Summary

G-Resources Group Ltd. (G-Resources or the Company) has become a gold manufacturer after succeeding in acquiring the Martabe Project in July 2009. Its gold reserve is still low, but there are untested prospects and potential for Mineral Resources on the remaining 97% of the COW Area, and the reserves may see a great increase potential. Furthermore, It is a significant orebody amenable to conventional open pit mining methods and owns the advantage on convenient transportation, both contributing to the possible low cost. The project will be put into operation from 4Q11, then the Company may turn loss to profit. Compared to the peers, its P/B and intrinsic value per ounce gold reserve are at a low level and can win the space to improve. We give the 12m TP of HK$0.55 and Buy rating.

Delayed project progress suppresses the stock price

After hitting the high of HK$1.74 when acquiring the Martabe Project in July 2009, the share price of G-Resources experienced a sharp drop and had kept stable at the low level between HK$0.4-0.6 in 1H10. However, the price has bottomed at HK$0.35 with the dropping gold price since June.

Compared to the peers, its share price performance has only led the Zijin Mining who is suffering from the enviromental crisis and still made a loss in the last year. In our view, the poor performance is attributable to the severe rainfall events in the early year, which let the Company has to change the locations for the process plant and tailing storage facilities and be subjected to an increase of the capital cost, meanwhile puts off the time limit from 1Q11 to 4Q11 for the Martabe Project. Recently the Company has identified new locations for the process plant and tailing storage facilities and estimated the capital cost will increase US$80 million. In our view, its previous sluggish price has reflected the negative impact by the delay.

Gold reserve is still low but with great potential to increase

The Smart Rich Energy Finance (Holdings) Ltd. was the precursor of G-Resources and managed the financial information service, electronics products trade and securities transaction businesses. However, it operates poorly with the annual revenue at only HK$30 million, and has made consecutive loss in past years. In July 2009, the Company acquired the Martabe Project in the Province of Northern Sumatra, Indonesia, and then transmitted to be a gold manufacturer. The Martabe Project is now the key start project.

The Martabe Project is with the Ore Reserves of 2.72 million ounces of gold and 32.82 million ounces of silver and Mineral Resources of 6.45 million ounces of gold and 66.36 million ounces of silver, as classified under the JORC Code. According to the Company's estimation, it will realize the production of 250 thousand ounces of gold and 2.5 million ounces of silver in the first stage of the project.

Compared to the peers in mainland, its gold reserve of 87 tons is low and the static reserve life of 9 years is short. However, The project is established under a sixth generation Contract of Work which was signed with Indonesia, covering 1,639 sq.km potential area and including six mines like Barani, Joring, Pit 1, Ramba Joring, Tor Uluala and UlualaHulu. The Company believes its gold reserves and static reserve life will see a great increase because more mineral resources have been found near to the ore deposits. What's more, besides the Martabe Project been exploring, there are untested prospects and potential for Mineral Resources on the remaining 97% of the COW Area. In future, G-Resources can expand its scale by endogenous growth and external acquisition. It is also estimated that the Company will realize the output of annual 1 million ounces gold within five years.

Low cost & convenient transportation

The Martabe Project holds the advantage of low cost, with the overall cash cost of US$268/Oz (net of by-product credits), nearly the lowest level in global gold mines. Firstly, It is a significant orebody amenable to conventional open pit mining methods, with a very low strip ratio (approximately 0.7:1 (waste: ore)) and good recovery ratios (70-80% for gold and 60-80% for silver).

Secondly, its gold ore grade is high. Compared to the peers in mainland, its ore grade is low with 2.1g/ton for gold and 25.8g/ton for silver. However, nowadays the ore grade is only 1.5g/ton for gold globally, which is far lower than the grade of the Martabe Project. Therefore the Company can win the competitive advantage on the manufacturing cost.

Thirdly, the Martabe Project can benefit from its close proximity to key infrastructure. Despite its remote location and rugged topography, the Martabe Project is adjacent to the Tans-Sumatra highway and is about 350 kilometres away by major arterial road from Medan, which is the regional center of Sumatra and the third largest city in Indonesia. The Martabe Project is only 40 kilometres from the port of Sibolga which has port facilities available. The Martabe Project also has good access to a reliable supply of water and electricity, which are typically two key local inputs for mining operations. Power is expected to be provided from the local high voltage grid which has recently been supplemented by the commissioning of a power station in Sibolga. Therefore, the Martabe Project can save the operation and transportation cost and take advantage of a large base of capable and professional Indonesian mining personnel.

Gold price is optimistic in medium to long term

After recording a new high of US$1265/Oz, the gold price has experienced a correction. In the short term, we think the weakening of the price will keep on, because the hedging tendency incurred by European sovereign debt crisis has alleviated and the commodity demand for the gold is in the off season and won`t enter the peak season until August. Therefore, currently there are little investing challenge for the gold.

However, we think there is a great probablity that the gold price will see a higher price in medium to long term. After experiencing the financial crisis in 2008, the confidence on the paper currency has been unstable. Taking the US$ as the example, recent data show that the US$ had taken a smaller share in the global foreign exchange reserves in 1Q10, down from 62.14% to 61.54%. Another report by the United Nations also indicates that the US$ should be replaced as the world's reserve currency. What's more, the huge amounts of debts and deficits of the developped economies are still the focus of fears, the greatly increased base money unleashed by quantitative easing policy also make the inflation expectation keep severe. In our view, the gold will be in bullish trend in medium to long term before the international fianancial syatem reform reachs a preliminary framework, and there is a great probability to see a higher price for the gold.

Risk

The precious metals prices perform poorly;

The project's progress isn`t on schedule;

Natural disasters and etc.

Worth buying for the undervalued price

G-Resources is still in the project construction period and the stock price keeps low. However, its future growth is optimistic. Plus with the upwards trend of the gold price, we think the Company is undervalued. Its P/B is below 1.2X, nearly the lowest level in the industry, far lower than the average 3X of others. More than that, its intrinsic value is only about US$200 per ounce gold reserve, also far lower than the level over US$300 of its peers abroad. We give it the 12m TP of HK$0.55 and Buy rating, suggesting 1.71X PB and 1.51X PB on FY2011 BVPS and FY2012 BVPS.

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