October 05, 2010
Real Gold Mining (246 HK)
 COMPANY INSIGHTS
Target price
HK$16.17 (+17%)
Current price
HK$13.78
A real gold play
A fast-growing miner with increasing gold exposure
Real Gold Mining, HK$
17.0
Real Gold share price vs Gold price
R² = 0.7883
15.0
13.0
11.0
9.0
7.0
5.0
850
900
950
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
Gold price, US$/oz
Thomas Zhu
[email protected]
+852 3411 3717
We initiate coverage on Real Gold with a BUY rating and a share price
target of HK$16.17, based on the stock trading at 13.3x 2011e P/E.
Simon Francis
[email protected]
+852 3411 3713
Real Gold owns rich poly-metallic gold deposits in Inner Mongolia and
exploration and mining tenements in Guangxi, Yunnan and Jiangxi.
The company has successfully boosted its gold resources by 39% in the
18 months since its IPO, at average prices of just US$100-159/ounce
and has plenty of cash for further acquisitions. We view Real Gold as
one of the fastest growing gold companies in China and one of the
lowest cost gold producers globally.
Technical analysis contributed by:
Seung Min You and Sang Cheol Im
[email protected]
Samsung Securities Korea*
We expect strong share price performance to be driven by robust sales
volume growth over the next couple of years, as recently acquired
assets come on stream, further acquisitions, and high gold prices.
 SAMSUNG vs THE STREET
Further acquisitions not
factored in
 SUMMARY FINANCIAL DATA
No. of I/B/E/S estimates
Target price vs I/B/E/S mean
Estimates up/down (4 weeks)
1yr fwd EPS vs I/B/E/S mean
Estimates up/down (4 weeks)
I/B/E/S recommendation
7
+7%
1/0
+7%
2/0
Buy (1.71)
 We are slightly more bullish in the short term.
This suggests that, like us, the street is not
factoring in any further acquisitions.
Revenue (Rmb m)
EBITDA
Net Inc
EPS (Rmb)
P/E
EV/EBITDA
Div Yld (%)
P/B
ROE (%)
Source: Company data, Samsung Securities
This report has been prepared by Samsung Securities (Asia) Limited.
*Not licensed in Hong Kong nor carrying on any business in Hong Kong.
ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 35
12-08
312
194
104
0.47
na
na
na
na
42
12-09
1,011
767
527
0.78
9.2
7.7
0.0
3.2
35
12-10E
1,341
1,076
761
0.90
13.4
7.6
0.0
2.3
21
12-11E
1,608
1,353
970
1.07
11.3
5.6
0.0
1.9
19
12-12E
1,823
1,415
977
1.08
11.2
4.9
0.0
1.7
16
Real Gold Mining
 THE PITCH
 RETURN FORECAST
Real Gold owns three rich poly-metallic gold deposits in Inner Mongolia and
16 gold tenements in Guangxi, Yunnan and Jiangxi. The company has
boosted gold resources by 39% in the 18 months since its IPO and has
plenty of cash for further acquisitions. We view Real Gold as one of the
fastest growing gold companies in China and one of the lowest cost gold
producers globally. We expect strong share price performance to be driven
by robust sales volume growth, further acquisitions, and high gold prices.
Fundamentals
We expect Real Gold to deliver the fastest volume
growth among the major HK-listed Chinese gold
miners in 2009-12e and also the lowest production
costs.
Valuation
Our initial P/E-based target price is HK$16.17. Real
Gold is trading at a 15% discount to our target price.
Technicals
We expect an upward trend to become visible and
the company to challenge its historical high.
 VALUATION
P/E (adj) (x)
P/B (x)
EV/EBITDA (x)
Dividend yield (%)
ROE (%)
12-10E
13.4
2.3
7.6
0.00
21.2
12-11E
11.3
1.9
5.6
0.00
18.7
12-12E
11.2
1.7
4.9
0.00
15.9
 FUNDAMENTALS
 High quality poly-metallic gold deposits: Two of Real Gold’s mines in
Inner Mongolia enjoy large resources of ~85.5 tonnes and gold grades of
~10.8 g/t, which is high by global standards, and a third mine has very high
copper grades of ~2.2%. Real Gold has gold resources of ~164 tonnes
based on JORC and Chinese standards but this could be more than 220
tonnes if further exploration work is undertaken.
 Solid track record in acquiring resources: Three acquisitions since the
IPO in February 2009 have boosted Real Gold’s gold resources by ~39%
at a cost of just US$100-159 per ounce. Acquisition-led growth remains a
key strategy, which Real Gold has plenty of cash to execute.
 Strong volume growth: We expect production to rise from 3.6 t of gold in
2009 to 6.8 t in 2012e, a CAGR of 23% in 2009-12e. We believe Real Gold
is the fastest growing company among its major Chinese peers.
 Low production cost: We estimate Real Gold’s cash production costs at
~US$211/oz in 2010e, among the lowest globally.
 SAMSUNG vs THE STREET
Target Price
Samsung
HK$16.17
Street
HK$15.08
EPS 12-10E
EPS 12-11E
Rmb0.90
Rmb1.07
Rmb0.92
Rmb0.98
EPS 12-12E
Buy/Hold/Sell
Rmb1.08
Buy
Rmb1.00
Buy (1.71)
Business summary
Real Gold has 19 gold tenements with gold
resources of ~164 tonnes. The company sold
concentrates containing ~3.6 tonnes of gold, ~5,600
tonnes of copper and ~33.6 tonnes of silver in 2009.
Real Gold plans to start producing gold bullions at
mines outside Inner Mongolia from July 2011.
Sector
Materials
Market cap.
Shares out. (float)
US$1,638m
907.5m (47%)
52 week high-low
HK$15.06-8.60
Real Gold Mining
Hang Seng China Ent
 Our target price is based on Real Gold trading at a P/E of 13.3x in 2011e,
representing a 25% discount to global peers and justified in our view by
Real Gold’s strong earnings growth, high margins, low production costs,
solid track record in M&A, increasing production scale and high gold prices.
 Among the listed Chinese gold miners, we view Zhaojin Mining as the best
 AT A GLANCE
Bloomberg
Price performance
 VALUATION
1M
6M
246 HK
12M
+15%
+7%
+17%
-1%
+53%
+9%
comparable for Real Gold. We estimate Real Gold is trading at a 47%
discount to Zhaojin (consensus earnings) in 2010e and a 49% discount in
2011e. We further calculate Real Gold is trading at an EV/Resource of
US$227/oz, representing a 45% discount to Zhaojin.
 TECHNICALS
 The stock has recently breached the resistance that lasted over the past
year. We expect an upward trend to become visible and expect the stock to
challenge its historical high of HK$15.74.
 BEAR VIEWS & BLUE SKIES
 Bear view – HK$10.10: This is based on a six-month delay at Daping and
Yangchangbian and a lower 2011e P/E of 9.3x, which is Real Gold’s
average P/E minus one standard deviation since May 2009.
 Blue sky – HK$21.55: This is based on Real Gold trading at the global
average P/E of 17.7x, which could come about if Real Gold successfully
boosts its reserves either through exploration or further acquisitions.
 THREE NUMBERS THAT MATTER
Gold resources
Current
Gold production
2012e
Production cash cost
2010e
~164 tonnes
~6.8 tonnes
US$211/oz
Real Gold has increased gold resources by ~36%
since IPO in February 2009.
This represents a CAGR of 23% from 2009, the
fastest growth among the major Chinese peers.
Real Gold’s cash cost is near the low end of the
industry cost curve.
October 05, 2010
Real Gold Mining
 INDEX
Business fundamentals
p3
Earnings outlook
p6
Valuation
p12
Bear Views & Blue Skies
p16
Technical analysis
p17
What is Real Gold Mining
p17
Outlook for gold
p23
Business fundamentals
We expect Real Gold to deliver the fastest
volume growth among the major HK-listed
Chinese gold miners in 2009-12e and also
the lowest production costs.
An acquisitive and fastgrowing gold producer
Business Fundamentals
A real gold play
Real Gold owns three production-stage gold mines in Chifeng, Inner Mongolia and
exploration and mining tenements in Guangxi, Yunnan and Jiangxi. Management
expects production to commence in Yunnan and Jiangxi in 2011e and in Guangxi in
2012e. The company has total gold resources of ~164 tonnes based on a mixture of
JORC and Chinese mining standards though management believes resources could be
more than 220 tonnes once further exploration work has been undertaken at recently
acquired sites.
Real Gold sells concentrates containing gold and other by-products (mainly copper,
silver, and zinc). We expect the company to sell ~4.3 tonnes of gold and for gold
revenues to represent ~66% of the company‘s total revenues in 2010e. Real Gold plans
to produce gold bullion from tenements outside Inner Mongolia from July 2011.
Investment positives
High quality poly-metallic
gold assets in Inner Mongolia
High quality poly-metallic gold deposits: Two of Real Gold‘s mines in Inner
Mongolia, the Shirengou and Nantaizi mines are characterized by large reserves and
high gold grades. Based on JORC mining standards, these mines contain gold reserves
of ~61.9 tonnes with an average gold grade of ~9.7g/t and total gold resources of ~85.5
tonnes with an average gold grade of ~10.8g/t. These grades are considered high by
global standards.
The third mine in Inner Mongolia; the Luotuochang mine is characterized by its very
high copper grade of ~2.2%. This high copper grade significantly reduces Real Gold‘s
effective unit gold production costs at this mine.
Real Gold has increased
resources by ~36% since its
IPO, at attractive prices…
Successful track record in acquiring resources…: Real Gold has made three
major acquisitions since its IPO in February 2009, acquiring an exploration tenement
in Yunnan in September 2009, a mining tenement in Jiangxi in February 2010 and 14
more exploration tenements in Guangxi in May 2010. As a result, Real Gold‘s resources
have risen by ~36% compared to the level at the time of its IPO. Acquisition costs have
been cheap in our view at US$100-159 per ounce of gold resource.
…and plans to acquire more
…and a commitment to acquire more: Growth through acquisition is a key
strategy for Real Gold and we expect further acquisitions in future. Management has
told us it hopes to acquire some 16.0 tonnes of gold resources close to its existing
tenement in Yunnan and is also examining other targets. With an estimated
~Rmb2.8bn in net cash at the end of 2010e, we think Real Gold has plenty of funds for
further acquisitions.
Fastest volume growth
among major Chinese peers
Strong volume growth: We forecast Real Gold will produce 4.3 tonnes (138k oz) of
gold in 2010e, 4.9 tonnes (158 k oz) in 2011e, and 6.8 tonnes (218k oz) in 2012e. This
represents an average production growth rate of 23% pa in 2009-12e and, we believe,
3
October 05, 2010
Real Gold Mining
makes Real Gold the fastest growing company among the major Chinese gold
companies. Most of this growth in production will be driven by new mines coming on
stream and then expanding over the next two to three years.
We expect gold prices to rise
further into 2011e
Positive outlook for gold—at least for now: We forecast average gold prices to
rise 22% YoY to US$1,191/oz in 2010e and by a further 5% YoY to US$1,251/oz in 2011e
before declining 10% YoY to US$1,125/oz in 2012e. We believe gold prices will remain
high over the next year or so, supported by continued economic uncertainty, rising
investment demand, and official sector net purchases. The main risk seems to be a
stronger than expected global economic recovery. No bull market lasts forever.
Production cost is near the
low end of the industry cost
curve
Low cash costs: We estimate Real Gold‘s cash production cost at ~US$211/oz in
2010e. This is near the low end of the industry cost curve and is driven by the high gold
grades, significant amounts and high grades of by-products and low labour and
electricity costs.
Earnings sensitive to gold prices: We estimate that for a 10% increase in gold
prices in 2011e, Real Gold‘s earnings would increase by 9.6%. We expect Real Gold‘s
earnings sensitivity to gold prices to increase over the next few years as the company
becomes a more pure gold play.
Professional management
Experienced management team: Real Gold‘s management team has decades of
experience in the Chinese gold industry and a track record of buying and developing
mines. Company chairman Lu Tianjin has 25 years experience in gold production.
Company CEO Qiu Haicheng and vice chairman Ma Wenxue have 17 years and 22 years
experience respectively.
Healthy balance sheet
Strong balance sheet: Real Gold is in a strong financial position. We expect Real
Gold to have net cash of ~Rmb2.8bn by the end of 2010e. We expect the company‘s net
cash balance to grow over the next few years.
Investment concerns
Mine life is an often-cited
concern
Short mine lives of certain mines: Based on the current resources, we estimate
the current mine life at the Shirengou and Nantaizi mines to be ~17 years and the mine
life at the not-yet-producing Yangchangbian mine to be ~4 years. In reality, the mine
lives should be longer because, according to management, there is exploration upside
at these sites. For instance, at the Shirengou mine, Real Gold is open at depth having
only mined to ~80m so far.
There is a risk that in order to secure more reserves, exploration expenses and capital
expenditure for acquisitions will be higher than we expect.
Project delays are possible
Real Gold’s new mines may come on stream later than we expect: The
Yangchangbian and Daping projects have already been delayed a few months because
of bad weather and there is possibility for further delays. Mine developments costs may
be more than we anticipate.
It’s now more expensive to
acquire gold assets
Difficulty in finding quality acquisition targets: Gold reserves and grades in the
recently-acquired mines are mostly lower than the company‘s three mines in Inner
Mongolia. We think this reflects the fact that it is no longer easy to acquire quality gold
resources at reasonable prices.
We cannot completely rule
out weak gold prices
Gold prices could be weaker than we expect: Real Gold does not hedge its gold
sales, and thus lower gold prices would tend to mean slimmer margins. Moreover, the
discount of company‘s selling prices to the Au9995 price on the Shanghai Gold
Exchange may widen if gold prices are expected to decline.
4
October 05, 2010
Real Gold Mining
Cost increase has been fast
for most Chinese miners
Production costs may be higher than we expect, especially at new mines, which
are not yet in production and where it is harder to accurately estimate costs.
