42
Investment Analysis for Intelligent Investors Siddharth Rajeev, B.Tech, MBA, CFA Analyst Chris Porter, B.Sc Research Associate-Mining Miller Chu, BCom Research Associate November 25, 2011 2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT China Gold International Resources Corp Ltd. (TSX: CGG, HKSE: 2099) - Initiating Coverage - Gold/Copper Producer With Near-Term Expansion Potential Backed by Chinese SOE Sector/Industry: Exploration/Mining www.chinagoldintl.com Market Data (as of November 24, 2011) Current Price C$2.86 Fair Value C$5.50 Rating* BUY Risk* 3 (Average) 52 Week Range C$2.54 – C$6.10 Shares O/S 396.16 mm Market Cap $1,133 mm Current Yield N/A P/E (forward) 15.7x P/B 0.9x YoY Return -51.4% YoY TSX -11.0% *see back of report for rating and risk definitions 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 25-Nov-10 25-Mar-11 23-Jul-11 20-Nov-11 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 Investment Highlights The company is a gold and non-ferrous metal producer with two primary properties. The Chang Shan Hao (CSH) Gold Mine in Inner Mongolia is one of China’s largest gold mines, with current gold reserves of approximately 3 million ounces. The company also owns and operates the Jiama Mine, a poly-metallic deposit located in Tibet with a M&I resource estimate of 4.08 million tons of copper averaging 0.41% copper. The company’s largest share holder (39.33%) is China National Gold Group Corporation (CNG), a Chinese state owned company and the largest producer of gold in China. We believe significant potential exists for near term expansion of the operations at both properties following positive feasibility studies. We anticipate positive results from the 2011 drill program at both CSH and Jiama in Q4 2011/Q1 2012 to expand and upgrade the resource. CGG’s Forward P/E (2012 estimate) and the current P/B are just 10.4x and 0.9x versus Gold industry average multiples of 18.6x and 2.30x. We are initiating coverage with a BUY rating and a fair value of C$5.50 per share. Risks The value of the company depends on commodity prices - CGG does not use hedging strategies - produced gold and copper are sold at spot prices. Technical difficulties and delays in expansion may impede realization of economic benefits of the planned expansion. The success of drilling, resource expansion and development are important long-term success factors at both flagship properties. Political tension in Tibet may impact investor interest in the company. FRC Analysts have visited the company's projects in the last 12 months. All the figures are in US$ unless otherwise noted. China Gold International Resources Corp Ltd. is a gold and non-ferrous metal producing company with two flagship properties in China; The Chang Shan Hao Gold mine in Inner Mongolia, and The Jiama poly-metallic mine in Tibet. Strong potential exists for near term production growth and continued exploration aims to expand the existing resource base at both projects.

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Page 1: China Gold International Resources Corp Ltd. (TSX: CGG ...€¦ · China Gold International Resources Corp Ltd. is a gold and non-ferrous metal producing company with two flagship

Investment Analysis for Intelligent Investors

Siddharth Rajeev, B.Tech, MBA, CFAAnalyst

Chris Porter, B.ScResearch Associate-Mining

Miller Chu, BComResearch Associate

November 25, 2011

2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

China Gold International Resources Corp Ltd. (TSX: CGG, HKSE: 2099) - Initiating Coverage -

Gold/Copper Producer With Near-Term Expansion Potential Backed by Chinese SOE

Sector/Industry: Exploration/Mining www.chinagoldintl.com

Market Data (as of November 24, 2011)

Current Price C$2.86

Fair Value C$5.50

Rating* BUY

Risk* 3 (Average)

52 Week Range C$2.54 – C$6.10

Shares O/S 396.16 mm

Market Cap $1,133 mm

Current Yield N/A

P/E (forward) 15.7x

P/B 0.9x

YoY Return -51.4%

YoY TSX -11.0%

*see back of report for rating and risk definitions

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

25-Nov-10 25-Mar-11 23-Jul-11 20-Nov-11

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Investment Highlights

• The company is a gold and non-ferrous metal producer with two primary properties.

• The Chang Shan Hao (CSH) Gold Mine in Inner Mongolia is one of China’s largest gold mines, with current gold reserves of approximately 3 million ounces.

• The company also owns and operates the Jiama Mine, a poly-metallic deposit located in Tibet with a M&I resource estimate of 4.08 million tons of copper averaging 0.41% copper.

• The company’s largest share holder (39.33%) is China National Gold Group Corporation (CNG), a Chinese state owned company and the largest producer of gold in China.

• We believe significant potential exists for near term expansion of the operations at both properties following positive feasibility studies.

• We anticipate positive results from the 2011 drill program at both CSH and Jiama in Q4 2011/Q1 2012 to expand and upgrade the resource.

• CGG’s Forward P/E (2012 estimate) and the current P/B are just 10.4x and 0.9x versus Gold industry average multiples of 18.6x and 2.30x.

• We are initiating coverage with a BUY rating and a fair value of C$5.50 per share.

Risks

• The value of the company depends on commodity prices - CGG does not use hedging strategies - produced gold and copper are sold at spot prices.

• Technical difficulties and delays in expansion may impede realization of economic benefits of the planned expansion.

• The success of drilling, resource expansion and development are important long-term success factors at both flagship properties.

• Political tension in Tibet may impact investor interest in the company. • FRC Analysts have visited the company's projects in the last 12 months.

• All the figures are in US$ unless otherwise noted.

China Gold International Resources Corp Ltd. is a gold and non-ferrous metal producing company with two flagship properties in China; The

Chang Shan Hao Gold mine in Inner Mongolia, and The Jiama poly-metallic mine in Tibet. Strong potential exists for near term production

growth and continued exploration aims to expand the existing resource base at both projects.

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China Gold International Resources Corp Ltd. (TSX: CGG, HKSE: 2099) - Initiating Coverage Page 2

2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Company

Overview

China Gold International Resources Corp Ltd. (“the company” or “CGG”) is a mineral development company listed on the Toronto Stock Exchange as CGG, and the Hong Kong Stock Exchange as 2099. The company is based in Vancouver, Canada and has two producing properties.

The Chang Shan Hao (CSH) Gold Mine in Inner Mongolia is one of China’s largest

gold mines, with current gold reserves of approximately 3 million ounces. Operations comprise conventional open-pit mining and heap leach processing with a current processing rate of 30,000 tpd (10.65 Mtpa).

The company also owns and operates the Jiama Mine, a poly-metallic deposit located

in Tibet. Commercial operations began in September 2010 at the designed processing rate of 6,000 tpd (2.1Mtpa). Ore is currently extracted from two open pits and a smaller scale underground operation. A resource estimate published in August 2011 increased the

measured and indicated resources by approximately 4.4x to 1,006 million tonnes

averaging 0.41% copper for a total of 4.08 million tons of copper.

Following our discussions with management, we anticipate potential near term expansion at both projects. We expect announcements in Q4 2011, to Q1 2012, including positive results from the 2011 drill program at CSH to expand and upgrade the resource, as well as a potential Phase II expansion of the operations at both CSH and Jiama. We believe these

potential developments, combined with a large established resource base, represent

significant near term upside potential for CGG.

Corporate Structure/History

China Gold International Resources Corp Ltd. was incorporated in 2000 under the name Pacific Minerals Inc. (PMI), renamed as Jinshan Gold Mines Inc. (JIN) in 2004, and China Gold International Resources Corp Ltd. (CGG) in 2010. In 2002, CGG entered into an agreement with a Chinese State Owned Company to acquire up to a 96.5% interest in the CSH gold project. In May 2002, CGG entered into a participation agreement with Ivanhoe Mines Ltd. (TSX: IVN) granting them an option to earn a 60% participation interest (with a right to increase to 76.5%) in the CSH gold project. In October 2005, CGG reached an agreement to buy back all of IVN’s interest in the CSH project and all existing contractual rights to participate in CGG’s projects. As part of the transaction, IVN paid approximately $4 million and were issued 48.52 million common shares of CGG. Upon closing of the deal, IVN became the largest shareholder of CGG. In May 2008, China National Gold Group Corporation (CNG) purchased all of IVN’s

holdings of 67.52 million common shares in CGG at a price of C$3.11 per share for a total of C$217.7 million, and a $7.5 million promissory note issued to IVN. Following the transaction, CNG became CGGs largest share holder with 42% of the company's

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

shares. CNG continues to remain the company’s largest shareholder owning

approximately 39.33% of the issued and outstanding shares of CGG. China National Gold Group Corporation is a Chinese state owned company founded in 1979 and is the largest producer of gold in China. Through its numerous subsidiaries, it engages in gold mining and refining, irradiation treatment, trading, and media businesses in China. It is involved in all aspects of the gold mining industry from fabrication of equipment, exploration, mining, refining and sales. China Gold also controls Zhongjin Gold (SHSE: 600489), which in 2003, became the first publicly listed gold miner on the Shanghai Stock Exchange. CNG’s long term goals are to advance their exploration and development portfolio both in China and internationally. This mandate has been supported through association with CGG being CNGs primary overseas company. CNG intends to maintain its majority shareholder interest in the company. Access to capital, and the strong backing from a Chinese SOE

(which will be useful for CGG's acquisitions going forward), are the major

advantages of CNG being CGG's major shareholder. However, the disadvantage is

that conflicts of interest could arise going forward as CNG might not always act in

the best interest of CGG's other shareholders. For example - CNG also has several other subsidiaries operating in the mining space - it is not necessary that CGG will always receive the most favorable treatment (economically) from CNG; also, as CNG intends to use CGG as its international vehicle, and maintain a majority shareholder interest in the company, CNG might not entertain acquisition bids for CGG that might be beneficial for CGG's other shareholders. The current corporate structure of CGG is shown below:

In our discussions with management they indicated that CGG intends to grow organically by increasing production and resources at the existing properties, as well as through acquiring additional overseas gold projects. Primary acquisition targets would be large advanced stage gold-copper resources with potential for quick development into production. This is reflected by the non-compete agreement between the company and CNG that was part of the acquisition agreement in 2008. As part of this undertaking, CNG has allowed

60.67%

100%

39.33%

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China Gold International Resources Corp Ltd. (TSX: CGG, HKSE: 2099) - Initiating Coverage Page 4

2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Mining Outlook

in China

The Chang Shan

Hao Gold Mine-

Inner Mongolia

CGG preferential and first refusal rights on any future gold and non-ferrous properties acquired outside of China.

