Zijin: gold price to rise in H2 on cost controls

Zijin Mining Group Co Ltd, the biggest gold producer in China, expects better business performance in the second half as production increases and profit margins improve on effective cost control, chairman Chen Jinghe said.

Speaking at a press conference in Hong Kong on Monday to announce the company’s interim results, Chen said in the first half of 2012, the company’s net profit was 2.385 billion yuan, a 19.95 percent decrease from the same period a year ago.

No interim dividend was recommended.

Zijin Mining blamed its poor result in the first half to the negative impact of the Chinese Lunar New Year holidays as well as the adverse weather conditions on its production.

Zijin Mining’s overall gross profit margin was 26 percent for the first half of 2012, a 10.2 percentage points fall over the same period last year.

Chen believes there is room for gold price to rise in the second half and the rising production costs trend has already been effectively contained since the second quarter of the year.

The gold price has dropped from US$1,920 an ounce at the peak last year to US$1,597.41 at the end of June, the firm said in a statement.

Chen explained that the company’s profit margin was squeezed because a larger proportion of its sales income contribution was from its lowmargin refinery and processing sector, which had been impacted by rising costs of raw materials and labor during the review period.

China International Capital Corporation Analyst Cai Hongyu, who is relatively bullish about the gold price, said in a research report that although the gold price had been fluctuating recently, its downside is limited.

“The gold price is likely to be boosted by the rising demand from the upcoming holidays in China and other gold consumption countries” said Cai, adding that the rising expectation of QE3 will provide support for gold price too.

He said Zijin Mining’s rising costs will continue to weigh on its performance in the second half, but along with commencement of production of the Heilongjiang Duobaoshan Copper Mine, the increasing copper production will partially offset the impact of rising costs and help the company to achieve better results in the second half.

At the press conference, Chen said that the valuations of global mining and gold stocks are “reasonable” now amid the European debt crisis and as more acquisition opportunities have arisen.