3Q23 results in line with our expectations

Chifeng Jilong Gold Mining (Chifeng Gold) announced its results. In 1- 3Q23, revenue rose 13.10% YoY to around Rmb5.06bn; net profit attributable to shareholders rose 31.24% YoY to Rmb520mn; recurring net profit grew 33.49% YoY to Rmb563mn. In 3Q23, revenue rose 18.25% YoY to around Rmb1.69bn (-5.27% QoQ); net profit attributable to shareholders was Rmb208mn, turning profitable YoY (-12.17% QoQ). The firm's 3Q23 results are in line with our expectations.

Trends to watch Output and prices of mined gold both rise; cost reduction and efficiency enhancement continue. In 1-3Q23, output of mined gold rose 4.59% YoY to 10.23t. Gold ASP gained 13.66% YoY to Rmb443/g. We expect gold prices to continue rising as the US Federal Reserve rate hikes likely are nearing an end. Meanwhile, the company has shifted its business strategy to steadily increasing output while also reducing costs and enhancing efficiency. We believe the cost reduction in gold production has paid off. In 1-3Q23, the unit all-in sustainable cost (AISC) of gold fell 11.29% YoY. Unit cost of sales rose 9.91% YoY, mainly due to the impact of floods at overseas mines in July-August that resulted in slightly lower- than-planned mining grade and gold output. The impact of floods has ended. We expect costs to continue trending downward in 4Q23.

Rising output and cost control at gold mines take place simultaneously; production commencement at Phase I of Xidengping gold mine to further boost gold output.

The firm’s domestic mines: Jilong Mining’s concentrator capacity expansion project (increasing to 1,000t/day) has started, and the firm expects trial production in March 2024. Wulong Mining’s 3,000t/day concentrator has been completed and put into trial operation, and its processing capacity could continue to increase after its underground mining capacity improves, according to the company. The Phase I 140kt/yr mining and processing project of Xidengping gold mine started operation on October 25, and the firm expects its gold output to be 5,000t per year.

Overseas mines: The Sepon mine in Laos focuses on cost control and output expansion. The firm’s Discovery mine started mining in July 2023, and its recovery rate has improved significantly. Meanwhile, the firm continues to make new discoveries, and it expects the new project to enter the mining stage in 2024. The Wassa mine in Ghana is expanding production capacity. While the main mining area stabilizes production, the firm is exploring two new underground mining areas, 242 and B-Shoot South Extension, which should rapidly replenish ore volume and increase output for existing concentrators.

Third employee incentive plan shows confidence in future growth.

According to the firm's announcement, it has started the third phase of its share buyback plan. It plans to buy back up to 20mn shares (1.2% of total share capital) at no more than Rmb18/sh for employee incentives. As of October 18, the firm announced that it had repurchased 0.91% of its share capital at a price range of Rmb13.28-15.23/sh.

Financials and valuation

We largely maintain our 2023 and 2024 earnings forecasts, and the stock is trading at 25x and 18x 2023e and 2024e P/E. We maintain OUTPERFORM rating and target price of Rmb18.6, implying 31x and 22x 2023e and 2024e P/E, offering 26% upside.

Risks

Sharp fluctuations in gold prices; disappointing progress of projects; overseas geopolitical risks.