Real Gold has done two
placements since IPO
Will Real Gold raise more equity? Real Gold has raised new equity twice since its
IPO in February 2009. The company placed ~105m shares in October 2009, increasing
its share capital by 16%. It placed another ~100m shares in June 2010, increasing its
share capital by a further 12%. Both of the post-IPO placements were used to fund
acquisitions which we think will ultimately be value accretive for shareholders. We
think the risks of further equity placements are lower now. First, higher production
levels and stronger gold prices mean healthier operating cash flows. Second,
management has indicated a willingness to fund future growth with borrowings.
Potentially higher resources
levy
Higher resources levy on gold production: As part of its overhaul of the Chinese
resources taxation system, it is possible that China will introduce higher levies on gold
production. This would tend to impact the earnings and valuations of all Chinese gold
stocks.
5
October 05, 2010
Real Gold Mining
 INDEX
Business fundamentals
p3
Earnings outlook
p6
Valuation
p12
Bear Views & Blue Skies
p16
Technical analysis
p17
What is Real Gold Mining
p17
Outlook for gold
p23
Earnings outlook
We expect Real Gold to achieve strong and
imminent earnings growth.
Fast earnings growth driven
by volume increases
Earnings outlook
Growth is strong and imminent
We expect Real Gold to deliver strong earnings growth in 2010e and 2011e driven by
rising production and sales volume and robust gold prices. We forecast that net income
will rise from Rmb527m in 2009 to Rmb748m in 2010e and to Rmb970m in 2011e.
The main drivers of Real Gold‘s earnings are 1) production and sales volume; 2) gold
prices; 3) prices of by-products, especially copper; 4) production costs and 5) overhead
costs including SG&A.
We expect a huge volume
increase in the next two years
Production and sales volume: We forecast Real Gold will produce 4.3 tonnes (138k
oz) of gold in 2010e, 4.9 tonnes (158k oz) in 2011e and 6.8 tonnes (218k oz) in 2012e.
This represents an average production growth rate of 23% pa in 2009-12e. We believe
Real Gold is the fastest growing company among the major Chinese gold companies in
terms of production.
Most of this growth in production will be driven by new mines coming on stream, and
then expanding over the next two to three years.
Figure 1: Gold production by mine
250
koz
200
150
100
50
2008
Nantaizi-Shirengou
2009
2010E
Luotuochang
Yangchangbian
2011E
Daping
2012E
Yandan-Yantang
Source: Company data, Samsung Securities
6
October 05, 2010
Real Gold Mining
We forecast Real Gold will produce ~136k oz of gold in Inner Mongolia in 2010e, up
16% YoY. The Inner Mongolia mines are Real Gold‘s only producing mines at present,
but we do not expect production at these mines to increase from 2011e onwards.
The company has two new mines expected to come on stream in 2011e. We expect the
Yangchangbian mine in Yunnan to start production in July 2011 and forecast
production of ~18.6k oz of gold bullion in 2011e and ~37.3k oz of gold bullion in 2012e.
We expect the Daping mine in Jiangxi to start production in October 2011 and forecast
production of ~3.2k oz of gold bullion in 2011e and ~10.9k oz of gold bullion in 2012e.
We expect Real Gold‘s operations at the Yandan and Yantang mines in Guangxi to
commence in January 2012e with gold bullion output of ~33.1k oz.
We forecast robust gold
prices…
Gold prices: We forecast average gold prices to rise 22% YoY to US$1,191/oz in 2010e
and by a further 5% YoY to US$1,251/oz in 2011e before declining 10% YoY to
US$1,125/oz in 2012e. We believe gold prices will remain high over the next year or so,
supported by continued economic uncertainty, rising investment demand, and official
sector net purchases. The main risk seems to be a stronger than expected global
economic recovery.
…and copper prices
Prices of by-products: In addition to the gold price, the price of other metals which
Real Gold sells as by-products is also important. Sales of by-products accounted for
~34% of total revenues in 2009. We expect this to decline to ~27% by 2012e, still a
significant proportion.
Real Gold‘s by-products revenues are mainly driven by copper prices. We forecast
average copper prices to rise 37% YoY to US$7,090/t in 2010e and by a further 10%
YoY to US$7,781/t in 2011e before staying flat at US$7,770/t in 2012e.
Figure 2: Prices of by-products
(US$/t)
2008
2009
2010e
2011e
2012e
2013e
2014e
2015e
Copper
YoY
6,952
5,178
-26%
7,090
37%
7,781
10%
7,770
0%
6,723
-13%
8,378
25%
8,629
3%
15.7
14.7
-6%
18.6
27%
19.5
5%
16.5
-16%
17.9
9%
16.2
-10%
16.7
3%
Zinc
YoY
1,870
1,662
-11%
2,112
27%
2,350
11%
2,700
15%
2,259
-16%
2,425
7%
2,498
3%
Lead
YoY
2,085
1,726
-17%
2,075
20%
2,357
14%
2,500
6%
2,168
-13%
2,205
2%
2,271
3%
Silver (US$/oz)
YoY
Source: Bloomberg, Samsung Securities
Production costs are towards
the low end of the industry
cost curve
Production costs: We estimate Real Gold‘s cash production cost at ~US$211/oz in
2010e. This is near the low end of the industry cost curve. This low unit cost is mainly
driven by: 1) the high gold grade; 2) significant amounts and high grades of byproducts; 3) low labour costs; and 4) low electricity costs.
In calculating unit costs, Real Gold converts sales of by-products into ‗gold equivalent‘
sales based on the average selling price of each metal. It then divides total costs by total
gold sales (including this by-products gold equivalent) volume. Where a gold company
separates and sells the by-products separately and incurs additional costs, one would
normally calculate unit gold costs using the gold volume alone. In Real Gold‘s case, we
(and also management) cannot separate the costs associated with, say, copper byproducts production because gold and copper are sold together in concentrate.
Furthermore, the additional costs associated with by-products revenues are minimal.
7
October 05, 2010
Real Gold Mining
Labour and electricity comprise ~40% and ~20% of Real Gold‘s production costs
respectively. Average wages and power tariffs in the company‘s major operation regions
(Inner Mongolia, Yunnan, Guangxi and Jiangxi) are below national average and mostly
below the provinces where its major competitors operate. However, we highlight our
concern that labour and electricity cost inflation can be fast in the future.
We do expect Real Gold‘s production costs to rise as mines outside Inner Mongolia
come on stream. These new mines should have higher production costs because of 1)
lower gold grades and 2) a lack of cost credits from by-products. We estimate cash
production costs for mines outside Inner Mongolia to be ~US$225/oz in 2011e and
~US$378/oz in 2012e, much higher than Real Gold‘s current mines.
Operating expenses: We forecast operating expenses at Rmb59.3m in 2010e, which
includes M&A-related expenses and share-based compensation. We forecast operating
expenses to drop marginally to Rmb56.3m in 2011e on the absence of M&A and lower
share option costs. Obviously, if Real Gold is successful in acquiring further assets,
operating costs would be higher than we forecast.
Earnings sensitivity
Earnings and stock prices are
both sensitive to gold prices
Real Gold‘s earnings are sensitive to gold prices. We calculate that for a 10% increase in
gold prices in 2011e, Real Gold‘s earnings will increase by 9.6%.
Figure 3: Earnings sensitivity, 2011e
2011e gold price, US$/oz
2011e net income, Rmb m
2011e EPS, Rmb
1,101
858
0.95
1,151
896
0.99
1,251
970
1.07
1,201
933
1.03
1,301
1,008
1.11
1,351
1,045
1.15
1,401
1,082
1.20
Source: Samsung Securities
We expect Real Gold‘s earnings sensitivity to gold prices to increase over the next few
years as gold makes up a larger proportion of the company‘s revenues. We expect gold
to represent ~66% of Real Gold‘s total revenues in 2010e and expect this to increase to
~68% in 2011e and ~73% in 2012e.
The earnings sensitivity to gold prices is also reflected in share price performance. We
calculate that Real Gold has one of the highest R2 for the regression of stock prices to
gold prices since May 2009. The R2 was ~0.79 for Real Gold, ~0.80 for Zhaojin but
only ~0.22 for Zijin which derives substantial revenues from non-gold metals.
Figure 4: Total return, May 2009-Sep 2010
Figure 5: Real Gold share price vs gold price, May 2009-Sep 2010
140
17.0
%
Real Gold Mining, HK$
120
100
80
60
40
20
Aug-10
May-10
Feb-10
Nov-09
Aug-09
-40
May-09
0
-20
R² = 0.7883
15.0
13.0
11.0
9.0
7.0
5.0
850
950
1,050
1,150
1,250
1,350
-60
Gold
Real Gold Mining
Source: Bloomberg, Samsung Securities
Zhaojin
Zijin
Gold price, US$/oz
Source: Bloomberg, Samsung Securities
8
October 05, 2010
Real Gold Mining
Real Gold‘s earnings are less sensitive to cash production costs. We calculate that for a
10% increase in cash production costs in 2011e, Real Gold‘s earnings will decrease by
2.5%.
Margins and returns
Higher costs for mines
outside Inner Mongolia
should bring down margins
slightly
We expect Real Gold to achieve a gross margin of 75% in 2010e. We forecast the gross
margin to remain flat in 2011e as higher gold prices are offset by higher unit costs at
mines outside Inner Mongolia. Real Gold‘s projects in Guangxi, Yunnan and Jiangxi
typically contain lower gold grades than in Inner Mongolia and almost no by-products.
In 2012e, we expect Real Gold‘s gross margin to decline to 66% as selling prices come
off the boil and unit costs increase further.
We expect Real Gold to achieve an ROE of 21% in 2010e. We expect the ROE to decline
slightly to 19% in 2011e because of the significant increase in shareholder‘s equity as a
result of share placements in 2010.
Samsung versus consensus
We are 9 % higher than
consensus in 2011e
Our earnings forecasts are ~2% below consensus in 2010e and ~9% above consensus in
2011e. The range of earnings estimates in 2010e is fairly narrow, probably reflecting
management guidance. In 2011e, the range is wider which we think reflects different
gold price forecasts.
Figure 6: Street earnings estimates
(Rmb)
Consensus
High end estimate
Low end estimate
Range as % of consensus
2010e
2011e
0.92
0.98
0.87
94%-107%
0.98
1.22
0.83
85%-124%
Source: I/B/E/S, Samsung Securities
Over the past few weeks, consensus earnings forecasts have been rising, presumably
because of the increasing gold price.
9
October 05, 2010
Real Gold Mining
Figure 7: Key assumptions
2008
2009
2010e
2011e
2012e
85.1
559
284
9.2
87%
40.8
12.3
81.8
1,048
336
9.4
86%
91.3
27.7
77.8
1,480
305
9.0
85%
111
36.4
73.8
1,480
300
9.0
85%
109
36.5
69.8
1,480
300
9.0
85%
109
39.7
34.8
585
116
3.3
86%
6.2
7.8
33.9
876
329
3.2
86%
25.6
31.2
32.9
1,100
305
3.0
86%
27.4
36.5
31.9
1,100
300
3.0
86%
27.4
36.9
30.9
1,100
300
3.0
86%
27.4
41.3
Yangchangbian, Yunnan
Resources, tonnes
Effective heap-leaching capacity, ktpa
Gold grade, g/t
Recovery rate
Gold production, koz
-
-
4.1
-
3.4
250
2.9
80%
18.6
1.9
500
2.9
80%
37.3
Daping, Jiangxi
Resources, tonnes
Flotation capacity, tpd
Production days
Gold grade, g/t
Recovery rate
Gold production, koz
-
-
1.7
-
1.6
300
87
4.7
80%
3.2
1.1
300
300
4.7
80%
10.9
Yandan, Guangxi
Resources, tonnes
Flotation capacity, tpd
Production days
Effective heap-leaching capacity, ktpa
Gold grade, g/t
Recovery rate
Gold production, koz
-
-
-
12.8
-
12.3
500
300
100
2.2
83%
14.4
Yantang, Guangxi
Resources, tonnes
Flotation capacity, tpd
Production days
Effective heap-leaching capacity, ktpa
Gold grade, g/t
Recovery rate
Gold production, koz
-
-
-
17.9
-
17.2
500
300
100
2.8
83%
18.7
Sales volume, tonnes
2.0
5.5
6.6
7.2
9.3
Gold concs
Bullions
By-products (equiv. gold concs tonnage)
1.5
0.5
3.6
1.8
4.3
2.3
4.2
0.7
2.3
4.2
2.5
2.5
Average selling prices, US$/oz
Gold concs
Bullions
715
-
840
-
929
-
1,013
1,044
878
934
Production cash costs, US$/oz
181
218
211
212
255
Depreciation and amortization, Rmb m
5.9
42.6
35.7
63.3
101
Nantaizi-Shirengou, Inner Mongolia
Resources, tonnes
Flotation capacity, tpd
Production days
Gold grade, g/t
Recovery rate
Gold production, koz
By-products production (equiv gold concs koz)
Luotuochang, Inner Mongolia
Resources, tonnes
Flotation capacity, tpd
Production days
Gold grade, g/t
Recovery rate
Gold production, koz
By-products production (equiv. gold concs koz)
Source: Company data, Samsung Securities
10
October 05, 2010
Real Gold Mining
Figure 8: Revenue
2,000
Figure 9: Net income
35%
Rmb m
1,000
900
1,800
30%
1,600
1,400
25%
1,200
1,000
20%
800
600
15%
400
200
10%
2008
2009
2010E
Revenue
2011E
50%
Rmb m
45%
800
40%
700
35%
600
30%
500
25%
400
20%
300
15%
200
10%
100
5%
0
2012E
0%
2008
2009
YoY (RHS)
2010E
Net income
Source: Company data, Samsung Securities
Figure 10: Gold production volume
Figure 11: Sales mix, 2010e
40%
Tonnes
Zinc, 4%
6.0
35%
5.0
30%
4.0
25%
3.0
20%
2.0
15%
1.0
2012E
YoY (RHS)
Source: Company data, Samsung Securities
7.0
2011E
Lead, 3%
Silver, 8%
Copper, 20%
Gold, 66%
10%
2008
2009
2010E
Gold production
2011E
2012E
YoY (RHS)
Source: Company data, Samsung Securities
Source: Samsung Securities
Figure 12: Margins
Figure 13: Return on assets and equity
80%
45%
75%
40%
70%
65%
35%
60%
55%
30%
50%
25%
45%
40%
20%
35%
30%
15%
2008
2009
2010E
Gross margin
Source: Company data, Samsung Securities
2011E
Net margin
2012E
2008
2009
2010E
ROAA
2011E
2012E
ROAE
Source: Company data, Samsung Securities
11
October 05, 2010
Real Gold Mining
 INDEX
Business fundamentals
p3
Earnings outlook
p6
Valuation
p12
Bear Views & Blue Skies
p16
Technical analysis
p17
What is Real Gold Mining
p17
Outlook for gold
p23
Valuation
Valuation
Our initial P/E-based target price is
HK$16.17. Real Gold is trading at a 15%
discount to our target price.
Discount to peers to narrow
Initial share price target of HK$16.17
Our target price is based on Real Gold trading at a P/E of 13.3x in 2011e, representing a
25% discount to global peers. We view our target multiple as justified by Real Gold‘s:
Our target price is based a
25% P/E discount to global
peers in 2011e

