from the China International Gold Conference, in the first half of 2024, China's raw gold production increased by 0.58% year-on-year, with a further decline in growth rate compared to 2023.

The China Gold Association said that in the first half of 2024, although gold prices performed well, China's gold production did not increase as expected, mainly because the easily accessible resources in old mines are gradually decreasing, new mines face the challenge of deep shaft construction, and the requirements for safety and environmental protection policies are continuously increasing, leading to some gold mining enterprises reducing production, shutting down rectification, or being unable to continue production.

According to Chen Danwu, a senior consultant at the British Commodity Research Unit (CRU) Group, global gold mine production is expected to approach its peak around 2025, and will show a downward trend until 2028.

"Gold prices may continue to operate at high levels, and investors need to pay more attention to the sustainable development of resources and environmental protection in the future."

Shanjin International stated in its 2024 semi-annual report that the gold industry will show three major development trends in the future: global investment and mergers and acquisitions will become the mainstream, "going global" will become a strategic choice for Chinese gold mining companies; the new quality of productivity in the era of stock will become the key support for the transformation and upgrading of the industry, and technological innovation and management progress will become an important force to achieve the increase of reserves in existing mines and the efficient use of difficult-to-utilize resources; responsible gold mining will become the foundation for the healthy development of the gold mining industry, helping gold mining companies to achieve dual improvement of economic and social benefits.

In the view of Xu Jianzhong, the CFO of Shandong Gold Group Co., Ltd., green finance has brought new development opportunities to the gold mining industry, especially in terms of technological innovation and management progress.

Overseas investment is also a key focus for Chinese gold mining companies.

In recent years, the investment footprint of Chinese gold mining companies has spread across Africa, the Americas, Australia, and other places.

The Beladero gold mine under Shandong Gold is located in Argentina, the core asset of the Red Peak Gold's subsidiary Venus Resources is the Wassa gold mine in Ghana, Africa, and Zijin Mining's overseas gold mine layout involves Kyrgyzstan, Papua New Guinea, Australia, Colombia, and other places.

In the first half of 2024, Shanjin International implemented the acquisition of all the equity of the Canadian mining company Osino Resources Corp., with a transaction amount of about 368 million Canadian dollars, marking the first step in the international resource layout.

Through this acquisition, the company can quickly obtain high-quality resources and increase gold resource reserves, and it is expected to provide an annual gold production capacity of 5 tons after production.

In the view of Shanjin International, although gold prices have performed well, the growth of China's gold production has not met expectations, so making full use of overseas resources to fill the demand gap and improve the core competitiveness of gold mining companies has become a major trend for development.

The "Global Gold Yearbook 2024" (Chinese version) shows that in 2023, the global gold mining mergers and acquisitions transactions completed more than doubled year-on-year, reaching 21 billion US dollars.

According to the statistical data of the United States Geological Survey (USGS), the global gold reserves in 2023 were about 590,000 tons, with Australia, Russia, and South Africa accounting for 20.34%, 18.81%, and 8.47% respectively, and China's proportion of global gold reserves is about 5.08%.

In the view of Lu Shudong, the general manager of the Mineral Resources Department and International Cooperation Department of China National Gold Group Corporation, as China's demand for gold continues to grow, overseas mergers and acquisitions are of great significance for making up for domestic resource gaps and promoting the sustainable development of enterprises.

"Through technological innovation and international cooperation, Chinese gold companies can obtain more opportunities in the global market."