China Gold International’s shares commenced trading on the Hong Kong Stock

Exchange in December 2010.

The Fraser Institute is a Canadian based independent research organization that completes an annual survey of mining jurisdictions around the world. The most recent study published in March 2011, ranks China 62 out of 79 mining jurisdictions based on a number of factors such as security, mineral potential, infrastructure, government policy and taxation regime. China scored best (8/79) in the ‘uncertainty concerning which areas will be protected as wilderness areas, parks, or archaeological sites’ category. China ranked at 45 in both categories relating to ‘political stability’ and ‘security risk’. There have been fluctuations in political tension between Tibet and China for many years which could potentially impact investor interest in CGG. As noted above, CGG is partly owned by a state run company, which may mitigate any potential risks from political instability. Management has indicated that the Jiama mine located in Tibet employs locals from the surrounding area. We believe this offers a further benefit, as international companies operating in Tibet in the past have been accused of sourcing labour from outside the region, with little contribution to the local communities or economy. We are aware of certain groups that have expressed concerns regarding the Jiama mine in Tibet, especially relating to environmental impact. One news report states that in 2009, locals attempted to blockade mining trucks in an attempt to stop the operation and armed security were dispatched to deal with the protesters. It should be noted that political tension between Tibet and China may pose a risk to investors. However, we believe that CGG’s backing by a state-owned company may mitigate this risk and allow any issues that may affect the operations to be resolved. In recent years, China has invested capital in updating and expanding the infrastructure in both Inner Mongolia and Tibet, which has positively impacted CGG’s operations. This is discussed in more detail below.

Overview

The Chang Shan Hao (CSH) Gold Mine property is located in Wulatezhong Banner, Inner Mongolia Autonomous Region in China, as can be seen in Figure 1 below. Baotou is the closest major city located approximately 126 km to the southeast, with a population of approximately 1.5 million.

Operations at the CSH Mine are typical of low grade, high tonnage ore deposits and comprise three key phases: crushing, leaching, and processing. The final product is gold dore assaying approximately 90% to 95% gold plus silver. The mine currently

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

represents one of the largest operating gold mines in China with a NI 43-101 and

JORC compliant resource.

Commercial production began in July 2008, following one year of pre-commercial production. Total gold production in 2008 was approximately 59,320 oz, followed by

83,830 oz in 2009, and 111,434 oz in 2010. We estimate that gold production for

2011 will total approximately 125,718 ounces.

The plant underwent modifications in early 2010, when a 30,000 tpd crusher was installed. The original resource estimate and mine plan was updated in December 2009, based on drilling conducted in 2008. This latest measured and indicated resource estimate

gives 243 million tonnes (inclusive of reserves) averaging 0.64 g/t gold, totaling 4.99

million ounces of gold using a cut-off grade of 0.3 g/t. According to the latest plan, the mine life has been extended to 2023, with four additional years of leaching after. The CSH Mine is subject to the following taxes: a resource tax of RMB3.00 (about U$0.46) per tonne of processed ore, a resource compensation levy of 2.8% of 70% of revenue from sales, and a corporate income tax of 25%.

Ownership and History

The CSH Mine is currently owned by Inner Mongolia Pacific Mining Company Limited (IMP). IMP is a joint venture company between CGG, and the state-owned 217 Brigade of Northwest Geology and Exploration Bureau of China National Nuclear Corporation (“217 Brigade”), owning 96.5% and 3.5%, respectively.

Gold mineralization at the property was originally discovered in the 1970’s. 217 Brigade acquired the property in 1991, and commenced exploration until 1998, including geochemical sampling, surface trenching, the development of a 188m decline and heap leach testing. Exploration completed in 1999 confirmed the presence of a large, low grade gold deposit at the CSH property. The exploration program included satellite images, trenching, geochemical sampling, geological mapping and the drilling of 10 widely spaced diamond drill holes for a total of 2,797 m of drilling. In 2002, 217 Brigade entered into a joint venture with CGG to acquire up to a 96.5% interest in the CSH property by paying the sum of $750,000 in instalments over three years, $1 million when the decision is made to start construction of the operations, and a further U$1 million at the start of commercial mining. 217 Brigade retained a 3.5% interest in the property. In the same year, CGG began an aggressive drill program on the property including 4,997 meters of diamond drilling across 23 holes, as well as additional rock analysis. A number of drilling campaigns were completed on the property from 2003 to 2005, followed by a feasibility study in 2006, proposing open-pit mining and heap-leach

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

processing. Construction of the current operations began in January 2006, and initial trial mining in 2007.

Location, Accessibility and Infrastructure

The property is located in a semi-desert environment on the Inner Mongolian Plateau with Mean Sea Level elevations between 1,550m to 1,750m. Summer temperatures rarely exceed 30oC. Snowfall is minimal during the winter months (October to March) when the temperature can drop as low as -25oC. Average annual precipitation is just 230mm. Access to the property is along a paved highway, approximately 210 road kilometers from Baotou. Baotou is serviced by road, rail and air travel to Beijing and other major cities in China. Power for the operations is a 35kV transmission line from the Chulutu substation located to the south of the mine. This is supplemented by a backup diesel generator which will supply sufficient power to the operations should main electricity fail. Water for mine production and the mining camp is supplied from the Molen River and near by aquifers located approximately 5km west of the mine. CGG has permits in place to extract a maximum of 980,000m3 of water which is adequate for the current operations. Should CGG wish to expand the operations in the future, there is sufficient land on the property to accommodate new infrastructure, such as additional leach pads.

Figure 1. Location map of the CSH Mine.

(Source: Technical Report on the CSH Mine, dated March 30

th 2010)

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Geology and Mineralization

The CSH Mine property is located in the North China Gold Belt which has been subject to intense tectonic activity. Gold mineralization is hosted by the metasedimentary rocks of the Bilute Formation as part of the Bayan Obo Group from the Middle to Upper Proterozoic. Hosts rocks comprise carbonaceous intercalated phyllites and andalusite-garnite schists. The metasediments have been folded in a tight syncline in the area of the mine and were intruded by ultramafic lamprophyre dikes from approximately 413 to 205Ma.

Figure 2. Distribution of mineralized zones at the CSH Mine

(Source: Technical Report on the CSH Mine, dated March 30

th 2010)

Gold mineralization occurs in thin (typically 1mm to 10mm) sub-parallel quartz/sulphide veinlets/stringers providing a large tonnage, low grade gold deposit. Mineralization is divided into a Northeast Zone and Southwest Zone offset by a fault structure, as can be seen in Figure 2. There are three distinct types of mineralization at the CSH Mine that can be divided stratigraphically as follows;

• Upper Sequence: Dominantly quartz rich with minor sulphide seams.

• Middle Sequence: Equal sulphide seams and quartz mineralization.

• Lower Sequence: Dominantly sulphide type seams with rare scattered quartz material.

The upper sequence of gold mineralized quartz veinlets/stringers has been weathered along fractures and is classified as oxide. During our site visit of September 2011, we were told that the weathering profile extends to a depth of approximately 40m from surface. Initial

ROM leach pad feed for the mine operations was from this weathered oxide zone.

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Gold below this horizon is associated with sulphide mineralization.

Surface exploration and drilling has identified the mineralized zone over a continuous strike length of 4.8km, with a maximum width of 300m and maximum drilling depth of 375 vertical metres. Mineralization remains open to expansion at depth. The 2011 drill program is currently testing the down dip extension of the deposit below the base of the open pit. Current and future exploration is discussed in more detail below.

Resource Estimate

The resource estimate for the CSH mine has been updated on three occasions. The initial estimate was produced in conjunction with the final feasibility study for the project in 2006. A summary of the increase in measured and indicated resources is presented in the following table.

Table 3. Increase in CSH property M&I resource from 2006-2010

2006 2008 2010

Au cut-off grade 0.30 0.35 0.3

Total Ore (M tonnes) 128.4 171.3 243

Average Grade Au (g/t) 0.77 0.71 0.64

Contained Au (Moz) 3.16 3.92 4.99

Year

(Source: CGG company data)

Note: the resource estimate was not updated in 2007 or 2009

The latest resource and reserve estimate was produced in December 2009 by Nilsson Mine Services of Vancouver, Canada. The proven and probable reserves at both the

Northeast and Southwest pits combined stands at 139 million tonnes of ore with an

average gold grade of 0.67g/t, totaling approximately 3 million ounces of contained

gold.

The report also updated the measured and indicated resource estimate (inclusive of reserves) for the mine using a gold cut off grade of 0.3 g/t. The measured and indicated

resource is 243 million tonnes averaging 0.64 g/t gold, totaling 4.99 million ounces of

gold.

Table 4. Resource and Reserve Estimate for the CSH Mine

CategoryCutoff Au

(g/t)

Ore (M

tonnes)

Average

Grade Au

(g/t)

Contained

Au (Moz)

Proven 0.3 83.6 0.70 1.868

Probable 0.3 55.2 0.64 1.133

Total 0.3 138.8 0.67 3.001

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

CategoryCutoff Au

(g/t)

Ore (M

tonnes)

Average

Grade Au

(g/t)

Contained

Au (Moz)

Inferred 0.3 0.5 0.43 0.007

Measured 0.3 105.8 0.68 2.304

Indicated 0.3 137.6 0.61 2.691

Total M&I 0.3 243.4 0.64 4.992 (Source: Company)

The ongoing drill program is due for completion by the end of November 2011.