Strong earnings growth

High margins and returns

Low production costs

Developing track record in M&A which is…

…driving greater production scale and

High gold prices–gold companies tend to perform well when gold prices are rising
Currently, we believe Real Gold is cheap, both in absolute terms and relative to its
Chinese and global gold mining peers.
Significant discount to Zhaojin…
Among the listed Chinese gold miners, we view Zhaojin Mining as the best comparable
for Real Gold. We estimate Real Gold is trading at P/Es of 13.4x in 2010e, representing
a 47% discount to Zhaojin (based on consensus earnings for Zhaojin) and at 11.3x in
2011e, representing a 49% discount. Furthermore, we calculate Real Gold is trading at
an EV/Resource of US$227/oz, representing a 45% discount to Zhaojin.
Real Gold trades at a
significant discount to
Zhaojin
Figure 15: Real Gold P/E discount to Zhaojin
10.0
40%
5.0
35%
Source: Bloomberg, Samsung Securities
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Zhaojin
30%
May-09
Real Gold
Jul-10
45%
May-10
15.0
Mar-10
50%
Jan-10
20.0
Nov-09
55%
Sep-09
25.0
Jul-09
60%
May-09
30.0
Jul-09
Figure 14: Daily P/E
Source: Bloomberg, Samsung Securities
12
October 05, 2010
Real Gold Mining
Four main reasons for Real
Gold’s discount to Zhaojin
We think there are several reasons for this discount:

Zhaojin Mining has a much larger production scale than Real Gold. Zhaojin is
expected to produce ~10.7 tonnes of gold (from its own mines) in 2010e versus
~4.3 tonnes for Real Gold.

Zhaojin Mining is state-owned (by the local government in Shandong) whereas
Real Gold is privately owned.

Gold only accounts for ~66% of Real Gold‘s revenue compared to ~89% for Zhaojin

Real Gold has a relatively short trading history compared to Zhaojin

Real Gold has raised new equity twice since its IPO in February 2009. Zhaojin has
not.

