According to Investor Reference

Munger once said: "When I was young, I worked as a lawyer for a mining company. The owner of that company was a kind old man who told me: ‘Charlie, a good mine is not afraid of poor management.’"

However, for investors looking to make long-term investments in domestic gold mining companies, is it true that a good mine is resilient against poor management?

Following the breach of the $3,000 per ounce mark in March this year, international gold prices have further surged, successfully surpassing the $4,000 per ounce threshold in just six months. As of October 22 at 16:35, COMEX gold prices were reported at $4,095.8 per ounce.

The sustained rise in gold prices has significantly boosted earnings for several gold-listed companies. For example, Zijin Mining reported third-quarter operating revenue of 86.489 billion yuan, up 8.14% year-on-year; its net profit attributable to shareholders reached 14.572 billion yuan, a sharp increase of 57.14% year-on-year and an 11.02% increase quarter-on-quarter, maintaining its growth momentum.

Amid this ongoing "golden feast" characterized by soaring prices, Shandong Gold (600547.SH, 01787.HK), a major player in the global gold industry, faces scrutiny. The company recently released its third-quarter earnings forecast, indicating a net profit decrease of 44.33% to a range of 2.75 billion yuan, down from 1.782 billion yuan in the second quarter.

Some investors question how, despite rising gold prices and its substantial resource endowment, Shandong Gold struggles to effectively translate the increase in gold prices into corresponding actual profit gains. Its net profit repeatedly falls short of investor expectations, leading some to distance themselves from the company.

Furthermore, some experts have raised concerns about whether, based on Shandong Gold’s operational history, the company can provide substantial returns to shareholders, especially in comparison to funding methods such as maintaining an IPO in Hong Kong, targeted placements, and rapid placements.

Compared to its peers, Shandong Gold has significant advantages in gold resource reserves and production capacity. By the end of 2024, the company expects to hold gold reserves of 2,058 tons (equity basis), placing it among the top tier of domestic gold mining enterprises.

Generally speaking, there is a notable positive correlation between gold prices and gold stocks. When gold prices rise, mining companies often see increases in sales revenue and profits as they can sell gold at higher market prices, with net profit growth usually exceeding the gold price hike.

For example, if a mining company has a stable extraction cost of $1,200 per ounce of gold, when gold prices are at $1,800, the profit per ounce is $600; however, if gold prices rise to $3,600, profits jump to $2,400 — an increase of threefold.

Shandong Gold's annual report shows net profits from 2020 to 2024 were 2.496 billion yuan, -230 million yuan, 1.351 billion yuan, 2.823 billion yuan, and 4.388 billion yuan respectively.

Before the disclosure of this year’s third quarter report, some investors had already expressed concerns about Shandong Gold’s consistent net profit misses and difficulties in profit release. Senior investor Ma Hua (pseudonym) even lamented that despite the significant increase in gold prices in 2024, Shandong Gold's net profit increase was disappointingly low compared to 2023.

Analysts speculate whether there have been recommendations within the company to deliberately control the pace of profit release.

Senior investor Zhou Jun (pseudonym) believes that from a profitability perspective, Shandong Gold's operational efficiency is even lower than that of its subsidiary, Shanjin International (000975.SZ, formerly Yintai Resources), which was acquired for a significant sum of 12.76 billion yuan in 2023.

In other words, despite the ongoing price increase in gold, Shandong Gold’s resource endowment has not been sufficiently converted into corresponding profit growth, leading to frequent investor disappointment.

The persistently high 「three expenses」 (operating expenses) of Shandong Gold highlight the issues at hand.

The financial report indicates that in 2024, Shandong Gold's financial expenses surged by 46.3% year-on-year to 2.282 billion yuan, while management and selling expenses increased by 13.92% and 25.41%, respectively.

Investor Zhou Jun pointed out that in 2024, Shandong Gold's financial costs stayed elevated, with a significant portion of its generated cash flow consumed by high expenditures.

In a horizontal comparison, Shandong Gold's management expense ratio (3.5%) exceeds that of its subsidiary, Shanjin International (3%), and Zijin Mining (2.55%), which may be a crucial factor suppressing its gross profit margin performance.

Zhou Jun candidly stated that, for Shandong Gold, long-term shareholders might find it challenging to receive the expected returns that should arise from the company's strong resource endowment. Investment returns increasingly depend on transactional opportunities or the overall market uptick for gold mining companies. "All the bullish talk is just narrative, lacking the necessary cash return to shareholders for support."

In August this year, Han Yaodong was appointed as Chairman of Shandong Gold. It remains to be seen whether the new chairman can address some of the investor concerns and doubts mentioned above.

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