Corporate Strategy

China Precious Metal Resources (CPM), a Chinese gold producer, is poised to maintain a strong output growth by continuing market consolidation, and aims to become one of the county's top five gold producers within the next three years.

CPM currently owns gold resource totaling 7.3 million ounces or 220 tons, its chief executive officer Zhang Shuguang told China Daily. In 2011, the company produced 2.7 tons of gold and the output for this year is expected to be between 3.5 to 4 tons, Zhang added.

CPM owns five operating assets in three different provinces (Henan, Yunnan and Inner Mongolia) on the mainland, and it is already the largest gold producer in Henan and Yunnan province. CPM recently completed the acquisition of its fifth asset - Hengyi project, which has two mines located in Yunnan Province, at a cost of around $315 million.

"The gold reserve in Hengyi's mining areas is 56.7 tons, but there are huge amounts of gold (deposits) in the prospecting areas," its chief financial officer Zhang Liwei told China Daily.

He said that by 2014, Hengyi will process about 2,000 tons of ore daily and the gold output is expected to be 1.5 tons per year; with annual gold output reaching 2 tons by 2016.

Previously, CPM was in the edible oil business operating under the name of China Force Oil & Grains Industrial. By disposing of that business, which it started in 1999, the company became a gold producer in 2009. Although the company is "young", it has already built up a strong record with increasing reserves and resources through acquisitions.

Duncan Chan, an analyst at ICBC International, issued a report saying that the Hengyi acquisition marks a new milestone for CPM, as the new project will boost its total gold resources by 30 percent to 234 tons, or 24 percent of compound annual growth rate for 2010 to 2012.

Zhang Shuguang pointed out that the scale of the total assets it owns is already very large to CPM, so its priority now is to focus on the integration of small-scale, high quality resources that are located nearby its own mines.

"By continuing to consolidate small private gold mines in Henan and Yunnan as well as increasing production capacity at the gold mines we already have, our output is expected to steadily increase," said Zhang Shuguang.

According to CPM, the annual compound growth rate of its gold production for 2011 to 2014 is projected to be over 30 percent. In three years, its output of gold will reach 6 to 7 tons per year.

"According to our calculation based on technical reports, our annual gold production is expected to be between 6 to 7 tons in three years," said the CEO.

He said the company is aiming to become one of the top five gold producers in China by around 2015, and expects to be ranked as one of the industry's giants like China National Gold Group Corporation, Zijin Mining Group, Shandong Gold Group and Zhaojin Mining Industry.

Zhang Shuguang stressed that unless there is another major asset acquisition, the company has no plan to raise extra money from the capital market.

Zhang, who is very bullish about the gold price in the future, said that currently the annual gold production in the Chinese mainland is around 400 tons, but the country still needs to purchase around 400 tons of gold from overseas every year.

"Backed by the huge demand from China as well as the fact that gold is a non-renewable resource, the major trend of its price should be upwards," he said.

The company's CFO Zhang Liwei said for every 1 percent increase in gold price, CPM's net profit will increase by 1.2 to 1.3 percent.

In the research report issued by ICBC International, it projects CPM's compound annual growth rate of net profit for 2012-2014 to be 27 percent, which is based on a 23 percent compound annual growth rate for mining and processing capacity.

"Based on a consensus gold price forecast, we expect CPM's gross margin would be in the range between 59-64 percent in the period 2012 to 2014; EBITDA margin would be between 69 to 76 percent over the same period," Duncan Chan said in the report.

"CPM's net profit would increase 2 percent for every 1 percent increase in gold price, per our sensitivity analysis," Chan added.

sophiehe@chinadailyhk.com

(HK Edition 12/07/2012 page2)