EUR 850.00 For Business Accounts Only

Morningstar | Limited Upside for Jiangxi Copper Due to Our Bearish Metals and Mining Outlook

As China goes, so goes Jiangxi Copper. With more than 1 million tons of annual copper cathode capacity and 30% of China's copper reserves, the company exemplifies China's burgeoning industrial might and the rise of state capitalism.However, such impressive growth has failed to yield outsize economic profits. Since 2006, the firm's operating margin has been in a steady decline, the outgrowth of unbalanced development between the low-value-added refining and smelting business and the more profitable mining operation. Currently, Jiangxi Copper's mines are running at full capacity but can meet less than 20% of the firm's raw material needs.Despite Jiangxi Copper's origins as a mining firm, the revenue from its refining and smelting business currently accounts for 80% of its total revenue. As a refinery, Jiangxi Copper's profitability and returns are tied to treatment and refining, or TC/RC, fees, which are correlated positively with copper supply growth. In our opinion, the mining supply bottleneck and a rapid increase in Chinese copper smelting capacity have been largely responsible for suppressing TC/RC fees in the past. However, new mine supply from Chile, Peru, and Mongolia would cap copper prices and is positive for TC/RC fees in the next one to five years. Profitability and capital returns are at risk of further decline, should the company continue expanding its trading and smelting business amid rising mining costs. We expect copper consumption growth to slow below a 4% annual rate for the next five years, driven by slower economic growth and demand for durable goods in China. Consequently, Jiangxi Copper will have to build additional smelting and refining capacity, as management plans to sustain market share and meet this growing demand. As the company faces difficulty overcoming its mining supply constraints, Jiangxi Copper's self-sufficiency ratio (a measurement of raw material produced by the firm over the total amount required) is likely to fall by another 3 percentage points over the next five years.