Seeking Alpha
Long only, value, contrarian, medium-term horizon
Profile| Send Message|
( followers)  

I have recently written an article outlining my stance on gold; I had been incredibly lucky because the day after I had published that article gold shot back above the key 1300 resistance level. My ego would like to claim credit, that either I had made an excellent call, or that my amazingly intelligent readers had bid up the market because so many people read my article (I crack myself up sometimes), but the fact is that I was lucky, and my timing is probably as good as yours. Though I am unsure if it will stay above 1300, from a technical perspective it would appear that it is in a fairly firm position. In this article I explain the pros and cons of a particular stock that I believe is currently positioned to benefit from a good gold price; its potential upside is great and its riskiness is relatively low.

Zijin Mining Group (OTCPK:ZIJMF) is one of the largest primary gold mining companies based in China, it operates China's largest open-pit gold mine and was responsible for 20.53% of China's total gold production in 2006. With output increasing from 49.28 in 2006 to 69 tons to 2011, this figure is likely higher in recent years. It is also a majority share-holder of Australian small cap Norton Gold Fields which is expanding operations there. Zijin's share price is down over 70% from its 2007 peak and down almost 50% for the year. Zijin shares many characteristics with other primaries; it is almost identically leveraged with long-term debt, while also maintaining a healthy reserve of current assets to stay liquid for the period leading up to a proper gold recovery. Unlike juniors, primaries like Zijin are more capable of surviving this period of gold undervaluation. However, Zijin differs in that it has additional advantages which arise from its:

Geographical Location

Demand for physical gold is led by the Asian markets, and with the recent restrictions imposed by India, China has assumed first place in this regard. Gold demand from China remains strong, imports peaking in May at 106 tons, dipping slightly to 101 tons in June. Domestic demand was filled by The Shanghai Gold Exchange at a whopping 1098 tons for the six months to July, nearly equal to the entire amount traded for the entire year before. This particularly large domestic demand positions Zijin Mining (HKSE:2899) particularly well; no matter the world's pessimism regarding gold, China would prove to be a ready buyer for its own gold, and even if China's appetite were to become satiated, Zijin would be the last miner to be hurt. Further, it would be unlikely for China to allow its largest domestic gold supplier to fail, as this would severely constrict its control of this resource supply.

The above advantages have allowed Zijin to turn a profit while other primaries write-down assets and generate losses. Though it has projected a profit decline of about 55% for this half of the year, the important fact to note is that it is still projected to be profitable and thus capable of surviving for longer.

Expansionary Policy

As I had mentioned earlier, Zijin continues to expand acquisitions in Australia while gold prices are down. By buying junior miners with insufficient financing while they are relatively cheap, it solidifies its position, ready to capitalize on gold's potential rebound. The July 25th approval for the acquisition of Kalgoorlie Mining Company via Norton is a case in point.

This comes despite frequent reporting that gold is a worthless yellow metal and the continuously repeated assertions that "Gold has fallen 22 percent this year as some investors lost faith in the metal as a store of value amid an equity rally and low inflation and concern that the Federal Reserve may slow the pace of monetary stimulus.", assertions that I personally find profoundly annoying; one announcement is necessary if a fact were true, twice is essential to inform those who missed out, thrice to be charitable to those unfortunates who have not heard of the internet or 'news'. When almost every article repeats an assertion I must say that journalists have stepped over the line and into overkill territory. I digress.

(Takes a deep breath) I will explain my pick for a particular junior miner in another article, assuming I am able to gather enough information to make a clear case. It is a riskier investment, and I am also waiting on its financial results for the six months up to 30th June so that I can be more confident in my recommendation.

Source: Zijin Mining: An Undervalued Gold Miner, Primed To Expand?