CHIFENG JILONG GOLD MINING(600988)：PREANNOUNCED 2Q23 EARNINGS UP QOQ;EFFORTS TO REDUCE COSTS AND IMPROVE EFFICIENCY PAYING OFF

　　Preannounced earnings: 1H23 -20.38% YoY; 2Q23 +234.26% QoQ
　　Chifeng Jilong Gold Mining preannounced its 1H23 earnings: Estimated net profit attributable to shareholders fell 20.38% YoY but accelerated 713.38% HoH to Rmb327mn. For 2Q23, net profit attributable to shareholders likely grew 6.29% YoY and 234.26% QoQ to Rmb252mn.The firm’s preannounced 2Q23 earnings beat market expectations, mainly due to rising gold prices and the firm’s efforts to reduce costs and improve efficiency.
　　Trends to watch
　　Preannounced 1H23 earnings down YoY, mainly due to tax expenses　and floating loss. Based on its announcement, Chifeng Jilong Gold Mining’s profit likely fell YoY in 1H23, mainly due to two factors. First, the firm’s corporate income tax expenses increased by about Rmb100mn YoY.Second, gold leasing exposure led to a floating loss of about Rmb37.55mn in 1H23, but the firm has completed hedging for its gold leasing exposure as of June 30, 2023.
　　Preannounced 2Q23 earnings improve markedly thanks to rising gold prices and efforts to reduce costs and improve efficiency. In　2Q23, the average price of gold rose 12.3% YoY and 6.5% QoQ to Rmb448/g, boosting the firm’s sales revenue. Based on its announcement, the firm has shifted the focus of its business strategy from substantial to steady increases in production while simultaneously reducing costs and enhancing efficiency. We estimate that the firm’s cost of gold sales in 1Q23 fell about 10% compared with 4Q22, and we think its cost of sales improved further in 2Q23 and this trend will continue in 2H23.
　　Increasing production and controlling costs at gold mines; rare earth business to become a new profit growth driver. Gold mining business:According to the firm’s announcement, its domestic gold mine expansion project - seeking increased production capacity of Jilong Mining’s ore processing plant to 1,000t/day - has begun, which management expects to reach designed capacity by end-2024. Wulong Mining’s 3,000t/day ore processing plant has been completed and put into trial operation, and we expect its mining capacity to improve gradually.
　　Chifeng Jilong Gold Mining targets controlling costs and expanding production at the Sepon mine in Laos. The firm plans to start mining in the Discovery mining area in 2023, and it plans to further improve metal recovery rate and reduce costs by optimizing reagents used in production.
　　The firm is expanding production for the Wassa mine in Ghana, and it has obtained open-pit mining licenses in the Benso I and DMH mining areas in 2022. The firm expects new mining areas to rapidly replenish ores and increase production for its existing ore processing plants.
　　Rare earth business: Based on its announcement, Chifeng Jilong Gold Mining has obtained about 32,000t of middle-weight and heavy rare earth resources in the Sepon mining area in Laos, and it is applying for mining rights and licenses for rare earth resources. The firm is also stepping up efforts to acquire rare earth resources in other regions of Laos.
　　Employee incentives showing confidence in future growth. Based on　the firm’s announcement, it has started the third phase of its share buyback plan and it intends to buy back up to 20mn shares (1.2% of total shares) at no more than Rmb18/sh for employee incentives. As of June 28, the firm has bought back shares equivalent to 0.11% of its total shares.
　　Financials and valuation
　　We keep our 2023 and 2024 earnings forecasts unchanged. The stock is trading at 25x 2023e and 18x 2024e P/E. We maintain an OUTPERFORM rating. As the firm is changing its business strategy and lowering its target for long-term production, we cut our target price by 22% to Rmb18.6 (implying 31x 2023e and 22x 2024e P/E), with 25% upside.
　　Risks
　　Sharp fluctuations in gold prices; disappointing progress of projects; overseas geopolitical risks.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。