Following compilation of the drill data, we expect an updated resource estimate by

the end of January 2012. After discussions with management, we believe that the new estimate could potentially double the existing measured and indicated resource to

around 10 million ounces of gold (inclusive of reserves) based on the exploration work done on the project since the last estimate (discussed later in this report).

Current Operations

Operations began in July 2007, at the CSH mine, with commercial production starting in July 2008. The CSH Mine currently comprises two conventional open-pits (southwest pit and northeast pit) excavating large tonnage, low-grade material. Ore from the mine is then crushed to 80% -9mm before leaching. The material is then hauled in trucks to the multiple lift, single use heap-leach pad. Following leaching, gold is extracted from the leach solution through CIC (carbon in column) absorption and electro winning. The final product is gold dore assaying approximately 90% to 95% gold plus silver. Prior to start of production, a final feasibility study was published in 2006, that estimated heap leach gold recovery rates based on the different ore types to be mined.

Table 1. Ultimate gold extraction estimates by ore type

Ore Type Estimated gold extraction (%)

ROM Oxide (weathered) 80

Crushed Oxide (weathered) 85

ROM Sulfide (fresh) 40

Crushed Sulfide (fresh) 70 (Source: CSH Gold Project-Final feasibility report dated 15

th May 2006)

Initial pad feed was uncrushed ROM mixed oxide ore from the near surface weathered horizon. The feasibility study stated that the uncrushed ROM weathered oxide material would have a recovery rate of approximately 80%. In reality, CGG experienced lower and slower recovery grades than expected, with an average recovery rate of 37.3% from 2007 to 2009. Management explained the reason for this was because the ore origin was miss-categorized as being from weathered zones (or oxide) rather than mixed oxide and

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

sulphide ore, which was found to have low leaching recovery when not crushed. Further heap leach testing was carried out in 2009, aiming to examine the impact of feed grade and particle size on the extraction of gold through leaching. These tests found

that gold recovery is a function of the feed grade, and a higher ore grade results in a

higher recovery rate. Installation of a 30,000 tpd crusher was completed in Q1 2010, as part of the Phase II expansion of the project. Installation of the new crusher has enabled the company to have greater control on particle size which is known to impact the recovery grade. Leach recovery rates for crushed sulfide ore are expected to be approximately 70% after 5 years.

During our site visit in September 2011, management stated that recovery is

currently at 49%. This is expected to rise to 51% in 2012, and approximately 60%

within five years (which is lower than the 70% estimate of the feasibility study).

Table 2 below shows the actual production and processing rates for the CSH mine since the start of production in 2007.

Table 2. Production at CSH Gold Mine from July 2007

2007 2008 2009 20102011 - End

of Q3

Tonnes / Year (kt) 4,613 5,786 9,699 12,421 8,825

Avarage grade (g/t) 0.67 0.75 0.62 0.66 0.52

Recovery (%) 19.3 32.6 37.3 43.0 49.0

Produced Au (oz) 19,130 59,320 83,830 111,434 92,244

Source: Company

We estimate that gold production for 2011 will total approximately 125,718 ounces.

Exploration

CGG completed a drilling program in 2010, consisting of 8 diamond drill holes totaling 4187.57 metres. 6 of the holes aimed to test mineralization at depth, with the remaining 2 located to test gold mineralization of a new northwestern zone identified by surface trenching in 2000. Drill holes targeting deeper mineralization encountered good gold intercepts including;

• Hole DDH101- 144.50m grading 0.92g/t gold

• Hole DDH9950-00 – 134.30m grading 0.68g/t gold

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

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In May 2011, CGG announced a new exploration program aimed at defining more resources at depth. The program will consist of over 100 drill holes totaling approximately 55,000m of diamond drilling with a total budget of 50 million RMB (approximately US$7.7 million). Management has stated that they expect initial assay results to be published by the end of January 2012. The 2010 drill program successfully delineated additional down dip mineralization in the Southwestern area. In addition, extension of mineralization has also been established in the Northwest zone. No results from the 2011 drill program have been published to

date. However, during our site visit, management stated that recent drilling has

confirmed continuity of mineralization down dip and demonstrated that gold grade

increases with depth.

Future Development

Following positive results from the 2011 drill program, management has stated that they intend to commence an expansion program at CSH. Our discussion with management confirms that the actual amount of expansion will depend on the updated resource estimate. The expansion could see a potential 100% increase from the current production rate of 30,000 tpd to 60,000 tpd by the end of 2014. Assuming the expansion work is completed by 2014, and the operations are working at a maximum capacity of 60,000 tpd, we estimate that annual gold production could

potentially increase to around 230,000 ounces by 2014. A feasibility report detailing the proposed expansion is expected in Q1 2012. Further upside potential is the expected increase in the gold recovery rate. The CSH mine started commercial production in 2008, and the leach cycle is expected to take 5+ years. The company expects recovery rates to gradually increase from the current 43%, to 51% in 2012, and approximately 60% within five years. Furthermore, drilling results suggest that gold grade will increase as mining deepens the open pits.

Site Visit

On September 5, 2011, we had the opportunity to visit the CSH Gold Mine site to witness development work and in-place infrastructure. We observed the ongoing drill program at the northeastern pit, as well as the crushing and processing facility. Photographs taken by us on the site visit are provided below.

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

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Figure 3. View from the southern edge of the northeastern open pit.

Drill rigs can be seen operating in the base of the pit.

(Source: Fundamental Research Corp)

Figure 4. Crushing facility at the CSH mine.

(Source: Fundamental Research Corp)

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Figure 5. Haulage trucks being loaded with output from the crushing plant (80% -9mm) to

be transported to the leach pad.

(Source: Fundamental Research Corp)

Figure 6. Leach pad and leach solution delivery lines.

The leach pad is designed for a total of 8 lifts, 4 of which have been completed to date.

(Source: Fundamental Research Corp)

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Jiama Mine,

Tibet

Figure 7. Core from the 2010 drill program showing sulfide hosted gold mineralization in

quartz/sulphide veinlets/stringers.

(Source: Fundamental Research Corp)

Overview

The property is located in the Gandise metallogenic belt in Tibet, China. Lhasa is the closest major city located approximately 44 kilometers to the west with a population of around 400,000. The company currently holds two mining licenses with a total area of 2.9km2, and two exploration licenses totaling 143.3 km2. The ongoing 2011 exploration program aims to define the extension of mineralization across the permitted exploration area. This is discussed in more detail below.

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Figure 8. Jiama property mining and exploration permit boundaries.

(Source: Company) Phase I construction of the current operations began in June 2008, with commercial production starting in September 2010, at the designed processing rate of 6,000 tpd. In the first nine months of FY2011, the Jiama Mine produced 15.03 mm lbs. The final copper concentrate currently produced assays 22.5% copper, 6.5 g/t Au, 550 g/t Ag with less than 6% Pb and less than 6% Zn. Operations at the Jiama project are a combination of open pit and underground mining, followed by crushing and flotation processing. The primary product is copper (Cu) concentrate with secondary production of molybdenum (Mo), lead (Pb), gold (Au) and silver (Ag) concentrates. Following the successful 2010 drill program, the property is known to host three types of ore bodies: skarn, hornfels and porphyry. The large, skarn-type copper-polymetallic deposit is the primary source of mineralized ore at present. We

believe significant exploration potential exists at the Jiama property. The Jiama mine is subject to a resource tax of RMB 15.00 (approx US$2.3) per tonne of the processed ore and a resource compensation levy of 2% for the sales revenue from the operation. Cu, Mo, Pb, Zn, and Ag outputs are subject to a VAT of 17%. The project is also subject to a city maintenance tax and an education tax of 7%, and 3% of the VAT

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respectively. Corporate income tax for the region is 15%.

Ownership and History According to management, in April 2008, CNG completed the acquisition of 51% of Skyland Mining Limited (“Skyland”), whose primary asset was the Jiama Mine, for $211.5 million (RMB 1.4 billion). Skyland owned 100% of Tibet Huatailong Mining Development Company Ltd (Huatailong), who owns and operates the Jiama mine. Skyland was held by CNG, and a private company Rapid Results Investment Ltd. (“Rapid”), who each owned 51% and 49%, respectively. In December 2010, CGG purchased all of the issued and outstanding shares of Skyland from the companies for a total of 170.25 million common shares (at a deemed price of $4.36 per share, these shares were worth $742.3 million), and assumed the shareholders loan of $42.3 million advanced to Skyland by CNG and Rapid. CNG's acquisition price of a 51% interest in Skyland (in 2008) reflected a valuation of $415 million for a 100% interest in Skyland; which is about $370 million lower than the price CGG paid for Skyland (or Jiama) in 2010. According to management, CNG and its partner spent about $250 - $300 million from 2008 to 2010 (on construction + exploration - which resulted in a significant increase in resources) - which, we believe, justifies the higher price paid by CGG in 2010. The Jiama project is currently owned and operated by Huatailong, which is a wholly owned subsidiary of CGG. Initial mineral extraction at the Jiama property comprised small scale lead mining before the 1950’s. More recently, the site has been subject to a number of extensive exploration programs. This started with surface trenching between 1951, and 1990, which defined a 3,600m long copper-lead-zinc mineralized zone. The No. 6 Geological Brigade of Tibet Geology and Mineral Resource Bureau conducted further exploration including diamond drilling, trenching and a number of underground exploratory adits. Mining commenced across four mining licenses with four different operators until April 2007. In late 2007, the four mining licenses were amalgamated to produce the current Jiama property, and Huatailong commenced an extensive program of exploration in the following two years. These drilling results, in combination with historic drill data, formed the basis of the initial resource estimate for the property.

