Morningstar | Zijin Mining’s Robust Results Reflected; Still Not Cheap
Stripping out a CNY 496 million provision for asset impairment, no-moat Zijin Mining's cumulative nine-month 2018 net profit of CNY 3.35 billion, up 51% year over year, was broadly in line with expectation. The solid results were mainly attributable to higher selling prices and sales volume for products such as copper and zinc. After incorporating our latest commodity price deck and foreign exchange assumptions, we keep our fair value estimate at HKD 2.96 (CNY 2.56). Given our bearish expectation for long-term metal prices, we think Zijin is fully valued and greater upside is needed versus risks before we would buy.Zijin’s gross margin decreased to 12.0% in the first nine months of 2018 from 13.3% a year ago, largely due to increased contribution from its low-margin trading business. Third-quarter gross margin declined to 10.5% from 11.9% in the previous quarter on the back of a quarter-over-quarter fall in metal prices. Zijin has mined more low-grade mineral resources to take advantage of high metal prices and sustain production. As a result, unit selling costs for all products, except mine-produced zinc and refinery, processed and trading gold, were higher year over year. We note that Zijin’s gold output fell short of management target, while copper was on track and zinc is ahead. The deviations are not significant to our forecast and our main concern for Zijin is unchanged in that the firm’s production is increasingly skewed towards copper and zinc, which we expect will see greater price downside risk.
We expect limited upside for gold price in our midcycle forecast (CAGR of 1.6% over the next five years), while we think copper price will decline in the long term. During the third quarter, average copper prices fell 11% quarter over quarter and current copper price is trading at around $2.79 per pound as of Oct. 26. We project prices to fall further due to slowing demand growth in China and rising supply as mine restarts and new production comes online.
We maintain our long-term 2022 copper price forecast at USD 2.34 per pound (in nominal terms). As such, we think Zijin's earnings momentum is not sustainable in the long run.
Zijin Mining Group Company Limited is a China-based company principally engaged in the exploration, mining, smelting and sales of gold and other metal minerals. The Company's main products include gold products, copper products, lead and zinc products, iron products, silver products, among others. Its gold products mainly include the mineral gold, standard gold bullions, gold ingots and gold concentrates, among others. The Company is also involved in the geographic survey businesses through its subsidiaries.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.