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CSCI-Metals-Zijin Mining (2899 HK)：Aiming for further acquisition of gold assets-20171204

Aiming for further acquisition of gold assets

• Our update with management reaffirms our positive view on Zijin’s growth prospect in 2018. Zijin has been actively seeking M&A opportunities of gold projects overseas.
• Based on the company’s projects pipeline, we estimate copper contribution as a percentage of total EBIT would be maintained at 39% in both FY17E and FY18E, outpacing that of gold, being the major growth driver.
• With a 20% share price correction in the past three months, Zijin’s current valuation looks attractive and should have fully reflected the negatives on US rate hike in our view. Considering Zijin’s solid growth prospects, resource expansion potential and undemanding valuation, we maintain our Buy rating and target price unchanged at HKD3.4, representing 28.3% upside potential.

Setting a clear growth vision across its diversified metals asset portfolio. Management is confident that the company’s three-legged growth strategy will pay off. For copper, in order to tap into the expected growing market shortage ahead, the company plans to further ramp up the capacity of its Kolwezi Coper Mine in DR Congo; and meanwhile, the Kamoa Copper project, which is scheduled to commence operation by 2020, will be the primary mid-term growth driver. And for gold, the company is actively seeking M&A opportunities in Africa and South East Asia, so as to replenish gold resources following earlier depletion at its Zijinshan Gold mine. Meanwhile, for zinc, the company would maintain its high-grading-low-cost strategy as management foresees the zinc price would remain on an uptrend in the coming two years.

Stricter environmental requirements for mining and refining activities. Management foresees stricter governmental regulations on pollutant emission standards for the industry. Despite so, management believes it will not exert excessive burden on the company since Zijin’s production facilities comply with the standard and ongoing projects are likely to benefit from economies of scale.

Copper increasingly the growth driver. We estimate copper contribution as a percentage of total EBIT would be maintained at 39% in both FY17E and FY18E, whilst that of gold at 36%/38%, being the company’s two major earnings growth drivers. We estimate the company’s recurring net profit to grow at CAGR of 17.4% during FY17E-FY19E. According to our sensitivity analysis, for every 1% change in the unit selling price of gold, copper and zinc would translate into adjustment in our FY18E net profit estimates by 9%, 4% and 2%, respectively.

Undemanding valuation. Zijin is trading at an undemanding valuation of 1.3x FY18E PBR, considering the improving ROE, lucrative dividend yield at an estimated of 4.4% for FY18E, as well as potential catalyst from cobalt production. Thus, we will maintain our Buy rating and price target of HKD3.4, based on 1.7x FY18E PBR.