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Morningstar | Zijin Mining’s Robust Results Reflected; Shares Fairly Valued

With a decade-long gold bull market and several successful acquisitions, Zijin Mining has transformed itself from a single low-grade mine operator into China's largest gold and second-largest copper producer. Zijin Mining's low-cost advantage has set it apart. However, with its flagship gold mine reserves waning and the increasing frequency of mining accidents, the firm has lost some of its lustre.Zijin Mining derives 90% of its revenue and 85% of its profit from two diametrically opposed business models: the profitable gold and copper mining business and the low-margin and low-return smelting and refining operation. With 10.2 million ounces of proven gold reserves and 2.1 million tons of prospective copper reserves, the Zijinshan mine is the firm's most important asset. The Zijinshan mine produced 9,152 kilograms of gold and 48,702 tons of copper in 2015, accounting for 26% and 32% of the company's overall gold and copper mining output, respectively.We believe gold and copper mining supply constraints, rising demand, and the Chinese government's commitment to GDP growth have coerced Zijin Mining into expanding its refining capacity. During the past three years, the company's gold mining output stagnated, while the refining and smelting business increased nearly 100%. While Zijin may be the cleanest dirty shirt among the Chinese gold miners in terms of profitability and raw material self-sufficiency, investing in additional metal refining capacity is turning Zijin more into a refinery, further suppressing returns on investment. Copper could overtake gold as Zijin's key profit driver in the medium term. However, the company is commissioning operations at China's third-largest copper mine, Duobaoshan, and increasing production capacity at the Zijinshan copper mine. Together, the two mines account for 50% of the company's total copper reserves but only 10% of copper output at the moment. In the medium term, we expect copper mining output to grow at 10% per year, making it one of the most important and positive developments.