Capitalize on gold potential in Chinese mining stocks

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Photo Credit: Shandong Gold

Shandong Gold Mining released its first half profit figures, which where year-to-year five times higher due to greater output. The company is experiencing massive growth after buying five gold mines, while simultaneously cutting costs. High gold prices and demand for bullion around the world, as well as in Chinese electronics, made up a large portion of its profits. In fact, China’s gold consumption rose 23% in 2007.

Huge growth in production

Shandong Gold Mining may produce 2.5 times more gold this year than it did in 2007, which is at least what analysts are predicting. The stock trades at just 65 yuan, which is well off its high of 215 yuan in February when the Chinese bubble started unwinding. High gold prices and output are sure to keep the miner on track for larger profits.

An investment in the Chinese mining industry looks very strong as gold continues to rise to new levels and Shandong cuts costs. Oddly, Shandong trades for as much as it did in May 2007, even though profits are now five times higher than they were when the stock traded at 215 yuan per share. To say that the stock was overvalued even at 200 yuan might be a stretch, especially with a high operating income.

Plenty of upside potential

The upside for Shandong is not just in the possibility of higher output, but also in rising gold prices. If gold continues its upward movements, the profit potential triples. Gold at $1000 is more than 10% more profitable for producers because the cost to mine is the same. Gold becomes more profitable by margin when prices are higher. Lower energy prices could also help the mining industry, but that is still uncertain.

Shandong is predicted to earn as much as 904 million yuan on 15.12 metric tons. Shandong currently earns about $200 an ounce in pure profit, thus a gain in gold prices by 20% would virtually double profits. The upside potential for Shandong is huge, especially considering analysts estimates of gold topping $2000 per ounce in the next few years. Each 20% gain adds another 904 million yuan to the bottom line; a move from $970 an ounce to $2000 would be worth another 4.5 billion yuan per year.

Mining is highly leveraged

The mining industry is highly leveraged to gold prices. Shandong appears to be a solid investment at 65 yuan per share for a long term hold. If gold prices continue in its favor or cost cutting measures continue to produce, this stock could quickly climb to its pre-burst levels. Look for 200 yuan in just a few short years.

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