Construction of the current operations began in June 2008, with commercial

production starting two years later in July 2010.

Location, Accessibility and Infrastructure The Jiama Project is located in Metrorkongka County which is a mountainous region on the Tibetan Plateau (Figure 9). Mean Sea Level elevations for the property are between 4,350m to 5,410m. Topography of the site is characterized by erodible steep slopes with large elevation changes covered in sparse shrub bushes and weathered rock or soil. Being

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at high altitude, the summers are generally humid and cool, and the winters (October to March) are cold and dry. The property is accessed by a paved highway from Lhasa some 60 road kilometers to the west, which is connected to the rest of China by rail, highways and air services. Water for processing and camp requirements is obtained from the nearby Chikang River for which CGG has the required permits. Electric power is currently provided by on-site generators and reliability issues caused a number of delays during the start of production. The Central Tibetan power grid is currently being connected to the national China grid, which will provide a more consistent electricity supply to the region. Electrical

infrastructure at the Jiama mine is currently being upgraded to provide a 110-kV

transmission line to the site. During our site visit, management stated that they

expect the new electrical infrastructure to be in operation by the end of 2011. We believe this is a significant development for CGG and demonstrates that the infrastructure will likely be able accommodate future expansion of the operations.

Figure 9. Location map of the Jiama Mine.

(Source: ITR on the Jiama Mine, dated September 9

th 2010)

Geology and Mineralization

The Jiama Project is located in the central south Gangdise-Nianqing Tanggula Terrane as part of the Tibetan Plateau. Local geology is characterized by Upper Jurassic Duodigou Formation limestones and marbles, and Lower Cretaceous Linbuzong Formation sandstones and slates. It is thought that a large granitic intrusive body at depth provided a source of heat for metamorphism of the carbonate rocks. As a result, the local limestones have been altered to marbles and the Linbuzong clastic rocks metamorphosed to hornfels.

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A number of smaller scale intrusive mafic dikes have also been identified on the property, shown as the isolated purple areas on Figure 10 below. Following the 2010 drill program, mineralization at the Jiama project is known to comprise three types of ore bodies: skarn, hornfels and porphyry. Mineralization is a result of contact metamorphism and hydrothermal mineralization associated with the deep seated porphyry intrusion. Skarn hosted copper mineralization is associated with the contact between the intrusive bodies and the Duodigou marbles, as well as in the structural zone between the marbles and hornfels. The primary skarn deposit (I-1) strikes west-northwest and dips to the northeast. The approximately 900m thick hornfels deposit represents a near surface, low grade deposit that has been better defined through the 2010 exploration program. Drilling in 2010 also discovered a new deep seated low grade porphyry copper-molybdenum deposit underlying the skarn and hornfels type deposits, as well as a separate high grade porphyrite dyke type gold mineralized zone.

Figure 10. Geological map of the Jiama Mine

(Source: ITR on the Jiama Mine, dated September 9

th 2010)

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Resource Estimate

Following an extensive drill program in 2010, the resource estimate for the Jiama project was updated in August of this year by the Mineral Resource Research Institute of the Chinese Academy of Geological Sciences and reviewed by Behre Dolbear Asia Inc. The new estimate is based on drilling carried out by Huatailong since acquiring the property in 2007, including 51,362 assays from 300 holes totaling 120,196.92 meters of drilling. The previous estimate gave a measured and indicated resource of 185.1 million tons averaging 0.74% copper, containing 1.38 million tons of copper. The new resource

estimate gives a 4.4x increase in the measured and indicated categories to

approximately 1,006 million tonnes averaging 0.41% copper for a total of 4.08 million

tons of copper. Drilling in 2010 allowed CGG to upgrade a portion of the resource from inferred to the measured and indicated category. Details of the 2011 resource estimate can be seen in Table 5 and Table 6 below.

Table 5. Measured and indicated mineral resources at the Jiama Project, August 2011.

(Source: Company)

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Table 6. Inferred mineral resources at the Jiama Project, August 2011.

(Source: Company)

The 2010 drill program included 95 drill holes totaling 50,704 meters of drilling targeted at the extensions of the main skarn and hornfels deposits. Drilling results have defined

extensions to the skarn and hornfels ore bodies, as well as allowing CGG to upgrade

some areas to the measured and indicated categories that were previously defined as

inferred resources. Furthermore, drilling in the southwestern corner of the license area has discovered a new porphyrite dyke type gold mineralized zone, as well as a deep porphyry copper-molybdenum deposit underlying the skarn and hornfels type deposits. All three types of mineralized deposits (skarn, hornfels, porphyry) remain open along strike and down dip.

The newly defined deposits represent significant upside potential for the Jiama

property, and will allow CGG to add significant gold and copper tonnage to the

future resource estimate. The extensive 2011 exploration program of in-fill and step-out drilling aims to investigate the extent of mineralization in these areas.

Current Operations

The Jiama mine deposit is currently extracted from two open pits known as the Tongqianshan Pit and the larger Niumatang Pit, which are within two separate mining licences with a total area of 2.9 km2. Phase I construction of the current operations began in June 2008, including a 6,000 tpd processing plant, underground ore transportation system and initial development of the open pits and underground mine. Phase I is now complete and commercial production

began in September 2010, achieving the planed 6,000 tpd by the end of that year. Although ore is currently transported to the processing plant in haulage trucks, management has stated the underground rail transportation is now complete and will begin operations before the end of Q4 2011.

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After transportation to the processing facility, the ore particle size is reduced to 70% -0.074mm using a series of crushers and ball mills. The material is then processed using bulk flotation methods to produce a number of final concentrates, which are then dewatered and sold to the smelter buyers. Photographs of the ball mills and flotation cells observed by us during our site visit can be seen later below. In the first nine months of FY2011 (9 month period ended September 2011), the Jiama Mine produced 15.02 million lbs of copper. We expect the total annual copper

production in 2011 to total approximately 22.01 million pounds. The final copper concentrate produced currently assays 22.5% copper, 6.5 g/t Au, 550 g/t Ag with less than 6% Pb and less than 6% Zn.

Exploration

In April 2011, CGG announced a new exploration program consisting of 56 diamond

drill holes totaling 31,200 meters of drilling with a budget of US$5.6 million. During our site visit, management stated that a total of 41 drill rigs are currently working on the property. A summary of the primary aims for the drill program are as follows:

• Infill drilling of the skarn deposit to upgrade the resource to the measured and indicated category.

• Investigate the separate high grade porphyrite dyke type gold mineralized zone discovered during the 2010 drilling program.

• Define the northeast boundary of the skarn deposit.

• Explore the deep porphyry deposit by drilling to a depth of approximately 2,000 meters.

We believe there is significant potential to upgrade the inferred resource of the

hornfels and skarn deposits to the measured and indicated category following

completion of the extensive 2011 drill program. Step-out drilling on the deep porphyry deposit could potentially enable CGG to add significantly to the existing resource base. Management has stated that they expect drilling to be completed by the end of November, with initial assays results published by the end of 2011.

Future Development

The initial mine plan forecast a Phase II production increase to 12,000 tpd. However,

following the recent resource increase, CGG has revised the target to 40,000 tpd. The feasibility study is expected by the end of Q4 2011, or early Q1 2012. CGG expects the Phase II upgrades to be completed by 2014. We estimate that this would allow for an annual copper concentrate production increase from our estimated 22.01 million pounds

in 2011, to 250 - 300 mm lbs by 2015.

Management has stated that they intend to continue exploration during construction of the

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proposed expansion works which they expect to take approximately 2.5 years. We believe there is large potential to expand the resource which will add significant value to the deposit.

Site Visit

On September 7, 2011, we visited the Jiama property to witness development work and in-place infrastructure. We observed a number of drill rigs operating at various elevations in and around the open pit. The site tour also included the crushing facility, control room and flotation plant. Photographs taken by us on the site visit are provided below.

Figure 11. Open pit at Jiama

(Source: Fundamental Research Corp)

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Figure 12. A section of the ore rail transportation system

(Source: Fundamental Research Corp)

Figure 13. One of two 3,000 tpd ball mills at the crushing facility

(Source: Fundamental Research Corp)

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Figure 14. Control room at the Jiama Mine processing facility

(Source: Fundamental Research Corp)

Figure 15. Flotation cells.

(Source: Fundamental Research Corp)

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Management

Management and the board hold approximately 0.0059% of the outstanding shares.

We would have ideally liked to see higher management ownership. However, none of

the management team members have been offered stock options which, we believe, is

probably why their ownership is low. Several members of the management team and

board of directors also hold positions with CNG. Biographies of the company’s management team and board of directors, as provided by the company are below:

Zhaoxue Sun - Chairman

Mr. Sun is a senior engineer of professor level and PhD in mining resource economics at China Geology University and has 25 years of experience in the mining industry. He is currently the President of China National Gold Corporation, the largest gold producer in China. He also serves as Chairman of the Chinese Gold Association and the Chairman of Zhongjin Gold, a public company controlled by China National Gold and listed on the Shanghai Exchange. Prior to joining China National Gold Corporation, Mr. Sun spent 23 years with Aluminum Corporation of China Limited, also known as Chinalco, as Vice President in charge of strategy, planning, financing and M&A. Chinalco is the only producer of alumina and the largest producer of primary aluminium in China.

Xin Song - Chief Executive Officer, Director

Xin Song’s principal occupations include Chief Executive Officer of the Company from October 9, 2009 to present, Vice President of China National Gold in charge of production, international cooperation, audit, management and resources development from 2003 to present, Chairman of the Board of Skyland Mining Limited from December 2007 to present, Chairman of the Board of Tibet Jia Ertong Minerals Exploration Ltd. from April 2008 to present and Chairman of the Board of Tibet Huatailong Mining Development Co., Ltd. from April 2008 to June 2010, the subsidiaries of the Company which hold the Jiama Mine. Xin Song holds a Ph.D. doctorate degree in resources economics and management from the University of Science and Technology Beijing, China, a master’s degree in business administration from the China Europe International Business School, a master’s degree in mining engineering from the University of Science and Technology in Beijing and a bachelor’s degree in mineral processing engineering from the Central-South Institute of Mining and Metallurgy.