Real Gold‘s average mine life is ~19 years compared to ~24 years for Zhaojin
Figure 16: Real Gold vs Zhaojin Mining, 2010e
Ownership
Gold resources (tonnes)
Gold revenue as % of total
Gold production (tonnes)
Average mine life (years)
Real Gold (246 HK)
Private-owned
164
66%
4.3
19
Zhaojin (1818 HK)
State-owned
338
89%
10.7
24
EBIT margin
Net margin
70%
57%
41%
29%
Dividend yield
0%
1.9%
IPO
Share placements after IPO
Feb-09
2
Dec-06
0
Disclosure
Detailed and in-time
Some info is only disclosed briefly in annual/interim reports
Source: Company data, Bloomberg, Samsung Securities
While Real Gold has traded at a steep discount to Zhaojin historically, we believe this
discount will narrow (though not close) as Real Gold‘s new mines come on stream and
the company‘s production scale increases.
Real Gold also trades at a
significant discount to global
peers
…And to global peers
In addition to trading at a discount to Zhaojin, Real Gold is trading at a significant
discount to its global peer group. We estimate that global peer group is trading at P/Es
of 24.1x in 2010e, representing an 80% premium to Real Gold and at 17.7x in 2011e,
representing a 56% premium.
13
October 05, 2010
Real Gold Mining
Figure 17: Global peer comparison
Company
B'berg
Price Mkt cap
US$ bn
2009
PER
2010E
2011E
EV/EBITDA
2009
2010E
2011E
P/BV
2009
2010E
ROE
2009
2010E
2009
DIV YLD
2010E
2011E
China - H shares
Real Gold
246 HK
Sino Prosper
766 HK
Zhaojin Mining
1818 HK
Zijin Mining
2899 HK
H shares average
Australia
Kingsgate
KCN AU
Lihir Gold
LGL AU
Newcrest Mining NCM AU
Panaust
PNA AU
St Barbara
SBM AU
Australia average
13.78
0.38
23.90
6.60
1.6
0.3
4.5
14.9
15.1
n.a.
39.6
23.7
26.1
13.1
n.a.
25.4
16.4
18.3
11.1
24.3
22.2
14.3
18.0
9.3
n.a.
23.5
13.7
15.5
7.4
38.0
14.4
9.5
17.3
5.5
9.4
12.9
7.9
8.9
3.7
1.1
6.6
4.6
4.0
2.3
1.4
5.5
4.0
3.3
36%
-9%
18%
20%
16%
21%
-1%
24%
26%
18%
0%
0%
1%
2%
1%
0%
0%
2%
3%
1%
0%
0%
2%
3%
1%
11.44
4.48
40.00
0.67
0.38
1.1
10.3
29.7
1.9
0.7
20.4
36.0
30.6
71.8
n.a.
39.7
14.6
29.4
23.7
16.6
18.1
20.5
11.1
27.4
21.1
11.1
7.9
15.7
n.a.
20.6
15.7
15.8
11.4
15.9
20.1
15.2
16.2
8.1
6.0
13.1
7.9
14.2
12.0
5.8
3.1
8.6
4.0
3.2
4.2
3.9
2.1
3.5
3.2
2.9
3.0
3.0
2.0
2.8
22%
9%
15%
7%
-2%
10%
24%
10%
15%
21%
11%
16%
2%
0%
1%
n.a.
0%
1%
3%
1%
1%
0%
1%
1%
4%
1%
1%
0%
1%
1%
327.00
106.05
78.69
18.0
10.8
4.9
n.a.
23.7
20.8
22.3
22.2
17.9
33.6
24.6
15.7
13.5
14.7
14.7
n.a.
7.1
n.a.
7.1
9.4
5.7
n.a.
7.6
6.9
4.5
5.8
5.7
5.5
1.8
1.1
2.8
4.3
1.6
1.1
2.4
-30%
8%
6%
-6%
22%
10%
3%
12%
0%
1%
1%
1%
1%
2%
1%
1%
1%
3%
1%
2%
71.27
47.01
16.53
18.45
43.72
5.03
19.26
17.97
63.68
11.45
11.9
46.3
3.8
10.1
32.4
1.3
21.4
6.6
31.4
8.5
106.4
23.5
33.8
71.0
132.5
55.9
42.9
36.0
22.8
24.4
58.3
38.8
15.0
14.4
46.4
36.6
33.8
29.4
22.9
17.1
19.7
28.3
26.7
13.8
16.3
25.9
24.6
14.2
25.7
15.4
15.7
16.1
19.8
61.1
13.9
14.5
55.2
23.4
9.5
12.1
16.7
8.7
15.4
23.9
18.2
8.4
8.7
23.1
16.5
7.7
15.1
10.8
6.4
9.7
12.8
12.5
7.3
8.9
14.3
12.1
4.7
11.8
7.9
5.7
8.2
9.5
4.1
3.1
4.0
3.8
2.1
2.7
2.4
2.7
2.9
1.2
3.1
3.6
2.6
3.1
3.5
1.8
2.2
2.0
2.4
2.5
1.2
2.6
4%
12%
12%
7%
2%
5%
6%
8%
15%
5%
8%
10%
19%
24%
8%
5%
7%
7%
11%
16%
6%
12%
0%
1%
0%
0%
0%
0%
0%
0%
1%
0%
0%
0%
1%
0%
0%
0%
0%
1%
0%
1%
1%
0%
0%
1%
0%
0%
0%
0%
0%
1%
1%
1%
1%
43.7
24.1
17.7
19.3
13.1
8.6
3.2
2.7
8%
14%
1%
1%
1%
South Africa
Anglogold
ANG SJ
Gold Fields
GFI SJ
Harmony Gold
HAR SJ
South Africa average
North America
Agnico-Eagle
AEM US
Barrick Gold
ABX US
Centerra Gold
CG CN
Eldorado Gold
EGO US
Goldcorp
GG US
Golden Star
GSS US
Kinross Gold
K CN
IAMGOLD Corp IMG CN
Newmont Mining NEM US
Yamana Gold
AUY US
North America average
World average
Source: Bloomberg, Samsung Securities
P/NAV
We estimate that Real Gold is
trading at 1.5x P/NAV
In addition to P/Es, we also look at discounted cash flow valuations. We estimate Real
Gold‘s DCF valuation at HK$9.48 per share based on a discount rate 9.8% and gold
resources of 164 tonnes. Notably this valuation does not include exploration upside
which we view as potentially substantial, especially in Yunnan, Jiangxi and Guangxi
where Real Gold only recently acquired assets and is still exploring. We estimate that
Real Gold‘s DCF valuation would increase to HK$10.44 if we factor in management‘s
estimates of ~220 tonnes of gold resources.
Currently, we estimate Real Gold is trading at 1.5x P/NAV. At our price target, we
estimate Real Gold would trade at 1.7x P/NAV. Gold stocks often trade at premiums to
their DCF-based NAVs reflecting both exploration upside as well as the ‗store of value‘
properties of gold.
The key assumptions behind our NAV valuation are:

Gold resource of ~164 tonnes

Production to commence at Yangchangbian in Jul 2011, at Daping in Oct 2011 and
at Yandan-Yantang in Jan 2012

Daily flotation capacity of 2,580 tpd in 2010e, 2,880 tpd in 2011e, 3,880 tpd from
2012e
14
October 05, 2010
Real Gold Mining

Effective heap-leaching capacity of 250k tpa in 2011e and 700k tpa from 2012e

Real Gold produces concentrates at the Inner Mongolia mines and gold bullion
(containing ~96% of gold) in Yunnan, Jiangxi and Guangxi

Gold prices of US$1,191/oz in 2010e, US$1,251/oz in 2011e and US$1,125/oz in
2012e; we assume a long-term gold price of US$962/oz in 2014e (equivalent to
US$855/oz in 2010 dollars) which we inflate at 3% pa

Production cash cost of US$211/oz in 2010e, US$212/oz in 2011e and US$236/oz
in 2012e. We assume cash costs at individual mines rise by 3% pa. Overall unit
cash costs are driven by the mine production mix.

