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Morningstar | Zijin Mining's 2018 Results Below Expectation but Strong Production Growth Guided; Shares Overvalued. See Updated Analyst Note from 26 Mar 2019

No-moat Zijin Mining’s 2018 net profit rose 17% year over year to CNY 4.09 billion, largely attributable to higher selling prices and production volume for copper. Nonetheless, the results were below expectations due to higher-than-expected costs, with the firm’s gross margin declining to 11.1% from 12.5% a year ago. The firm also suffered CNY 1.5 billion of asset-impairment losses (CNY 2.2 billion in 2017), partly mitigated by investment income of CNY 1.06 billion. After rolling forward our earnings model and updating our foreign-exchange assumptions, our H share fair value estimate is marginally raised to HKD 2.98 from HKD 2.96, but our A share fair value estimate is reduced to CNY 2.54 from CNY 2.56. At current price levels, we think Zijin is overvalued, given our bearish long-term outlook for metal prices.

The gold mine and copper mine divisions accounted for 21% and 36% of the firm’s 2018 total gross profit, respectively. While we don’t expect significant downside for the gold price, we think upside is also limited as we forecast a nominal gold price of USD 1,300 per ounce by 2020. On the other hand, our long-term copper price forecast is below consensus; we project the copper price to fall to USD 2.29 per pound in 2021 before a gradual recovery is in place. This is largely due to slowing Chinese demand growth on the back of decelerating fixed-asset investment growth.

We think Zijin’s strong production growth should help to cushion the impact of our bearish copper price forecast . Management expects 2019 production to increase by 10% for gold (40 tons), 41% for copper (350,000 tons), 37% for zinc (380,000 tons), 25% for silver (275 tons), and flat output for iron ore (2.5 million tons). The strong production growth is largely attributable to newly constructed and acquired projects (such as Duobaoshan, Kolwezi, and RTB Bor), especially from overseas.

While capital expenditure of CNY 15.7 billion in 2018 was a record high largely due to mergers and acquisitions, the firm remains keen on expansion and guided for spending of CNY 11.4 billion in 2019. With Zijin’s net gearing ratio already high at 0.9 times at the end of 2018, we think the impending CNY 8 billion A share issuance will be crucial to the firm’s balance sheet strength.