Zhanming Wu - Director, Vice President of Business Development

Mr. Wu is experienced in financing, investment and M&A. He is the head of Capital Market Department of China National Gold Corporation, the largest gold producer in China. He also serves as the President of China National Gold Group Hong Kong Limited. Prior to joining China National Gold, Mr. Wu was an investment banker at Deutsche Bank Hong Kong based in Beijing, China. He also acted as director in charge of financing and investment of Digital China Financial Services Corporation Limited, the largest IT service provider for financial institutions in China. Mr. Wu holds bachelor and master degrees in management science and engineering from Tsinghua University.

Jerry Xie - Executive Vice President & Corporate Secretary

Mr. Xie is a professional engineer registered in Alberta and has 25 years of experience in the petro-chemical and oil-sand industry. Mr. Xie holds a Masters degree in Engineering

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from the Department of Mining in Beijing University of Science & Technology and a Masters degree of Engineering from University of Calgary, Alberta.

X.D. Jiang - Vice President of Production, Director

Mr. Jiang has over 20 years of experience working in the gold and copper exploration industry. He worked for 7 years in the province of Shandong, China's number one gold producing province, and 14 years in Canada. Mr. Jiang has worked on projects ranging from grass roots to bankable feasibility studies. As a geologist, he has also worked with companies such as Cyprus Amax, Placer Dome, American Barrick Resources and First Quantum Minerals, etc.

Derrick Zhang - Chief Financial Officer

Mr. Zhang is a Certified General Accountant in Canada and a member of the Association of Chartered Certified Accountants in the United Kingdom. Mr. Zhang holds a Bachelor of Commerce degree with a major in Accountancy from Concordia University in Montreal, Quebec, Canada and a Bachelor of Engineering degree in Geology from Southwest University of Science and Technology in China. Mr. Zhang possesses sound knowledge in IFRS, Canadian GAAP, PRC GAAP, Taiwan GAAP, US GAAP, mining engineering and exploration. Mr. Zhang has over 18 years of experience in financial reporting and engineering for public and private companies including experience leading financial reporting for mergers and acquisitions. Mr. Zhang joined the company as Controller in January 2010.

Bing Liu - Director

Mr. Liu has extensive experience in mining financing, mine construction and development. He is the Vice President and CFO of China National Gold Corporation, the largest gold producer in China. He also serves as a director of Zhongjin Gold, a public company controlled by China National Gold and listed in Shanghai, China. Prior to joining China National Gold, Mr. Liu was a senior official at China National Economy and Trade Commission and China Textile General Chambers. He also worked as a senior accountant of China Automobile Industry Corporation. Mr. Liu holds a bachelor degree in financing from Beijing Finance and Trade College and a master degree in currency and banking from China Academy of Social Sciences.

Y.B. Ian He - Independent Director

Mr. He has been a director of China Gold International Resources since May 2000. He has 22 years' experience in the mineral industry. He is currently President and Director of Tri-River Ventures Inc., a TSX Venture Exchange listed mineral exploration company. Prior to that Mr. He served as President of Spur Ventures Inc., a TSX listed company, with phosphate mining and fertilizer operations in China. Mr. He holds a Ph.D. degree in mineral process engineering from the University of British Columbia.

Yunfei Chen - Independent Director

Mr. Chen is now an independent advisor based in Hong Kong. He was previously a managing director at Deutsche Bank Hong Kong running its Asian mining investment banking business. He also served as co-head for Deutsche Bank Asian general industries

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2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

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Management

Rating

practice based in Hong Kong. Prior to joining Deutsche Bank, Mr. Chen was an attorney at American law firm Sullivan & Cromwell based in New York and Hong Kong. Mr. Chen obtained his bachelor of law degree in China and J.D. in the U.S. and is qualified in New York.

Greg Hall - Independent Director

Mr. Hall is a seasoned geologist with over 30 years of experience in the mining industry and extensive experience working with global mining companies. In his career, Mr. Hall has been involved in the discoveries of Barrick Gold's Granny Smith mine, Rio Tinto's Yandi iron ore mine and the Keringal mine in Australia. Mr. Hall holds a Bachelor of Applied Science degree from the University of New South Wales, Australia.

John King Burns - Independent Director

Mr. Burns has extensive experience in the global resource sector and is currently Managing Director of NuCoal Energy Corp. a private Saskatoon based energy company. Mr. Burns is a former Vice President and Chief Financial Officer of the Drexel Burnham Lambert Commodity Group in New York, London and Chicago, a former Managing Director and Global Head of the Derivative Trading and Finance Group of Barclays Metals Group, Barclays Bank PLC in London and a former Managing Director and an Associated Person of FRM Risk Management Inc. in Chicago. He has also acted as an independent Director, Audit Committee member and lead Director or a number of publicly listed resource companies. We believe that one of the most important aspects of a mining company is its management. Therefore we have developed a management rating system as a quantitative way to rate management based on a number of factors, including technical experience, the ability to raise financing, and management’s time commitment to the company. Our net rating for

China Gold International Resources Corp Ltd. is 4.3 out of 5.0.

Management Rating

4.30

3.50

4.50

4.50

4.50

4.50

0% 20% 40% 60% 80% 100%

Net Rating

Team's focus on the company

Experience in projects similar to the current project

Track record in raising capital/w orking for public

companies

Experience in putting mines to production/generating

prospects

Technical Experience

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Strength of

Board

Gold Sales

Financials

We believe that the Board of Directors of a company should include independent or unrelated directors who are free of any relationships or business that could materially interfere with the director’s ability to act in the best interest of the company. An unrelated/independent director can be a shareholder. Both the Audit Committee and the Compensation and Benefits Committee are made up of John King Burns, Gregory Hall, Yunfei Chen, and Ian He. Our board rating follows:

Poor Average Good

None of the directors have filed for personal bankruptcy X

Two out of nine hold shares in the company X

The Audit committee is composed of four independent

board membersX

The Compensation committee is composed of four

independent board membersX

XFour out of nine directors are independent

According to the laws in China, “all gold and silver mined and refined by factories and

mines, rural communes, brigades and teams, armed forces and individuals engaging in

and producing gold and silver (including that extracted from ore deposits and refined as

by-product), must be sold to the People's Bank of China, and must not be kept for sale,

exchange or use by themselves without authorization.” Individuals and companies are permitted to buy and sell gold and silver only when permitted and entrusted by the People’s Bank of China. Such permission and trust include being a member of the Shanghai Gold Exchange (SGE). SGE was established in 2002 by the People’s Bank of China and is currently the world’s largest spot gold exchange in the world. CGG is a member of the exchange and trades gold at the spot market price. Gold futures in China were not introduced until 2008, when the Shanghai Futures Exchange (SHFE) was established.

CGG’s sales contract is based on the prevailing spot market price for both gold and

copper. CGG does not engage in any futures trading activity to hedge price risk.

Most of CGG's produced gold is sold to CNG. At the end of Q3-2011, $137.59 million

(94.8%) of gold revenues came from CNG. China Gold began commercial production in July 2008, at the CSH Mine and is currently operating at a 30,000 tpd processing capacity. Jiama began commercial production in

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September 2010, and currently has a 6,000 tpd processing capacity. In Q3-2011 (3 month ended September 2011), the CSH Mine produced 36,985 oz of gold and the Jiama Mine produced 5.8 million pounds of copper.

The following section analyzes China Gold’s financial performance from 2007 to present:

Revenues and Production

China Gold generated $133.2 million in revenues in FY2010 (12 month ended

December 2010) versus $81.1 million in the previous year, reflecting a 64.24%

increase YoY. The following chart shows growth in gold production, copper production and revenues since 2007 (commercial production began in 2008), along with our forecasts for 2011 and 2012. Our revenue projections for FY2011, and FY2012, are $307.46

million, and $349.14 million, respectively.

We believe the following were/are the main revenue drivers for the company:

1. Increase in gold production from the CSH Mine - production increased from 33,670 ounces in 2008, to 111,289 ounces in 2010. Our forecast for 2011 is 125,718 ounces,

and for 2012 it is 115,209 ounces.

2. Increase in average gold spot price – the gold spot price increased from $842 per ounce in 2008, to $1,191 per ounce in 2010. The Q3-2011 average price was $1,693.20 per ounce. Our gold price forecasts used for our models for 2012 is $1,500 per ounce, 2013 is $1,350 per ounce, and 2014+ is $1,200 per ounce.

3. Scheduled production and sales increase at the Jiama Mine - our production forecast for 2011 is 22.01 million lbs, and for 2012 is 32.48 millions lbs Cu.

There were operational disruptions at both CSH and Jiama Mines in Q1 - as a result

revenues in Q1 of $35.42 million were lower than Q2 and Q3 (Q2 - $92.94 million; Q3

- $89.41 million).

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At the CSH Mine, production was adversely affected by a drop in temperature which caused leach solution to freeze in the feeder lines. CGG has attempted to resolve the issue by burying the feeder lines; however, the result was not satisfactory, and there is potential for the same issue to arise in the future.

The Jiama Mine was affected by power outages during January 2011, which resulted in minimal production. As stated in the 2011 interim report, power supply issues are expected to be resolved by the end of 2012, after Tibet’s power grid is connected to China’s National Power grid. Both issues caused the decrease in overall revenues in Q1.

In Q3-2011, CGG generated $63.47 million in revenues from the CSH Mine and

$25.94 million from the Jiama Mine.