A cost of capital of 9.8%, based on a target 20% debt financing

Terminal growth rate of 0%
Figure 18: NAV valuation
Year to Dec (Rmb m)
Free cash flow calculation
2009
2010E
2011E
2012E
2013E
2014E
2015E
2016E
Revenues
EBIT
Tax rate
NOPAT
Capex, net
D&A
Changes in working capital
Free operating CF
DCF inputs
Interest-bearing debt as % of EV
WACC
NPV of free cash flows
Less net debt/(cash)
Less minority interests
HK$/Rmb
Equity value (HK$ m)
Shares outstanding
NPV per share (HK$)
1,011
734
26%
542
(85)
33
(3)
487
1,341
1,040
26%
770
(1,425)
36
(1)
(621)
1,608
1,290
25%
967
(910)
63
6
127
1,823
1,314
25%
985
(676)
101
(24)
387
1,756
1,089
25%
817
(472)
129
(30)
444
1,604
912
25%
684
(412)
149
(8)
413
1,569
858
25%
643
(373)
167
(4)
434
1,574
835
25%
626
(347)
184
(4)
459
20%
9.8%
4,814
(2,794)
78
1.14
8,584
905
9.48
Sensitivity analysis
WACC
6.8%
7.8%
8.8%
9.8%
10.8%
11.8%
12.8%
-2.0%
12.05
10.81
9.82
9.01
8.35
7.79
7.32
-1.5%
12.32
11.00
9.96
9.12
8.43
7.85
7.37
-1.0%
12.62
11.21
10.11
9.23
8.51
7.91
7.42
Terminal growth rate
-0.5%
0.0%
0.5%
12.96
13.36
13.81
11.45
11.71
12.02
10.28
10.46
10.67
9.48
9.35
9.63
8.60
8.70
8.81
7.98
8.06
8.14
7.47
7.52
7.58
1.0%
14.35
12.36
10.91
9.80
8.92
8.22
7.65
2017E
2018E
1,621
1,669
851
870
25%
25%
638
652
(329)
(317)
199
214
(3)
(3)
506
546
WACC inputs
Terminal FCF growth
Risk-free rate
Market risk premium
Beta
Cost of debt (pre-tax)
1.5%
14.98
12.77
11.18
9.98
9.06
8.32
7.72
Terminal year
……
2024E
……
……
……
……
……
……
……
……
1,993
1,008
25%
756
(296)
296
(3)
753
0.0%
3.3%
7.0%
1.12
6.0%
2.0%
15.75
13.24
11.48
10.19
9.20
8.43
7.80
Source: Company data, Samsung Securities
15
October 05, 2010
Real Gold Mining
 INDEX
Business fundamentals
p3
Earnings outlook
p6
Valuation
p12
Bear Views & Blue Skies
p16
Technical analysis
p17
What is Real Gold Mining
p17
Outlook for gold
p23
Bear Views & Blue Skies
More reserves, more upside
Bear view – HK$10.10
The market should further
discount Real Gold if there
are further production delays
We derive our bear view valuation of HK$10.10 by delaying the commencement of
production at Daping and Yangchangbian by six months and by applying a 2011E P/E
of 9.3x. This is the company‘s average P/E minus one standard deviation since May
2009. That is, we assume both lower 2011e earnings and also that the market punishes
the company with a lower multiple.
Blue sky – HK$21.55
Real Gold has the potential to
trade at global peers average
P/E of 17.7x
We base our blue-sky valuation scenario on Real Gold trading at the global average P/E
of 17.7x in 2011e. This could come about if the company is able to substantially increase
its gold reserves, funding further acquisitions with debt, rather than additional equity.
Our blue-sky scenario suggests a target price of HK$21.55.
16
October 05, 2010
Real Gold Mining
 INDEX
Business fundamentals
p3
Earnings outlook
p6
Valuation
p12
Bear Views & Blue Skies
p16
Technical analysis
p17
What is Real Gold Mining
p17
Outlook for gold
p23
Technical analysis
We expect an upward trend to become visible
and the company to challenge its historical
high.
Technical Analysis
Likely more upside
Figure 19: Technical Trader 2.0 rating
Relative
strength
Positive
Medium-term phase
Full-blown uptrend (U1)
Short-term
signal
Long
Relatively
OB/OS
Neutral
Score
TA rating
0
P
TA ratings: PPP = Triple Positive, PP = Double Positive, P = Single Positive, N = Neutral, NT = Negative Action to be
taken by investor: BUY recommendations = PPP and PP rated stocks, HOLD recommendation = P and N rated
stocks, SELL recommendation = NT rated stocks
Source: Samsung Securities
Upward trend likely to resume
Given insufficient time-series data, we only present our short-term view here.
We expect Real Gold to
challenge its historical high
of HK$15.74.
The stock has shown no clear direction since Dec 2009 (instead, exhibiting a triangular
form of convergence). The stock saw its uptrend eroded as it fell below major support
based on our SSC model (HK$9.38) in Jan 2010, but since then, has continued to
attempt to rebound. In particular, it is positive that share prices have fluctuated with
the medium-term support formed since Apr 2009 remaining intact. The stock has
recently broken above a triangle formed over the past year, which, albeit not a
traditional triangle pattern, is significant in that the stock has breached the resistance
that lasted over the past year. Overall, we expect an uptrend to become visible going
forward. The stock should breach the previous high of HK$14 and challenge its
historical high of HK$15.74.
0.00
Figure 20: Daily log, MACD, Stochastics, RS
16.5
16.0
15.5
15.0
14.5
15.74
14.26
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
-0.9
14.08
14.0
13.5
13.10
13.00
13.12
13.0
12.44
12.5
12.0
11.5
11.80
11.94
10.96
11.72
11.40
11.0
11.14
10.80
10.5
MACD (12,26 RHS)
10.50
10.42
10.0
9.5
9.38
9.0
8.5
Uptrend line from Apr 2009
8.83
8.60
100
Stochastics Slow (10,5,1)
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
90
80
70
60
50
40
30
20
RS to HSI (RHS)
10
0
September
October
November
December
2010
February
March
April
May
June
July
August
September
October
November
Note: The Samsung stochastics cycle (SSC) model is used to determine short-to-medium-term trend reversals, and
set meaningful resistance (or support) targets using stochastics (slow 10, 5). Meaningful resistance occurs at the
Share’s intraday peak during a period when the stochastics oscillator turns downward at the 70% level and falls to
30%. In contrast, meaningful support occurs at the Share’s intraday trough during a period when stochastics turn
upward at 30% and rise to the 70% threshold. Breakthroughs at such targets (30% and 70%) are thought to mark
trend reversals
Source: Bloomberg, Samsung Securities
17
October 05, 2010
Real Gold Mining
 INDEX
Business fundamentals
p3
Earnings outlook
p6
Valuation
p12
Bear Views & Blue Skies
p16
Technical analysis
p17
What is Real Gold Mining
p17
Outlook for gold
p23
Real Gold owns 19 gold
tenements
What is Real Gold Mining Ltd
Real Gold owns three production-stage gold mines in Chifeng, Inner Mongolia and
exploration and mining tenements in Guangxi, Yunnan and Jiangxi. Management
expects production to commence in Yunnan and Jiangxi in 2011e and in Guangxi in
2012e.
Figure 21: Asset distribution
Source: Company data
Gold resources
Gold resources increased by
~36% since IPO in February
2009
According to management, the company has total gold resources of ~164 tonnes based
on a mixture of JORC and Chinese mining standards. Management believes resources
could be more than 220 tonnes once further exploration work has been undertaken at
recently acquired tenements.
18
October 05, 2010
Real Gold Mining
Figure 22: Gold resources
Resources, tonnes
Resources, koz
25.9
59.6
34.9
1.7
4.1
10.1
17.9
832
1,916
1,122
54
132
325
574
JORC standard
JORC standard
JORC standard
332+333 under Chinese mining standard
333+334 under Chinese mining standard
333+334 under Chinese mining standard
333+334 under Chinese mining standard
9.4
303
333+334 under Chinese mining standard
163.5
5,258
Shirengou
Nantaizi
Luotuochang
Daping
Yangchangbian
Yandan
Yantang
Other twelve tenements in
Guangxi
Total
Mining standards
Source: Company data
Nantaizi and Shirengou mines, Inner Mongolia – 100% owned
The Nantaizi and Shirengou
mine complex account for
~80% of Real Gold’s current
gold output
The Nantaizi and Shirengou mines are located roughly 50km west of Chifeng city,
Inner Mongolia. These mines are Real Gold‘s most important mines in terms of current
production. We estimate output from these mines will account for ~80% of Real Gold‘s
gold production in 2010e.
Figure 23: Mines in Inner Mongolia
Source: IPO prospectus
At the time of the IPO in February 2009, the mines had JORC standard reserves of
~61.9 tonnes with an average grade of 9.7 g/t. Both mines are poly-metallic gold mines
which in addition to high gold grades also contain rich quantities of by-products
including copper, silver, zinc and lead.
19
October 05, 2010
Real Gold Mining
Gold ores from these mines are processed at a plant near the Nantaizi mine, which has
a flotation processing capacity of 1,480 tpd.
In 2009, production from these mines reached 3.7 tonnes of equivalent gold,
comprising 2.8 tonnes of gold and 0.9 tonnes of gold equivalent by-products. In 2010e,
we expect this to rise to 4.6 tonnes of equivalent gold, comprising 3.5 tonnes of gold
and 1.1 tonne of gold equivalent by-products.
Figure 24: Reserves of Nantaizi mine and Shirengou mine, November 2008
Raw ore
(kt)
Au g/t
Grades
Ag g/t
Cu %
Nantaizi
Proven
Probable
Subtotal
1,037
3,241
4,278
9.9
10.2
10.1
80.6
81.0
80.9
0.4
0.5
0.4
1.3
1.5
1.5
1.2
1.4
1.3
331
1,058
1,389
2,687
8,444
11,131
4,073
14,730
18,804
13,493
48,674
62,167
12,868
43,755
56,624
Shirengou
Proven
Probable
Subtotal
523
1,573
2,096
8.6
9.0
8.9
78.2
86.0
84.1
0.3
0.3
0.3
1.5
1.8
1.7
1.2
1.3
1.3
144
457
601
1,315
4,351
5,667
1,636
4,577
6,213
7,857
27,756
35,613
6,481
21,092
27,573
Total
6,374
9.7
82.0
0.4
1.5
1.3
1,990
16,798
25,017
97,780
84,197
Pb %
Contained metals
Zn % Au koz Ag koz
Cu t
Pb t
Zn t
Source: IPO prospectus, Samsung Securities
Luotuochang mine, Inner Mongolia – 100% owned
The Luotuochang mine
accounts for ~20% of current
gold production
The Luotuochang mine is located roughly 250 km north of Chifeng city in Inner
Mongolia. We estimate that production from the Luotuochang mine will account for
~20% of Real Gold‘s gold production in 2010e.
At the time of the IPO in February 2009, this mine had JORC standard reserves of
~28.0 tonnes with an average grade of 3.4 g/t. Although the gold grade is lower than at
the Nantaizi and Shirengou mines, the by-product grades at Luotuochang are even
higher. Based on the JORC analysis, the mine contained 182,000 tonnes of copper at
