(Yicai) Sept. 2 -- Chinese gold mining companies took advantage of rising prices of the precious metal in the first half of the year to invest in expanding resources, with the 10 largest of them spending more than half of their profits in the first half of the year on mergers and acquisitions.

The cumulative net profit of the top 10 Chinese mainland-listed gold mining firms exceeded CNY54 billion (USD8 billion) in the six months ended June 30, according to data compiled by Yicai. The six of them that carried out M&As in the period invested over CNY30.8 billion in such operations.

Nine of the above 10 gold miners reported growth in first-half earnings, with net profits of Zhaojin Mining Group, Western Region Gold, Humon Smelting, and Sichuan Gold doubling from the same period last year.

The global mining industry has ushered in an era where the focus of competition is on mergers and acquisitions, driven by the abundant cash flow from rising gold prices. It has become normal for large miners to hold stakes in smaller peers, signaling the beginning of a consolidation cycle.

Zijin Mining Group was the Chinese mining firm that spent the most on M&As in the first half, investing about CNY21.6 billion, equal to 70 percent of the total. It bought a 26 percent stake in Chifeng Gold for CNY18.3 billion and a 72 percent stake in Gansu Northwest Gold for CNY2.4 billion (USD357.1 million), and acquired Lianrui Mining Industry for CNY900 million (USD133.9 million).

CMOC Group ranked second as it purchased four operating gold mines in Brazil for about CNY7.3 billion. The deal, which was closed on Jan. 23 in only 40 days, brought the company around CNY1.3 billion in net profit in the first half.

The core value of gold mining stocks lies in their operational leverage over gold prices, Liu Tingyu, manager of Maxwealth Fund Management, told Yicai. Compared with commodity gold, gold miners not only benefit from changes in gold prices but also improve profitability through production growth, cost optimization, and cash flow improvement, he noted.

The transmission of high gold prices to mining companies’ revenue and profits is still ongoing, Liu pointed out.

“In the history of M&As in the mining industry, if a company encounters a cyclical downturn after acquiring an asset at a high price, the M&A premium is directly converted into book impairment and cash flow burden,” a mining industry insider told Yicai.

As gold price dividends gradually convert into mining rights on the balance sheet, it remains to be seen whether these resources purchased at high prices can convert into sustained cash flow amid gold price fluctuations, the insider noted. He believes that with the industry consolidation, operational efficiency and cost-control capabilities will become the watershed in the next stage.

Editor: Futura Costaglione