Despite being more than halfway through 2024, gold prices are still on the rise. Data shows that gold prices rose by about 12% in the first half of this year. The closing price for Shanghai Gold Exchange at the end of June was 549.30 yuan/gram, up about 13% from the beginning of the year; many offline gold jewelry brands also quoted prices for jewelry gold that exceeded 700 yuan/gram.

(Chart of the trend of London gold closing prices in the past six months)

At the midpoint of the disclosure season for semi-annual reports, the gold price is repeatedly hitting new highs, also driving the performance of a group of gold sector listed companies to soar. Looking forward to the future, the gold market continues to have a high degree of certainty, and there may be an opportunity for valuation repair in the gold sector.

The rise in gold prices has driven the performance of gold stocks higher.

According to the Zhitong Finance and Economics APP, due to the strong performance of the gold market in the first half of this year, upstream mineral companies have achieved strong production and sales, and most of the companies that have announced performance forecasts in the gold sector recently have achieved significant double-digit profit growth, with Western Region Gold (601069.SH) turning losses into gains, and it is expected to have a net profit of 50 million yuan to 69 million yuan in the first half of this year.

In the performance forecast, most companies stated that gold production and sales prices in the reporting period increased compared to the same period last year. Among them, the net profit of Chifeng Jilong Gold Mining (600988.SH) increased the most in the first half of the year, mainly due to the sale by its wholly-owned subsidiary Chijin International of all its shares in Tiertuo Mining Industry, which had an impact on this period's profit and loss of approximately 78.4393 million yuan.

In addition, Zijin Mining Group (02899) has the highest net profit forecast, expected to achieve a net profit attributable to the parent company of about 14.55-15.45 billion yuan, an increase of about 41%-50% compared to the same period last year's 10.302 billion yuan, mainly due to the simultaneous increase in the quantity and price of gold, copper, and silver.

In addition, the successful acquisition of Yintai Gold Co., Ltd. by SD Gold (01787) has also driven the company's profits in the first half of the year. According to a recent announcement by Yintai Gold, the company intends to change its full name to "Shanjin International Gold Co., Ltd." and its stock abbreviation to "Shanjin International". It is reported that Yintai Gold is currently launching overseas mineral acquisition projects.

Looking back at past performance, the outstanding performance of the gold sector in 2024 continued the overall growth of the sector last year. According to Dongguan Securities statistics, as gold prices continued to rise, precious metal sectors achieved both revenue and net profit growth throughout the year, with the total operating revenue of the sector reaching 236.219 billion yuan, an increase of 15.98% year-on-year, and the net profit attributable to the parent company reaching 8.215 billion yuan, an increase of 31.00% year-on-year. Meanwhile, the gross profit margin of the sector was 11.53%, up 0.28 percentage points year-on-year, and the net profit margin was 4.06%, up 0.59 percentage points year-on-year.

In the first quarter of 2024, the precious metal sector continued its strong performance, achieving a single-quarter operating revenue of 68.759 billion yuan, an increase of 24.81% year-on-year and 15.31% quarter-on-quarter; achieving a net profit attributable to the parent company of 2.566 billion yuan, an increase of 67.16% year-on-year and 18.16% quarter-on-quarter. The gross profit margin and net profit margin increased by 0.76 and 1.32 percentage point, respectively, to 10.91% and 4.63%.

With declining resource endowments and rising costs, is the future of gold prices more likely to rise than fall?

Behind the high growth of a group of gold companies, the hot market for gold is not to be underestimated, but the proactive reduction of costs by digitizing and intelligentizing and reducing energy consumption are also performance growth factors that cannot be ignored.

According to Sinolink Securities statistics, among the major gold listed companies in 2023, the unit cost of gold production of Shandong Gold Mining Co., Ltd. (01787) increased by 3.68% year-on-year to 230.38 yuan/gram, and that of Yintai Gold Co., Ltd. increased by 5.30% year-on-year to 176.42 yuan/gram. Hunan Gold Corporation (002155.SZ) increased by 2.05% year-on-year to 251.50 yuan/gram, and Chifeng Jilong Gold Mining increased by 1.13% year-on-year to 280.20 yuan/gram. The growth rate of unit cost of mineral gold for the full year is generally down. By comparison, the compound growth rates of the above-mentioned companies' mineral gold costs from 2018 to 2022 were 9.63%, 10.46%, 9.86%, and 13.32%, respectively.

It's worth mentioning that behind the rising cost of gold companies year by year, on the one hand, is the continuous rise in inflation and energy costs, and on the other hand, the decreasing daily gold reserves, which also leads to high mining costs. The AISC curve of total maintenance costs in Q3 2023 shows that the AISC cost of 10% of gold production enterprises has risen to more than $2000 per ounce. Among them, the mining cost of Newmont, the world's largest gold mining company, also reached $1485 per ounce in 2023, a year-on-year increase of 22%. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.