an average grade of 2.2%, which is very high for a gold mine. In fact, we calculate the
gold equivalent production of by-products is even higher than the gold output at this
mine. Revenue from by-products (mainly copper) represented 56% of Luotuochang‘s
total revenues in 2009.
Luotuochang has a flotation processing capacity of 1,100 tpd.
In 2009, production from the mine reached 1.8 tonnes of equivalent gold, comprising
0.8 tonnes of gold and 1.0 tonnes of gold equivalent by-products. In 2010e, we expect
this to rise to 2.0 tonnes of equivalent gold, comprising 0.9 tonnes of gold and 1.1
tonnes of gold equivalent by-products.
Figure 25: Reserves of Luotuochang mine, November 2008
Proven
Probable
Total
Raw ore
(kt)
968
7,255
8,222
Au g/t
3.7
3.4
3.4
Grades
Ag g/t
41.7
41.2
41.2
Cu %
2.3
2.2
2.2
Contained metals
Au koz
Ag koz
114
1,298
797
9,599
910
10,897
Cu t
21,979
160,078
182,057
Source: IPO prospectus, Samsung Securities
20
October 05, 2010
Real Gold Mining
Yangchangbian exploration tenement, Yunnan – 95% owned
Yangchangbian production
should start in July 2011e
Real Gold acquired a 95% stake in the Yangchangbian tenements in September 2009 at
a cost of Rmb90m (US$13m).
Current gold resources are ~4.1 tonnes (333+334 under Chinese mining standards) and
the average grade is 2.9 g/t. This suggests a resource cost of ~US$105/oz, which we
view as cheap. Management believes total resources could be more than 14.0 tonnes.
Real Gold is applying for exploration licenses for three pieces of land surrounding
Yangchangbian tenement. Management estimates gold resources in these areas to be
~16.0 tonnes with average grade of ~2.9 g/t. These exploration licenses are expected to
cost ~Rmb349m (US$51m) representing a resource acquisition cost of ~US$99/oz.
The company is building 500k tpa of heap-leaching capacity and plans to start
production in July 2011. We expect production at Yangchangbian to reach 0.58 tonnes
of gold in 2011e and 1.2 tonnes of gold in 2012e.
Daping mining tenement, Jiangxi—100% owned
Production at Daping should
start in October 2011e
Real Gold acquired the Daping tenement in February 2010 at a cost of Rmb60m
(US$8.8m).
Current gold reserves are ~1.7 tonnes (332+333 under Chinese mining standard) and
the average grade is 4.7 g/t. This suggests a reserves cost of ~US$159/oz which is
reasonably cheap. Management believes total resources could be more than 10.0
tonnes.
The company is building 300 tpd flotation capacity and plans to start production in
October 2011. We expect production at Daping to reach 0.09 tonnes of gold in 2011e
and 0.34 tonnes of gold in 2012e.
14 exploration tenements in Guangxi
Production in Guangxi should
start in January 2012e
Real Gold acquired 14 gold tenements in Guangxi in June 2010 at a cost of Rmb888m
(US$130m). The company paid Rmb407m (US$60m) of the consideration in shares by
issuing ~37.0m new shares at HK$12.67 per share (equal to the company‘s average
stock price before the acquisition). The company now fully owns the Yantang tenement
and has a 78.57% stake in 13 tenements including the Yandan tenement.
Current gold resources are ~30.7 tonnes (333+334 under Chinese mining standard)
and average grade is ~2.5g/t. This suggests a resources cost of ~US$108/oz.
Management believes total resources could be more than 65.0 tonnes.
The company plans to build 1,000 tpd flotation capacity and 200,000 tpa heapleaching capacity of by January 2012. Real Gold also plans to increase flotation capacity
to 2,000 tpd by January 2013.
We expect production at the Guangxi tenements to reach 1.0 tonnes of gold in 2012e.
Products, sales
Real Gold sells gold together
with other base metals
Real Gold sells concentrates containing various quantities of gold and other metals
including copper, silver, zinc, and lead. The concentrates are sold to smelting
companies who process them into finished metal products. Real Gold‘s selling prices
are determined by the price of the underlying metals, the amount of metal contained in
the concentrate, smelting costs, and the smelters margins.
21
October 05, 2010
Real Gold Mining
Real Gold sold ~3.6 tonnes of gold in 2009 and gold represented ~66% of the
company‘s total revenue. Real Gold plans to produce gold bullions from tenements
outside Inner Mongolia from July 2011.
IPO, share issues
Real Gold listed on the Hong Kong Stock Exchange in February 2009, issuing 104m
new shares at HK$6.25 per share and raising ~HK$569m (US$73m).
Real Gold has done two placements since the IPO. The company placed ~105m shares
at HK$9.60 per share in October 2009, raising US$128m. It placed another ~100m
shares at HK$12.15 per share in June 2010, raising US$153m.
Figure 26: Share issues, million shares
Time
Feb-09
Oct-09
Jun-10
# of shares # of shares
before issue
issued
556
664
805
Share capital increase (%)
Issue price
(HK$)
19%
16%
12%
6.25
9.60
12.15
104
105
100
Net proceeds raised Reason for share issue
(US$)
73 IPO
128 Development of Yangchangbian tenement and future acquisitions
153 Development of current tenements and future acquisitions
Source: Company data, Samsung Securities
Controlling shareholder—Wu Ruilin
Mr. Wu is the founder of Real
Gold and a famous
entrepreneur in China
Wu Ruilin is the founder of Real Gold and holds a ~53% stake in the company. Real
Gold is one of Mr Wu‘s primary investments in China‘s mining industry since 2006. Mr.
Wu is not involved in the operations of Real Gold.
According to Real Gold, Mr. Wu is also the founder of a number of well-known
companies in China, including Qiao Xing Universal Telephone (XING US, not rated),
Qiao Xing Mobile Communication (QXM US, not rated) and Huizhou Qiaoxing Group.
Company management
Professional and experienced
management
Lu Tianjun is chairman and executive director of Real Gold. He has ~25 years of
experience in gold production and is a qualified project engineer. Mr. Lu worked at
Chifeng Honghuagou mine between 1986 and 2001. According to Real Gold,
Honghuagou mine was one of the largest state-owned gold mines in China. Mr. Lu
worked at Chifeng Shirengou Gold Mines Co., Ltd. as technical consultant and engineer
between 2001 and 2007. He joined Real Gold in 2007.
Qiu Haicheng is CEO and executive director of Real Gold. He has ~17 years of
experience in gold production and is a qualified engineer. Mr. Qiu worked at Chifeng
Honghuagou mine between 1993 and 2004. He worked as deputy manager of Balinzuo
Banner Materials Products Trading Co., Ltd. from 2004 and 2007. Mr. Qiu joined Real
Gold in 2007.
Ma Wenxue is vice president and executive director of Real Gold. He has ~22 years of
experience in gold production and is a qualified engineer. Mr. Ma worked in Chifeng
Honghuagou mine between 1988 and 2004. He worked as chief engineer of Kalaqinqi
Nantaizixiang Gold Mine from 2004 to 2007. Mr. Ma joined Real Gold in 2007.
Cui Jie is CFO and executive director of Real Gold. He has ~18 years of experience in
finance and accounting. Mr. Cui worked as CFO of Beijing LongTech Huanyu
Technology from 2004 to 2005 and as general manager of Beijing branch of Beijing
Shang Bai Financial Accounting Society from 2005 to 2006. He assisted Wu Ruilin in
founding and establishing Chifeng Fuqiao, a subsidiary of Real Gold.
22
October 05, 2010
Real Gold Mining
 INDEX
Business fundamentals
p3
Earnings outlook
p6
Valuation
p12
Bear Views & Blue Skies
p16
Technical analysis
p17
What is Real Gold Mining
p17
Outlook for gold
p23
The outlook for gold
We view gold as an “uncertainty” hedge
without particularly strong fundamentals.
We outline our forecasts for
prices, supply and demand
The outlook for gold
Higher prices now but a global
recovery could take the shine off
In this section, we outline our views on gold prices and discuss the main factors
affecting supply and demand. In essence, our view is that gold is mainly an ‗uncertainty
hedge‘ and tends to perform well in times of political and economic upheaval. While we
do not view the supply-demand dynamics of gold as particularly strong, we do expect
gold prices to remain high while financial markets remain concerned with whether
there will or will not be a ―double dip‖. At some stage, the global economy will recover.
When that happens, gold prices are likely to decline; no bull market lasts forever.
Many of the charts and much of the data in this section is drawn from the excellent
website maintained by the World Gold Council at www.gold.org.
Price forecasts
We expect gold prices to rise
further into 2011E
We forecast average gold prices to rise 22% YoY to US$1,191/oz in 2010 and a further
5% YoY to US$1,251/oz in 2011 before declining 10% YoY to US$1,125/oz in 2012. We
believe gold prices will remain high over the next year or so supported by continued
economic uncertainty, rising investment demand and official sector net purchases.
Gold prices are driven by a number of factors that are highly volatile. For instance,
buying by ETFs can be substantial in one quarter but not in the next. Gold scrap supply
also varies widely with prices and expectations. These things make forecasting gold
prices difficult, in our view.
Figure 27: Gold prices, US$/oz
London PM fix
YoY
2008
872
25%
2009
972
12%
2010E
1,191
22%
2011E
1,251
5%
2012E
1,125
-10%
2013E
1,013
-10%
2014E
962
-5%
2015E
991
3%
Source: Bloomberg, Samsung Securities
The main risk to gold appears
to be economic recovery
We view the main risk as being that a stronger than expected global economic recovery
leads to less investment buying of gold, hence weaker prices. In this scenario, we would
expect stronger price performances in the industrial metals—bulk commodities and
base metals—rather than the ‗financial‘ metals, gold and silver.
23
October 05, 2010
Real Gold Mining
Figure 28: Historical gold prices
1400
US$/oz
1200
1000
800
600
400
200
