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Morningstar | Zijin's Solid 1H Results Underpinned by Higher Metal Prices and Lower Exchange Losses

No-moat-rated Zijin Mining's first-half 2018 net profit of CNY 2.53 billion, up 68% year over year, was in line with the preliminary earnings announced in July and largely within our expectation. The strong growth was largely attributable to rising metal prices (such as copper and zinc), increasing production volume (copper and zinc), and lower foreign exchange losses. Our commodity price forecasts are unchanged but we increase our fair value estimate to HKD 2.96 (CNY 2.56) from HKD 2.76 (CNY 2.36), after updating our foreign exchange assumptions. The firm's earnings will benefit from depreciation of the Chinese yuan as metal prices are USD-denominated. Nevertheless, we think upside will be limited for Zijin's share price in the near term, as concerns of a trade war between the U.S. and China will pressure metal prices.

The company's gross margin was largely stable at 12.8% in first-half 2018 from 13.1%, a year ago. Volume for mine-produced gold was down 10% year over year due to an earthquake in Papua New Guinea, which affected operations of the Porgera gold mine. Nonetheless, the losses were covered by insurance. On the other hand, volume for mine-produced copper and zinc rose 30% and 5%, respectively, year over year, broadly in line with Zijin's 2018 full-year targets. In particular, the robust copper production growth was mainly contributed by the Kolwezi copper mine in the Democratic Republic of the Congo, which reached full capacity following the commencement of production in June 2017. Meanwhile, in line with stronger metal prices and given that Zijin has mined more low-grade resources to take advantage of current prices, the firm also witnessed higher unit cost for most metals produced.

Gold and copper remain the major earnings contributors for Zijin, which accounted for 37% and 20% of the firm's total gross profit in the first-half, respectively. However, we are bearish on long-term copper price. We continue to forecast 2018 copper prices to average USD 3.00 per pound. Although prices averaged USD 3.14 during the first half of the year, they have fallen to about USD 2.70 as of Aug. 24. As new supply ramps up and demand growth in China continues to slow, we expect prices to fall further and our long-term 2022 copper price forecast is at USD 2.34 per pound (in nominal terms). As such, we think Zijin's earnings momentum is not sustainable in the long run.