Gold production from the CSH Mine increased from 33,670 ounces in FY2008, to

111,289 ounces in FY2010, and recovery rates improved from 32.6% in 2008, to

43.0% in 2010. The CSH Mine has a maximum stated ore processing capacity of 30,000 tpd. However, the company processed at 34,032 tpd in 2010, and 36,017 in Q3-2011, which implies that the actual production capacity at the CSH Mine is greater than the stated capacity.

Gold production in Q3-2011 was 36,985 ounces versus 17,740, and 37,519 ounces, in

Q1, and Q2 2011. Recovery rates improved from 43% at the end of 2010, to 49%;

however, ore grades continued to fall from 0.67g/t at the end of 2010, to 0.46g/t in Q3-

2011.

The chart below shows production data for the CSH Mine along with our forecast for

2011 and 2012.

CSH Mine Production Data

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2008A 2009A 2010A 2011E 2012E

Ounces

-

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Grade & Recovery R

ate

Au Production (ounces) Average Grade (g/t) Recovery Rate (%)

Source: Fundamental Research Corp.

The Jiama Mine commenced commercial production in September 2010, and reached

its stated processing capacity of 6,000tpd by December 2010. In Q3-2011, Jiama

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produced 5.81 million pounds of copper versus 3.0 million, and 6.2 million pounds, in

Q1, and Q2 2011. The graph below shows copper production at the Jiama Mine.

Average ore grades at the Jiama Mine were 63%, and 82%, for Q1, and Q2, respectively while recovery rates were 88.51% and 85.79%. The recovery rates were slightly below the figures presented in the 2010 technical report.

CGG had originally planned phase II development with planned operating capacity of 12,000 tpd; however, after the recent increase in resource estimates, CGG has expressed potential for further increases in operating capacity to 40,000 tpd. As mentioned earlier in the report, the development plan is currently in the planning phase with a feasibility study under progress.

Operating Cost

Operating costs per ounce of gold at the CSH Mine were $537.84 (2008), $603.79

(2009) and $490.11 (2010). For Q3-2011, the operating cost per ounce of gold was

$692.05 versus $558.72, and $716.63, in Q1, and Q2. The fluctuations in operating cost were mainly attributed to differences in ore grades and recovery rates. Other factors such as weather also affect the operating cost. We are expecting operating costs to be about $655.80 per ounce in 2011, and $600.00 per ounce in 2012. The lower operating cost for 2012 is due to higher grades and recovery rate expectations.

For the Jiama Mine, we expect operating costs per pound of copper (Q3-2011 - $2.72/lb, Q2-2011 - $2.51/lb and Q1 - $2.38/lb) to decrease going forward as production volume increases with higher ore grades and recovery rates. We expect operating costs per

pound of copper at $2.53/lb, and $2.28/lb, for 2011, and 2012, respectively. The table below presents historical data of CCG along with our forecasts.

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Production & Revenue Breakdown

CSH Mine 2007A 2008A 2009A 2010A 2011E 2012E

Total Ore Production/Processed (t) - 3,068,406 9,698,571 12,421,839 12,065,734 12,775,000

Gold Production (oz) - 33,670 83,570 111,289 125,718 115,209

Operating Cost (million) -$ 18.11$ 50.46$ 54.54$ 84.35$ 69.13$

Operating Cost per Ounce of Gold -$ 537.84$ 603.79$ 490.11$ 655.80$ 600.00$

Jiama Mine 2007A 2008A 2009A 2010A 2011E 2012E

Total Ore Production/Processed (t) - - - - 1,585,134 2,190,000

Cu Production (lb) - - - - 22,005,419 32,483,513

Operating Cost (million) -$ -$ -$ -$ 67.45$ 109.67$

Operating Cost per Pound of Copper -$ -$ -$ -$ 2.53$ 2.28$

Source: Fundamental Research Corp.

EBITDA and EBIT and Net Income

EBIT and EBITDA both turned positive in 2009, one year after the commencement of production at the CSH Mine. Prior to 2009, the negative EBIT and EBITDA were due to a combination of zero/low revenues. EBITDA for Q3-2011 was $42.74 million compared to $14.71 million, and $43.75 million, for Q1, and Q2, respectively. EBIT for the same periods were $32.64 million (Q3), $7.84 million (Q1) and $35.15 million (Q2).

Our 2011 EBITDA, and EBIT estimates are $144.81 million, and $108.63 million,

respectively, and for 2012 our estimates are $158.74 million, and $123.82 million,

respectively.

The graph below shows historical and forecast EBITDA and EBIT.

After adjusting for non-operating items (gain/loss of foreign exchange and change in

fair value of warrants), CGG generated net income for the first time in 2009, of $3.73

million (EPS: $0.02), and $34.83 million (EPS: $0.18) in 2010. Adjusted net income was

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-$13.63 million (EPS: -$0.09), and -$6.27 million (EPS: -$0.04), for 2007, and 2008, respectively.

Actual reported net profits were -$16.95 million (EPS: -$0.11), $14.58 million (EPS: $0.09), -$9.34 million (EPS: -$0.06) and $26.22 million (EPS: $0.14) for the years from 2007 to 2010, respectively.

The table below shows adjusted and reported figures.

Earnings 2007A 2008A 2009A 2010A 2011E 2012E

Adjusted Net P ro fit (13 .63 )$ (6 .27 )$ 3 .73$ 34 .83$ 71 .54$ 108 .55$

Adju sted EPS (0 .09 )$ (0 .04 )$ 0 .02$ 0 .18$ 0 .18$ 0 .27$

Repo rted Net P ro fit (16 .95 )$ 14 .58$ (9 .34 )$ 26 .22$ 72 .30$ 108 .55$

Repo rted EPS (0 .11 )$ 0 .09$ (0 .06 )$ 0 .14$ 0 .18$ 0 .27$

Source: Fu nda men ta l R esea rch C orp .

We estimate net profit of $72.30 million (EPS: $0.18), and $108.55 million (EPS:

$0.27), for 2011, and 2012.

Margins & Profitability

The table below shows CGG’s margins since 2007. In FY2010, and the first nine months of FY2011, CGG’s margins were relatively better than industry average. In the first nine months of FY2011, gross margins matched the industry while EBITDA margins (46.47% vs. 39.00%), EBIT margins (34.72% vs. 31.10%) and net margins (24.34% vs. 24.00%) were above industry average.

Margins 2007A 2008A 2009A 2010A9 Month

2011

Go ld

Industry

Average

Gross Margins - 38.34% 37.74% 56.44% 50.18% 51.00%

EBITDA Margins - (0.50%) 30.86% 52.03% 46.47% 39.00%

EBIT Margins - (8.71%) 23.75% 43.91% 34.72% 31.10%

Net Margins - 49.64% (11.53%) 19.68% 24.34% 24.00%

Source: Fundamental Research Corp. & Capital IQ

Return on assets, and return on equity, for FY2010, were 2.86%, and 4.24%,

respectively. Both ROA and ROE were lower than the industry averages of 8.4% and 8.6%, respectively. We expect CGG to gradually increase its ROA and ROE to be more in line with industry averages as operating profits improve at both CSH and Jiama.

Profitability Analysis 2007A 2008A 2009A 2010A 2011E 2012E

Gold

Industry

Average

ROA (19.89%) 14.25% (6.36%) 2.86% 4.29% 6.20% 8.4%

ROE (172.19%) 59.52% (24.60%) 4.24% 5.85% 8.17% 8.6%

ROIC (31.33%) 19.47% (8.29%) 3.40% 4.99% 7.15% 10.3%

Source: Fundamental Research Corp.

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Cash Flows

CGG has shown significant improvement in cash flow from operations since FY2008,

from -$33.04 million to $10.92 million in 2010. We expect cash flow from operations to further improve to $25.56 million in 2011, and $140.01 million in 2012.

Prior to 2009, CGG had been funding its operations through a combination of equity and debt financing. In 2010, financing cash flows were $305 million from common share issuance which were used to finance the purchase of the Jiama Mine.

Going forward, we expect negative financing cash flows as CGG starts to pay down its debt obligations. The current projections for investing cash flow include only regular maintenance capital expenditures; larger outflows may result upon further facility expansion or acquisitions.

Free cash flows to the firm turned positive in 2010, and are projected to remain positive for 2011, and 2012. We expect that the positive cash flows along with a growing cash balance will be able to provide CGG the necessary funding for further expansion and acquisitions projects.

The table below shows historical cash flows along with our estimates.

Cash Flows ($ million) 2007A 2008A 2009A 2010A 2011E 2012E

Cash Flow from Operations (4.59) (33.04) 10.73 10.92 25.56 140.01

Cash Flow from Investing (25.52) (11.11) (31.35) 6.89 (68.85) (50.00)

Cash Flow from Financing 27.14 29.93 32.34 259.84 (0.45) (42.04)

Foreign Exchange Rate Adj. 2.08 (0.50) 0.07 0.00 - -

Net Change in Cash (0.88) (14.72) 11.79 277.65 (43.73) 47.98

Free Cash Flows (43.91) (57.14) (21.14) 2.11 (33.95) 96.95

Cash, Beginning of the Year 27.88 26.95 12.14 23.98 301.61 264.60

Sourece: Fundamental Research Corp.

Cash and Liquidity Position

At the end of Q3-2011, CGG had cash and cash equivalents of $303.42 million and working capital of $261.24 million. CGG had a stronger current ratio, of 3.01x, when

compared to the industry average of 0.80x.

Debt to capital, and long term debt to capital, at the end of Q3-2011, were 16.58%, and 13.85%, respectively. As of Q3-2011, the company had $244.06 million in interest

bearing debt outstanding, an increase of $31.41 million from December 2010. Of the $244.06 million, $40.84 million is due within one year. The debt is from the Agriculture Bank of China, Bank of China and syndicated loans from various banks in China.