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
0
Source: Bloomberg
Demand and supply
Gold’s fundamentals are not
strong in our view
We do not view the fundamentals for gold as particularly compelling. There is a big
inventory; all the gold ever mined still exists and presumably could be recycled. There
is no significant industrial use and demand from the jewellery sector—the biggest
element of consumption—has been declining for a decade. Gold prices have been
underpinned up the ‗uncertainty hedge‘ and massive buying by ETFs and other funds.
This demand could easily decline, in our view, if the global economy starts to recover.
That said, some emerging market central banks have become buyers of gold. Lower
prices could lead to strong official sector buying. It could also lead to stronger demand
for jewellery and lower scrap supplies.
Figure 29: Global gold demand and supply, tonnes
2005
2006
2007
2008
2009
2010E
2011E
2012E
Supply
Mine production
Net producer hedging
Net mine supply
2,520
(131)
2,389
2,475
(369)
2,106
2,473
(444)
2,029
2,410
(352)
2,058
2,575
(254)
2,321
2,590
(80)
2,510
2,600
(80)
2,520
2,600
(80)
2,520
Official sector sales
Gold scrap recycled
Total supply
661
861
3,911
329
1,106
3,541
484
982
3,495
232
1,316
3,606
30
1,673
4,024
(60)
1,800
4,250
(30)
1,800
4,290
(30)
1,700
4,190
Demand
Total fabrication demand
3,151
2,760
2,882
2,632
2,132
2,395
2,587
2,690
Jewellery
Industrial
2,718
433
2,298
462
2,417
465
2,193
439
1,759
373
1,970
425
2,128
459
2,213
477
Net retail investment
394
416
437
858
731
830
800
780
Bar and coin retail investment
Other retail investment
411
(26)
411
(28)
447
(10)
643
215
503
228
650
180
600
200
600
180
ETFs and others
208
260
253
321
617
600
650
600
3,753
3,436
3,572
3,811
3,480
3,825
4,037
4,070
158
105
(77)
(205)
544
425
253
120
Total demand
Supply minus demand
or "inferred investment"
Source: WGC, Samsung Securities
24
October 05, 2010
Real Gold Mining
Gold supply
Gold supply has hinged on
recycling as mine output has
stalled
Gold supply comes from three main sources; mine production, recycling of gold scrap
and net sales by the ‗official sector‘ including central banks and the IMF. Mine
production is the largest source of global gold supply accounting for 60-65% of annual
supply over the past decade. Although mine supply is the biggest portion, it has
stagnated over the past few years; supply has increased largely because of increased
recycling of gold scrap. ‗Official‘ sector gold sales remain an important source of gold
supply yet since 2Q09 purchases by emerging market central banks has made the
official sector a net buyer.
Figure 30: World gold supply
4,500
Tonnes
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
Mine production
Gold scrap recycled
2009
2008
2007
2006
2005
2004
2003
2002
0
Official sector sales
Source: WGC, Samsung Securities
Mine production
Mines have been struggling
with rising costs and
declining grades
Global mine production peaked at 2,600 tonnes in 2001. By 2008, production had
declined by 7% to 2,410 tonnes though it rebounded to 2,575 tonnes in 2009. Mine
supply has been impacted by increasing capital costs and lead times as mines are
engineered to greater depths and by diminishing ore grades in some mines in the
traditional gold mining countries—South Africa, Australia, Canada and the US. Also,
we believe that a lack of investment in the 1990s and early 2000s, when gold prices
were low has meant that mine output is being restricted now. We expect mine
production to remain roughly flat over the next few years at ~2,600 tpa.
While mine output in the traditional gold producing countries has generally declined
over the past decade, gold production in key emerging markets—notably China, Russia
and Peru—has increased. One important driver for this has been emerging countries
desire to boost financial reserves by mining their own gold deposits.
25
October 05, 2010
Real Gold Mining
World mine output has
stagnated over the past
decade
Figure 31: World gold production
2,600
Tonnes
8%
2,500
5%
2,400
3%
2,300
0%
2,200
-3%
2,100
Mine production
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-5%
1990
2,000
YoY (RHS)
Source: WGC, US Geological Survey, Samsung Securities
For instance, in China‘s Eleventh Five Year plan (2006-2010) the government aimed to
increase Chinese gold production by 5% pa and to raise Chinese gold reserves by
3,000-3,500 tonnes. As a result, there has been a strong focus on both raising mine
production and on improving mine and resource efficiency over the past few years.
Mine production has risen in
China, Peru, and Russia, but
not elsewhere
Figure 32: Mine production change, 1999-2009, %, YoY
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
South Africa
USA
Canada
Australia
Russia
Peru
China
Source: WGC
Notably, Chinese mine supply has risen by an average of 7% pa since 2000 reaching
314 tonnes in 2009. Chinese supply now represents ~12% of world mine production, up
from ~7% in 2000.
26
October 05, 2010
Real Gold Mining
Figure 33: Mine production by country, 2009
Figure 34: Mine production in China
330
China, 12%
310
13%
Tonnes
12%
290
Others, 29%
Australia, 9%
US, 9%
11%
270
250
10%
230
9%
210
8%
190
Uzbekistan,
4%
7%
170
Peru, 8%
China mine production
Canada, 4%
Source: WGC, Samsung Securities
2009
2008
2007
2006
2005
2004
2003
2002
Russia, 8%
6%
2001
Indonesia,
4%
150
2000
South Africa,
9%
Ghana, 4%
China as % of global (RHS)
Source: WGC, Samsung Securities
Net producer hedging
Falling gold prices in the late-1980s and through the 1990s led to a surge in gold
hedging by producers. Producers typically sold a portion of their production forward in
order to lock-in what at the time were perceived as good prices. In the late-1990s, about
three quarters of all gold sales were hedged in this way.
The gold price reached a trough of US$256/oz in April 2001 and since then has risen
about five times. This surge in prices has led to a reversal of this hedging strategy over
the past decade. In our global gold model, we show this reduction in net producer
hedging (effectively gold purchases) as a reduction in mine supply.
Even though the global hedging book has declined from 423 tonnes in 2002 to about
254 in 2009, gold producers are still looking to unwind remaining hedge positions. For
example, AngloAshanti (ANG SJ, not rated), the world‘s third largest gold producer,
announced that it plans to unwind its hedge book entirely by early 2011. The company
plans to raise ~US$1.4bn selling shares and convertible bonds in order to do this.
According to the Financial Times, the company‘s forward sales are at less than
US$450/oz.
We view the continued reduction in the size of the global hedging book as a risk to
longer-term gold prices because one aspect of gold demand is being removed from the
market. This of course, assumes that no new hedging activity occurs. It is likely that if
producers sense that gold prices have peaked, they may start to hedge forward sales
again. Similarly, continued de-hedging suggests producers see the gold price heading
higher.
27
October 05, 2010
Real Gold Mining
Figure 35: Net producer hedging
450
200%
Tonnes
400
150%
350
100%
300
50%
250
0%
200
-50%
150
Net producer hedging
2009
2008
2007
2006
2005
2004
2003
-100%
2002
100
YoY (RHS)
Source: WGC, Samsung Securities
Recycled gold
Scrap recycling is a
significant part of supply…
After mine production, the recycling of gold scrap is the second largest source of gold
supply. The supply of recycled gold reached 1,673 tonnes in 2009, up from 836 tonnes
in 2002 and representing ~39% of total gold supply in 2009. Most gold scrap supply
comes from jewellery, though smaller quantities are also recovered from electronic
components. Gold is almost indestructible and this means that virtually all the gold
ever mined—roughly 165,000 tonnes since gold mining first started before 2000 BC—
still exists. Gold is easily melted and refined and can thus be simply recovered from a
current source and reused.
…And increases during tough
times
The supply of gold scrap depends upon two main factors. The first is the level of
economic prosperity or hardship. Scrap supply tends to increase during periods of
economic hardship or uncertainty. For instance, there was a substantial increase in
recycled gold supply in 1Q09 at the height of the financial crisis. The Asian Crisis in
1997 also led to a sharp rise in supply. The second factor is the gold price; there is a
greater incentive to sell when gold prices are high. The supply of recycled gold is
relatively volatile compared to mine output.
Turkey is the most important source of recycled gold, followed by the US, India,
Indonesia, the Middle East, Italy, and China. Chinese recycled gold supply reached 62
tonnes in 2008, accounting for ~5% of world supply though we do not expect this to
increase rapidly. Chinese per capita consumption of and investment in gold is still
increasing from very low levels. Over the next few years, the Chinese are more likely to
consume and hoard gold in our view than they are to sell.
28
October 05, 2010
Real Gold Mining
Figure 36: Global gold scrap recycled
1,700
Figure 37: Quarterly gold scrap recycled
650
Tonnes
Tonnes
600
1,500
550
500
1,300
450
1,100
400
350
900
300
700
250
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Source: WGC, Samsung Securities
1Q07
200
500
Source: WGC, Samsung Securities
Official sector sales and now purchases
The official sector comprises central banks, government bodies such as the Monetary
Authority of Singapore, organisations such as the IMF, The Bank for International
Settlements and the European Central Bank. The official sector currently holds some
20% of the 165,000 tonnes of gold ever produced in reserves. Gold offers several
advantages to central banks including

