Asset Disposal Makes Kingold One Of The Cheapest Ways To Own Gold In The World

Summary

  • Kingold just sold their entire Real Estate Development investments for a price substantially above all expectations.
  • Book Value per Share will climb north of $5 per share.
  • The Book Value massively understates the Net Asset Value. Gold bullion is valued at cost. Valued at market, the NAV is over $7 a share.
  • With the real estate gone, the NAV is almost entirely gold and cash. It's the Gold Stupid!
  • The core operating business of jewelry manufacturing is highly profitable and thrown in for free.

Background

For background on Kingold (OTC:KGJI) and our original investment thesis, which we wrote when the stock was selling at $1.40, please refer to our original SA article on May 2nd.

Kingold is China's largest independent gold jewelry manufacturer. The core manufacturing business is highly profitable and growing.

However, it is the accumulated reserves of gold bullion that has caught the eye of savvy gold investors looking for hidden value. Kingold owns 15.8 million grams of gold bullion built up over 10 years. At least 12.5 million grams are surplus to the inventory needs of the business. The book cost of their gold bullion reserves is $503 million but the market value is closer to $680 million. Prior to this announcement, the value of gold and cash accounted for 69% of the company's assets. This announcement means that 90%+ of the company assets will be gold and cash.

In our previous article, we carefully set out our calculations for a base case NAV of $5.53 per share and an aggressive case for $6.54 per share. We were too low on all counts.

We also identified four potential catalysts that could cause the share price to reflect underlying value over the next two years. We set a year-end target share price of $1.90 and a longer-term target of $6. We were too conservative on our timing and we missed altogether a rather obvious fifth catalyst (a rising gold price!).

Since last May, the Net Asset Value has risen substantially due to:-

1. The rising gold price.

2. Retained earnings from the jewelry business (this is the smallest of the three)

3. Last Friday's unexpectedly large gain as they exited their real estate investment

At $2.00, the stock is much cheaper now than it was at $1.40.

The Disposal of their ENTIRE

This article was written by

Partner at Investment Adviser to a Family Office. 30 + years as a professional investor in London and New York Retired after 20 years as Chief Investment Officer of $50 billion+ fund. Looking globally for special situations where we can uncover complex and compelling value

Disclosure: I am/we are long KGJI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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