As mentioned earlier, we expect CGG to reduce its interest bearing debt in the near future through its strong operating cash flows. In our opinion, CGG’s strong balance sheet and

low debt to capital ratio is a strong advantage for the company. The company will be able to leverage the strong balance sheet to acquire any additional external financing to

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Valuation

fund potential investments and generate returns for shareholders.

Liquidity Analysis 2007A 2008A 2009A 2010A9 Month

2011

Gold

Industry

Average

Cash and Equivalents (MM) 26.95$ 12.14$ 23.98$ 301.61$ 303.42$ -

Working Capital (MM) 14.67$ (8.21)$ (9.60)$ 224.77$ 261.24$ -

Current Ratio 1.97x 0.86x 0.80x 2.72x 3.01x 0.80x

Debt / Capital 81.80% 59.09% 71.61% 15.05% 16.58% 19.40%

LT Debt / Capital 81.80% 15.60% 62.29% 12.80% 13.85% 3.70%

Source: Fundamental Research Corp. & Capital IQ

Stock Options and Warrants

We estimate the company has 695,000 stock options outstanding with 295,000 stock options currently “in-the-money”. The exercise price ranges from $2.20 to $5.30 with maturity periods between 2013 and 2015. At the end of Q3-2011, there were no warrants outstanding.

Our Discounted Cash Flow (DCF) model gave a fair value estimate of C$5.77 per

share. A summary of our valuation model is show below.

DCF Valuation

Q4-2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E2021E -

2040E

CFO 14.50 140.01 136.78 116.37 340.61 433.88 457.32 534.50 642.15 478.21

Plus: Interest less tax (3.20) (7.36) (5.75) (3.70) (1.80) (0.85) - - - -

Less: Capital Expenditure (17.03) (50.00) (231.84) (105.82) (17.03) (21.69) (22.87) (26.73) (32.11) (23.91)

FCFF (5.73) 82.66 (100.81) 6.85 321.79 411.34 434.46 507.78 610.04 454.30

PV(FCFF) (5.73) 75.14 (83.31) 5.14 219.78 255.41 245.24 260.57 284.59 192.67 689.43

Sum of PV FCFF 2,138.94

Cash - Debt 59

Equity Value 2,080

Intrinsic Value per Share (CAD) 5.77$

Note: All figures in million $ except per share estimates

Source: Fundamental Research Corp.

Primary Assumptions:

• We have assumed the CSH Mine will produce slightly above its capacity (30,000 tpd) from 2011 to 2014. CSG produces at 60,000 tpd starting 2014.

• We have assumed the Jiama Mine will produce at 6,000 tpd from 2011, to 2013, and increase to 40,000 tpd by 2015. We assumed total CAPEX of $300 million for the expansion.

• The CSH Mine will operate until 2023, and the Jiama Mine will operate until 2040.

• A 10.0% discount rate.

• Assumed gold price of $1,500 in 2012, $1,350 in 2013, and $1,200 per oz in

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2014+. Assumed copper price of $3.25 in 2012, $2.75 in 2013, and $2.25 per lb in 2014+.

• Long-term (2014+) C$/US$ - 1.10 The sensitivity table below shows the intrinsic value per share vs. long-term gold and copper prices.

5.77$ 900$ 950$ 1,000$ 1,050$ 1,100$ 1,150$ 1,200$ 1,250$ 1,300$ 1,350$ 1,400$

$0.75 (1.57)$ (1.37)$ (1.17)$ (0.97)$ (0.77)$ (0.57)$ (0.37)$ (0.17)$ 0.03$ 0.23$ 0.43$

$1.00 (0.55)$ (0.35)$ (0.15)$ 0.05$ 0.25$ 0.45$ 0.66$ 0.86$ 1.06$ 1.26$ 1.46$

$1.25 0.48$ 0.68$ 0.88$ 1.08$ 1.28$ 1.48$ 1.68$ 1.88$ 2.08$ 2.28$ 2.48$

$1.50 1.50$ 1.70$ 1.90$ 2.10$ 2.30$ 2.50$ 2.70$ 2.90$ 3.10$ 3.30$ 3.51$

$1.75 2.52$ 2.72$ 2.92$ 3.12$ 3.33$ 3.53$ 3.73$ 3.93$ 4.13$ 4.33$ 4.53$

$2.00 3.55$ 3.75$ 3.95$ 4.15$ 4.35$ 4.55$ 4.75$ 4.95$ 5.15$ 5.35$ 5.55$

$2.25 4.57$ 4.77$ 4.97$ 5.17$ 5.37$ 5.57$ 5.77$ 5.97$ 6.18$ 6.38$ 6.58$

$2.50 5.59$ 5.79$ 6.00$ 6.20$ 6.40$ 6.60$ 6.80$ 7.00$ 7.20$ 7.40$ 7.60$

$2.75 6.62$ 6.82$ 7.02$ 7.22$ 7.42$ 7.62$ 7.82$ 8.02$ 8.22$ 8.42$ 8.62$

$3.00 7.64$ 7.84$ 8.04$ 8.24$ 8.44$ 8.64$ 8.85$ 9.05$ 9.25$ 9.45$ 9.65$

$3.25 8.67$ 8.87$ 9.07$ 9.27$ 9.47$ 9.67$ 9.87$ 10.07$ 10.27$ 10.47$ 10.67$

$3.50 9.69$ 9.89$ 10.09$ 10.29$ 10.49$ 10.69$ 10.89$ 11.09$ 11.29$ 11.49$ 11.70$

$3.75 10.71$ 10.91$ 11.11$ 11.31$ 11.52$ 11.72$ 11.92$ 12.12$ 12.32$ 12.52$ 12.72$

$4.00 11.74$ 11.94$ 12.14$ 12.34$ 12.54$ 12.74$ 12.94$ 13.14$ 13.34$ 13.54$ 13.74$

$4.25 12.76$ 12.96$ 13.16$ 13.36$ 13.56$ 13.76$ 13.96$ 14.16$ 14.37$ 14.57$ 14.77$

$4.50 13.78$ 13.98$ 14.19$ 14.39$ 14.59$ 14.79$ 14.99$ 15.19$ 15.39$ 15.59$ 15.79$

Source: Fundamental Research Corp.

LT Gold Price

Source: Fundamental Research Corp.

CGG's forward multiples (based on 2012 forecasts), are currently trading below industry average valuation metrics - EV/Sales is 3.13x vs. the industry average of 4.16x,

EV/EBITDA is 6.89x vs. 10.97x, EV/EBIT is 8.83x vs. 17.35x and P/E is 10.62x vs.

23.72x as can be seen in the table below.

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Company Name Ticker EV EV/Sales EV/EBITDA EV/EBIT P/E

ALAMOS GOLD INC. AGI-T 1,534.01 7.45 13.62 16.73 32.62

AURIZON MINES LTD. ARZ-T 715.44 3.35 11.94 25.90 31.50

AVOCA RESOURCES LTD AVORF-5 865.07 3.60 7.24 15.27 15.85

B2GOLD CORPORATION BTO-T 1,134.99 5.63 9.81 12.38 16.00

COEUR D ALENE MINES

CORPORATIONCDE-N 2,372.34 2.43 6.00 13.12 31.21

DUNDEE PRECIOUS METALS

INC.DPM-T 1,096.87 4.13 9.62 13.77 12.61

HIGH RIVER GOLD MINES

LIMITEDHRG-T 951.23 1.87 3.75 4.93 8.40

JAGUAR MINING

INCORPORATEDJAG-T 787.46 3.67 10.33 27.12 108.18

KINGSGATE CONSOLIDATED

LIMITEDKCN-AU 1,026.44 5.56 20.17 50.11 34.12

KIRKLAND LAKE GOLD INC. KGI-T 1,247.20 9.81 35.60 49.81 31.43

KOZA ALTIN ISLETMELERI A.S KOZAL-IS 2,457.90 9.17 11.67 15.60 19.76

LINGBAO GOLD CO LTD 3330-HK 800.80 0.96 6.65 8.65 6.67

MEDUSA MINING LTD MML-AU 1,087.92 6.84 8.43 9.20 9.70

OCEANAGOLD CORPORATION OGC-AU 579.76 1.61 3.51 6.41 11.46

REAL GOLD MINING LIMITED 246-HK 628.19 2.66 3.37 3.48 7.80

RESOLUTE MINING LIMITED RSG-AU 1,018.52 2.06 6.72 12.05 14.20

SEMAFO INC SMF-T 1,772.40 5.08 10.50 13.44 19.59

SHANDONG HUMON SMELTING

COMPANY LIMITED002237-SZ 1,791.63 1.33 24.35 22.02 28.84

ST BARBARA LIMITED SBM-AU 720.28 1.87 5.25 9.65 10.83

Mean 4.16 10.97 17.35 23.72

Median 3.60 9.62 13.44 16.00

High 2,457.90 9.81 35.60 50.11 108.18

Low 579.76 0.96 3.37 3.48 6.67

China Gold International CGG-T 1,093 3.13 6.89 8.83 10.62

Average

Valuation Base on Peer Average (CAD per Share) 3.93$ 4.68$ 5.74$ 6.69$ 5.26$

Source:Fundamental Research Corp. & Thomson Reuters, Thomson One

The average valuation on CGG based on industry average multiples is C$5.26 per

share.

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Rating

Risks

Based on our review of the company’s business model, strong management team,

near-term expansion potential, and our valuation, we initiate coverage on China Gold

with a BUY rating, and a fair value of C$5.50 per share (average of our DCF and

comparables valuations).

The following risks, though not exhaustive, may cause our estimates to differ from actual results:

• The value of the company depends on commodity prices.

• The company is subject to delays that are affecting the entire mining industry.

• The success of drilling, resource expansion and development are important long-term success factors at both flagship properties.