Unlike currencies, gold is not overly reliant on the economic or political policies of
any one country

It has a reputation as a safe haven—and over the past two years has acted like one

Diversification benefits—gold is typically poorly correlated to reserve currencies

Increased confidence if the reserves are sufficient
Against these factors, gold has added costs such as storage, insurance and shipping. It
is also more usually volatile than the major reserve currencies.
During the 1990s, the official sector became a significant net seller of gold. This was
driven by the generally sound macroeconomic outlook, which meant gold‘s value as a
safe haven was unnecessary and generally falling gold prices. European central banks
became the biggest sellers, reflecting the fact that historically they had held a high
proportion of gold in their reserves. Net selling continued through the early-2000s,
though selling by the European central banks started to slow abruptly in 2007.
From 2Q09, the official sector moved from being a net seller of gold to a net buyer.
Notably, sales by the European central banks have declined sharply in the past two to
three years, and purchases by some emerging market central banks have increased.
Notably, India, China, and Russia have all added to their gold reserves in recent years.
This change has been driven by several factors. First, global reserves have grown
substantially over the past few years, mostly in currencies. Although the gold price has
risen, it has done so quickly enough to maintain gold‘s proportion in the reserves of fast
growing emerging nations. In China, for instance, gold accounted for 2.2% of reserves
in 2002, but according to the World Gold Council, this has fallen to ~1.5% now, even
after the announcement that China bought 454 tonnes of gold in Apr 2009.
29
October 05, 2010
Real Gold Mining
In India, gold accounted for ~20% of reserves in the mid-1990s but this had fallen to
~4% by 2008. India bought 200 tonnes of gold in late 2009, boosting the gold
proportion of reserves to ~7%.
Second, there have recently been increased concerns over the major reserve currencies.
Over the past decade, the US dollar has plummeted against the euro, and the increasing
US government deficit increases the risks of further dollar depreciation. The euro is
hardly viewed as a solid reserves currency, not least because of the precarious state of
the economies in the PIIGS countries. Central banks have bought gold.
Third, the recent financial crisis has once again highlighted gold‘s ‗safe haven‘ nature
after the large extent of monetary easing in many countries after the crisis raised fears
of inflation.
Fourth, the IMF‘s decision to sell 400 tonnes of gold enabled central banks to buy gold
off-market—ie, without disturbing the private sector market.
The World Gold Council believes we are unlikely to see the end of this net buying
anytime soon. They recognise that the global economic outlook may not always
highlight gold‘s virtues to the same extent as now but they do not see selling returning
to the same levels as in the 1990s. In The WGC believes ―the crisis which started in
2007 has proven once again that boom tends to be followed by bust and the economic
nirvana still eludes humankind‖. That is a compelling case for gold.
Figure 38: Official sector net sales/(purchases)
700
Figure 39: Official sector net sales/(purchases)
200
Tonnes
Tonnes
600
150
500
400
100
300
50
200
100
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2009
2008
2007
2006
2005
2004
2003
2002
Source: WGC, Samsung Securities
2Q07
1Q07
0
0
-50
Source: WGC, Samsung Securities
Gold demand
Gold demand has been
roughly flat over the past
decade …
Gold demand is driven by three main sectors; jewellery (which accounted for ~51% of
global demand in 2009), industrial demand (~11%), and investment demand (~38%).
Industrial demand includes the electronics sector as well as medical and dental
demand. Investment demand includes investments by ETFs and other funds as well as
net buying by individuals.
Over the past decade, world gold demand has fluctuated between 3.5-3.8k tpa.
Jewellery demand has declined during this period whereas investment demand has
risen sharply.
30
October 05, 2010
Real Gold Mining
Figure 40: World gold demand
4,000
Tonnes
3,500
3,000
2,500
2,000
1,500
1,000
500
Jewellery
Industrial
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Investment
Source: WGC, Samsung Securities
Jewellery demand
… as buying by ETFs and
other funds has offset
declining jewellery demand
Historically, gold jewellery has been closely associated with special occasions all over
the world, and in some countries such as India, the Middle East, and China, the giving
of gold remains an important part of the culture. Over the past decade, however, gold
has increasingly faced competition for discretionary spending from other luxury items
such as other (non-gold) jewellery products, electronics goods, fashion items, and
others. Since 2000, jewellery demand has fallen sharply (in tonnes terms) in all major
markets except China.
While jewellery demand still accounts for the largest portion of global gold demand the
portion has fallen sharply over the past few years. According to data from the World
Gold Council, jewellery demand reached 1,759 tonnes in 2009, worth US$55.0bn at
average 2009 prices and representing 51% of total world demand. This was down from
3,205 tonnes in 2000 (a fall of ~50%), when jewellery accounted for 84% of world
demand. While the gold jewellery market has disappointed in tonnes terms, in dollar
terms, the market has roughly doubled in size over the past decade.
Chinese jewellery demand has increased over the past decade even as demand in
tonnage terms) has declined in other countries. Up until about 2002, Chinese gold
demand was stagnant at ~200 tpa. The market was strictly regulated, prices were
controlled, and foreign companies were not allowed to produce or sell gold products.
Since deregulation, jewellery design has started to appeal to a more affluent and
younger generation and demand has risen.
31
October 05, 2010
Real Gold Mining
Figure 41: World jewellery demand, tonnes
3,650
Figure 42: World jewellery demand, US dollars
10%
Tonnes
3,150
5%
65.0
25%
US$ bn
60.0
20%
55.0
-15%
650
-20%
150
-25%
Gold jewellery
15%
50.0
10%
5%
0%
35.0
YoY (RHS)
Gold jewellery
2009
2008
2007
2006
2005
-15%
2004
20.0
2003
-10%
2002
25.0
2001
-5%
2000
30.0
2009
2008
1,150
2007
40.0
2006
-10%
2005
1,650
2004
45.0
2003
-5%
2002
2,150
2001
0%
2000
2,650
YoY (RHS)
Source: WGC, Samsung Securities
Source: WGC, Samsung Securities
Figure 43: Jewellery demand in main countries, tonnes
Figure 44: Jewellery demand in main countries, US dollars
700
14,000
Tonnes
600
12,000
500
10,000
400
8,000
300
6,000
200
4,000
100
2,000
0
US$ m
0
India
USA
China
Turkey
2000
Saudi
Arabia
Egypt
UAE
Italy
India
2009
USA
China
Turkey
2000
Source: WGC, Samsung Securities
Saudi
Arabia
Egypt
UAE
Italy
2009
Source: WGC, Samsung Securities
Industrial demand
Industrial demand is steady,
but gold lacks a ‘killer
application’
In addition to jewellery, gold is also used in various industrial applications. Gold has
high thermal and electrical conductivity and excellent corrosion resistance and this
makes it ideal in electronics components. Gold also has medical applications, as its
resistance to bacteria and corrosion means that it can be used inside the human body—
eg in stents used to support weak arteries. Altogether, industrial demand accounted for
~11% of world gold demand in 2009. Of this, electronics applications accounted for
~7% of demand with other industrial applications and dentistry accounting for ~2%
each.
Investment demand—ETFs, etc
Over the past decade, we have seen a huge increase in investment demand for gold
driven by both retail investments—ie, hoarding of gold bars and coins—and investment
by funds such as ETFs. In fact, investment demand has risen from 166 tonnes in 2000
when it represented 4% of total gold demand to 1,348 tonnes in 2009 when it
represented 39% of demand.
32
October 05, 2010
Real Gold Mining
The World Gold Council estimates that ETFs now hold a total of 2,042 tonnes (up from
zero in 2000)—according to the data, the ETFs that the WGC tracks only started
accumulating gold in 2002. Notably ETF holdings are worth some US$82.1bn at
current prices. Net retail investment reached 731 tonnes at the end of 2009, down from
the peak of 858 tonnes at end-2008 after some crisis-affected selling, but still up
substantially from 166 tonnes in 2000.
One of the issues in forecasting gold demand is that gold purchases by ETFs and other
funds is very highly volatile. According to the World Gold Council ETFs bought just 5
tonnes of gold in 1Q10 but a substantial 243 tonnes in 2Q10. In 1Q10, ETFs accounted
for an estimated 1% of world gold demand, yet in 2Q10 this rose to 28%. This high
degree of volatility makes forecasting gold demand and thus prices over the short-term,
difficult.
Net retail investment
Source: WGC, Samsung Securities
ETFs and others
Net retail investment
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
-100
Tonnes
4Q07
0
2009
0
2008
100
200
2007
400
2006
200
2005
300
600
2004
800
2003
400
2002
500
1,000
2001
1,200
2000
600
3Q07
700
Tonnes
1,400
2Q07
1,600
Figure 46: Quarterly investment demand
1Q07
Figure 45: Gold investment demand
ETFs and others
Source: WGC, Samsung Securities
33
October 05, 2010
Real Gold Mining
Figure 47: Financial summary
12-08
12-09
12-10E
12-11E
12-12E
Profit & Loss (Rmb m)
Revenue
312
1,011
1,341
1,608
1,823
COGS
Gross profit
Gross profit margin (%)
-81
232
74
-263
749
74
-340
1,001
75
-399
1,209
75
-623
1,200
66
Selling, general & admin
Operating profit
-64
184
-48
734
-60
1,040
-56
1,290
-64
1,314
Operating margin (%)
59
73
78
80
72
Interest expense
Interest income
Others
Profit before tax
0
0
16
184
0
2
34
736
0
5
99
1,045
0
9
137
1,299
0
11
177
1,325
Taxation
Minorities
Net income
Net income margin
-75
-6
104
33
-193
-17
527
52
-272
-12
761
57
-325
-4
970
60
-331
-16
977
54
Adjusted net income
Adjusted EPS, Rmb
DPS, Rmb
104
0.47
0.00
527
0.78
0.00
761
0.90
0.00
970
1.07
0.00
977
1.08
0.00
Dividend payout ratio (%)
EBITDA
EBITDA margin (%)
0
194
62
0
767
76
0
1,076
80
0
1,353
84
0
1,415
78
12-08
12-09
12-10E
12-11E
12-12E
Balance Sheet (Rmb m)
Current assets
Cash and cash equivalents
Trade receivables
Inventory
Other current assets
Fixed assets
Other non-current assets
Total assets
12-08
12-09
12-10E
12-11E
12-12E
na
na
na
na
na
na
9.2
3.2
4.8
7.7
5.9
0.0
13.4
2.3
7.5
7.4
6.0
0.0
11.3
1.9
6.7
5.5
4.6
0.0
11.2
1.7
5.9
4.8
3.7
0.0
3,800
nm
na
224
296
66
33
40
15
20
26
18
13
5
1
42.0
25.0
net cash
net cash
0.0
nm
3.5
35.3
28.8
net cash
net cash
0.0
nm
1.4
21.2
19.0
net cash
net cash
0.0
nm
6.9
18.7
17.9
net cash
net cash
0.0
nm
8.2
15.9
15.2
net cash
net cash
0.0
nm
6.9
1.3
0.5
4.5
0.9
18.4
0.5
20.8
0.6
20.7
0.5
12-08
47.0
12-09
116.9
12-10E
138.5
12-11E
158.4
12-12E
217.9
40.8
6.2
0.0
0.0
0.0
0.0
91.3
25.6
0.0
0.0
0.0
0.0
111.0
27.4
0.0
0.0
0.0
0.0
109.2
27.4
18.6
3.2
0.0
0.0
109.2
27.4
37.3
10.9
14.4
18.7
Sales volume, tonnes
2.0
5.5
6.6
7.2
9.3
Concentrates
Bullions
By-products
1.5
0.0
0.5
3.6
0.0
1.8
4.3
0.0
2.3
4.2
0.7
2.3
4.2
2.5
2.5
Concentrates
Bullions
715
0
840
0
929
0
1,013
1,044
878
934
Production cash costs, US$/oz
181
218
211
212
255
Ratio Analysis
PER (x)
Price to book (x)
Price to sales (x)
EV/EBITDA (x)
EV/Sales (x)
Dividend yield (%)
Revenues growth (%)
EBITDA growth (%)
EPS growth (%)
ROE (%)
ROA (%)
Net debt to equity (%)
Net debt to total capital (%)
Total debt to equity (%)
Interest cover (x)
Interest and current liabs cover (x)
Current assets/current liabilities
Curr asset less cash/curr liab
Gold production, koz
69
2,424
2,875
3,442
4,194
42
21
5
0
316
197
582
1,958
33
6
427
378
275
3,078
2,794
55
26
0
553
1,490
4,918
3,345
66
31
0
962
1,498
5,902
4,084
75
35
0
1,250
1,488
6,933
Current liabilities
-52
-540
-156
-166
-202
Borrowings due in <1 year
Trade payables
Other current liabilities
Long-term liabilities
na
-40
-12
-17
na
-46
-494
-17
na
-56
-100
-17
na
-66
-100
-17
na
-102
-100
-17
Borrowings due >1 year
Other long-term liabilities
Total liabilities
Shareholders' equity
Total debt and sh. equity
na
-17
-69
497
582
na
-17
-557
2,484
3,078
na
-17
-173
4,696
4,918
na
-17
-183
5,667
5,902
na
-17
-220
6,644
6,933
12-08
12-09
12-10E
12-11E
12-12E
Pre-tax profit
184
736
1,045
1,299
1,325
Depreciation & amortisation
Increase in working capital
Others
Net cash from operating activities
9
30
-45
178
33
3
-122
650
36
1
-370
712
63
-6
-447
909
101
24
-485
965
Capex
Associates & investments
Others
Net cash in investing
-297
0
3
-293
-88
-90
-427
-605
-1,415
0
0
-1,415
-458
0
0
-458
-340
0
0
-340
Dividends paid
New debts / debts (repaid)
0
-248
0
0
0
0
0
0
0
0
Issue of shares
Others
Net cash in financing
388
19
158
1,443
427
1,871
1,451
88
1,539
0
101
101
0
114
114
Net increase in cash
43
1,915
836
551
739
Nantaizi-Shirengou
Luotuochang
Yangchangbian
Daping
Yandan
Yantang
Average selling price, US$/oz
Shareholding Structure
Cash Flow (Rmb m)
Shareholders
Code
Wu Ruilin
Others - public shares
Total shares in issue
246 HK
246 HK
No. of shares
%
480
425
905
53%
47%
100%
Source: Company data, Samsung Securities
34
October 05, 2010
Real Gold Mining
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35