According to the World Gold Council, the total amount of gold mined globally so far is 0.201296 million tons, while the amount of gold reserves already confirmed is 0.053 million tons. The amount of gold already mined is close to 80% of the total. In recent years, the scale of gold mining production has accelerated, but the discovery of new gold mines has gradually slowed down, and the depletion of ore resources and the continuous rise in global labor costs have increased market concerns about future gold supply. According to Ichimizu Yuichi, a representative director of the Japan Precious Metals Market Association, the current output of gold may be at its peak, then it will gradually decrease and stabilize at around 3,000 tons per year.

While the production on the supply side has hit a ceiling, the sustained bullishness in the gold price is driven by economic recovery, cooling inflation, and risk aversion. With the accelerated process of de-dollarization by central banks, the demand for gold purchases by central banks has exceeded expectations, and it will also support the gold price to be strengthened. Considering various factors, looking at the medium to long-term time dimension, gold prices are still more likely to rise than to fall. Recently, Citibank forecast that the growth of gold consumption and the potential buying behavior of central banks will drive the gold price to rise in the second half of the year, with spot gold trading reaching a record-high price range of $2400-2600 per ounce, and it may reach a price range of $2800-3000 per ounce by mid-2025.

As gold and resource companies, in addition to prices and costs, the amount of reserves is also an important factor in measuring the investment value of gold companies. Many factors affect the production cost of gold, depending on the processing method. Gold extracted from ore mined from a mine is referred to as mineral gold, while refined gold is gold that does not meet the quality standards purchased from other mining companies and then refined again. The two not only have different purities, but the cost of refining gold is much higher than that of mineral gold. The gross margin of refined gold is usually less than 3%, while the gross margin of mineral gold is around 30%-50%. Shandong Humon Smelting has a business gross margin of only 1.87% in 2023 despite being ranked high in gold production, mostly due to the purchase of refined gold. In contrast, in 2023, Zijin Mining Group's gross margins for gold and gold concentrates were 33.94% and 58.05%, respectively, and the gross margin of self-produced gold products from Shandong Gold in the same year reached 48.91%, a year-on-year increase of 5.57 percentage points.

Is buying mines and expanding still the main theme of the industry?

As precious metal and resource companies, in addition to prices and costs, the amount of reserves is also an important factor in measuring the investment value of gold companies.

Depending on the processing method, gold can be divided into different categories such as ore gold, refined gold, and standard gold. Ore gold is gold ore smelted from mines, while refined gold is gold with quality standards purchased from other mining companies and then refined again. The two not only have different purities, but the cost of refining gold is much higher than that of ore gold. The gross margin of refined gold is usually less than 3%, while the gross margin of ore gold is around 30%-50%.

Although Shandong Humon Smelting (002237.SZ) is ranked high in gold production, most of the gold was purchased refined gold, and its business gross margin for gold in 2023 was only 1.87%. In contrast, in the same year, the gross margins for gold ingots and gold concentrates from Zijin Mining Group were 33.94% and 58.05%, respectively, and the gross margin of self-produced gold products from Shandong Gold in the same year reached 48.91%, a year-on-year increase of 5.57 percentage points.

In recent years, leading companies such as Zijin Mining Group and Shandong Gold have launched a "buy, buy, buy" mode to expand their resource maps through investments in mines, mergers and acquisitions, and other means to further enhance their resource and cost advantages.

Since this year, Shandong Gold has not only announced plans to acquire the Xiling Gold Mine, the largest individual gold mine in China, but also announced that its subsidiary Yintai Gold intends to use cash of nearly RMB 2 billion to acquire the TwinHills gold mine project in Namibia held by Canadian mining companies. Meanwhile, Zijin Mining plans to acquire the LaArena mine in Peru owned by Pan American Silver for RMB 1.768 billion, which had a gold output of 0.0971 million ounces in 2023.

However, on the other hand, huge amounts of investment in expansion plans have made the company's debt soar. At the end of Q1 2024, Zijin Mining Group's debt-to-asset ratio was about 58.30%, and in June, the company announced a financing plan exceeding RMB 18 billion, which according to Wind's statistics, will be the largest financing in Zijin Mining Group's history.

In conclusion, in the current market where the gold price is generally expected to rise, listed companies in the gold sector are expected to usher in a "Davis Double-Click" of performance and stock prices. From a fundamental perspective, apart from the potential for growth in resource reserves and production, companies' ability to control costs is also a reflection of their operational capacity and worth paying attention to.