• Early leach recovery rates at the CSH Mine have been lower than initially expected. Lower production volumes in winter 2010 due to cold temperatures affecting the buried irrigation system.

• The outcome of feasibility studies and mine expansion plans at both the CSH and Jiama mines.

• Technical difficulties and delays in expansion may impede realization of economic benefits of the planned expansion.

• The ability of the company to provide adequate financing for future expansion.

• Political tension in Tibet may impact investor interest in the company.

• The ability to maintain a consistent power supply to the operations given the remote location of both properties.

We rate the company’s Share a RISK of 3 (Average).

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Appendix

Income Statement

USD; in millions, except per share items 2007A 2008A 2009A 2010A 2011E 2012E

Revenue from Gold (CSH Mine) -$ 29.37$ 81.05$ 128.41$ 200.70 172.81$

Revenue from Copper and other (Jiama) - - - 4.79 106.76 176.33

Total Revenue - 29.37 81.05 133.20 307.46 349.14

COGS (exclude dep) - 18.11 50.46 58.03 151.79 178.80

Gross Profit - 11.26 30.59 75.17 155.67 170.34

SG&A (excclude dep & stock base com) 3.17 4.83 4.14 4.74 10.12 10.37

Exploration and Evaluation Expenditure 6.60 5.11 1.81 0.63 0.41 0.41

Stock-based Compensation 2.13 1.47 (0.38) 0.49 0.33 0.83

Asset Retirement Cost 0.42 - - - -

Other operating expense, total 12.33 11.41 5.58 5.86 10.85 11.61

EBITDA (12.33) (0.15) 25.01 69.31 144.81 158.74

Depreciation and Amortization 0.05 2.41 5.76 10.82 36.18 34.91

EBIT (12.37) (2.56) 19.25 58.48 108.63 123.82

Financing Cost (1.70) (3.59) (6.31) (5.84) (12.06) (9.70)

Interest Income 0.44 0.17 0.01 0.07 3.57 -

Net Financing Expense (1.26) (3.42) (6.30) (5.78) (8.49) (9.70)

Gain (Loss) of Foreign Exchange (3.32) 8.06 (5.89) (1.48) 0.76 -

Listing Expenses - - (2.15) (2.10) (2.12) (2.12)

Fair Value Change on Warrant Liabilities - 12.79 (7.19) (7.16) - -

EBT Excl. Unusual Items (16.95) 14.87 (2.28) 41.97 98.77 112.00

Gain (Loss) on Disposal of Subsidiary - - - 0.02 - -

EBT Incl. Unusual Items (16.95) 14.87 (2.28) 41.99 98.77 112.00

Income tax expense - - 6.09 14.86 23.88 -

Minority Interest in Earnings - 0.30 0.98 0.91 2.60 3.45

Net Income (16.95) 14.58 (9.34) 26.22 72.30 108.55

Basic EPS (0.11)$ 0.09$ (0.06)$ 0.14$ 0.18$ 0.27$

Source: Fundamental Research Corp.

Page 40: China Gold International Resources Corp Ltd. (TSX: CGG ...€¦ · China Gold International Resources Corp Ltd. is a gold and non-ferrous metal producing company with two flagship

China Gold International Resources Corp Ltd. (TSX: CGG, HKSE: 2099) - Initiating Coverage Page 40

2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Balance Sheet

USD; in millions, except per share items 2007A 2008A 2009A 2010A 2011E 2012E

ASSETS

Cash and Equivalents 26.95 12.14 23.98 301.61 264.60 312.58

Restricted Cash - 5.22 - 6.73 - -

Total Cash and Restricted Cash 26.95 17.36 23.98 308.33 264.60 312.58

Accounts Receivable 0.35 0.15 1.68 9.05 63.18 71.74

Total Receivables 0.35 0.15 1.68 9.05 63.18 71.74

Prepaid Expense and Deposits 2.00 7.18 1.73 3.42 8.94 10.53

Prepaid Lease Payments - - - 0.14 0.32 0.36

Inventory 0.43 27.64 10.17 34.15 41.59 48.99

Total Current Assets 29.74 52.33 37.57 355.09 378.63 444.20

Asset Classified as Held for Sale - - 0.19 0.05 0.05 0.05

Gross PP&E 56.90 71.79 128.34 317.93 386.06 436.06

Accumulated Depreciation (1.39) (4.81) (10.42) (20.03) (56.21) (91.12)

Net PP&E 55.51 66.98 117.92 297.90 329.85 344.94

Prepaid Expense and Deposits - - - 2.40 2.40 2.40

Prepaid Lease Payments - - - 6.63 6.63 6.63

Amount due from non-controlling Shareholder - - - 0.42 0.42 0.42

Long-term Receivable - - 0.05 - - -

Inventory - - 18.85 17.84 17.84 17.84

Intangibles - - - 975.28 975.28 975.28

Total Assets 85.25 119.31 174.58 1,655.62 1,711.11 1,791.77

LIABILITIES

Accounts Payable and Accrued Expenses 15.07 18.93 35.07 90.84 74.86 88.17

Borrowings - 41.60 12.09 31.86 42.04 54.87

Tax Liabilities - - - 7.63 7.63 7.63

Total Current Liabilities 15.07 60.54 47.16 130.33 124.53 150.68

Liabiliities Classified as Held for Sale - - 0.04 0.02 0.02 0.02

Deferred Lease Inducement - - 0.19 0.14 0.14 0.14

Borrowing 44.27 14.93 80.84 180.79 169.64 114.77

Warrant Liabilities 13.83 0.27 5.29 - - -

Deferred Tax Liabilities - - 1.34 138.31 138.31 138.31

Deffered Income - - - 0.71 - -

Environmental Rehabilitation 2.24 4.13 1.60 1.89 1.89 1.89

Total Liabilities 75.40 79.87 136.47 452.19 434.53 405.81

Common Stock 80.55 95.27 102.31 1,239.50 1,240.34 1,241.17

Retained Earnings (Deficit) (70.71) (56.13) (65.47) (39.25) 33.05 141.60

Total Common Equity 9.85 39.14 36.84 1,200.25 1,273.39 1,382.77

Non-controlling Interest - 0.30 1.27 3.18 3.18 3.18

Total Liabilities and Equity 85.25 119.31 174.58 1,655.62 1,711.11 1,791.77

Page 41: China Gold International Resources Corp Ltd. (TSX: CGG ...€¦ · China Gold International Resources Corp Ltd. is a gold and non-ferrous metal producing company with two flagship

China Gold International Resources Corp Ltd. (TSX: CGG, HKSE: 2099) - Initiating Coverage Page 41

2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Cash Flow Statement

USD; in millions, except per share items 2007A 2008A 2009A 2010A 2011E 2012E

Net Income (16.50) 14.58 (9.30) 26.23 72.30 108.55

Depreciation & Amort. 0.05 2.41 5.76 9.64 36.18 34.91

Amort. Of Good will and Intangibles - - - 1.18 - -

Impairment of Assets - - - - - -

D&A., Total 0.05 2.41 5.76 10.82 36.18 34.91

Other Amortization - - - 0.01 - -

(Gain) Loss From Sale Of Assets - - - - - -

Stock-Based Compensation 2.13 1.64 (0.50) 0.21 0.33 0.83

Other Operating Activities 3.18 (22.70) 11.30 17.87 - -

Change in Acc. Receivable - 0.30 (1.40) 2.48 (54.13) (8.56)

Change In Inventories (0.40) (27.80) (1.40) (18.20) (7.43) (7.40)

Change in Acc. Payable 6.95 3.73 0.82 (26.70) (15.98) 13.32

Change in Unearned Rev. - - - 0.71 - -

Change in Other Net Operating Assets 0.02 (5.20) 5.44 (2.50) (5.70) (1.63)

Cash from Operations (4.59) (33.04) 10.73 10.92 25.56 140.01

Capital Expenditure (40.60) (26.80) (36.60) (13.20) (68.13) (50.00)

Sale of Property, Plant, and Equipment - - 0.03 0.04 -

Cash Acquisitions - - - 13.61 - -

Divestitures - - - 0.02 - -

Other Investing Activities 15.08 15.69 5.22 6.42 (0.71) -

Cash from Investing (25.52) (11.11) (31.35) 6.89 (68.85) (50.00)

Short Term Debt Issued - - - - - -

Long-Term Debt Issued 18.67 18.91 94.01 7.55 34.67 -

Total Debt Issued 18.67 18.91 94.01 7.55 34.67 -

Short Term Debt Repaid - - - - - -

Long-Term Debt Repaid - - (67.00) (52.70) (35.64) (42.04)

Total Debt Repaid - - (67.00) (52.70) (35.64) (42.04)

Issuance of Common Stock 9.07 11.02 5.33 304.99 0.52 -

Repurchase of Common Stock - - - - - -

Common Dividends Paid - - - - - -

Total Dividends Paid - - - - - -

Special Dividend Paid - - - - - -

Other Financing Activities (0.60) - - - - -

Cash from Financing 27.14 29.93 32.34 259.84 (0.45) (42.04)

Foreign Exchange Rate Adj. 2.08 (0.50) 0.07 0.00 - -

Net Change in Cash (0.88) (14.72) 11.79 277.65 (43.73) 47.98

Source: Fundamental Research Corp.

Page 42: China Gold International Resources Corp Ltd. (TSX: CGG ...€¦ · China Gold International Resources Corp Ltd. is a gold and non-ferrous metal producing company with two flagship

China Gold International Resources Corp Ltd. (TSX: CGG, HKSE: 2099) - Initiating Coverage Page 42

2011 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

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The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by CGG to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, CGG has agreed to a minimum coverage term including an initial report and three updates starting with this report. Coverage can not be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at www.investars.com. The distribution of FRC’s ratings are as follows: BUY (68%), HOLD (8%), SELL (4%), SUSPEND (20%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscription.htm for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.