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<News Analysis> Key beneficiary from higher gold prices

What’s New

Gold price holds near 5-month high at inflation pressures. Gold prices have risen to their highest level since June, as inflation worries continue to push investors toward the safe-haven metal. Gold prices have increased c. 6% since Oct to c. US$1,850/oz following the latest US inflation data, which showed a sharply higher CPI for the month of October with a headline rate of 6.2%, the highest in over three decades. Although rate hikes remain a potential risk for gold, inflation expectations may drive further gains. 

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To benefit from higher gold prices. Gold (mined gold and processed gold) contributed 49% to its revenue and 23% to its gross profit with 49% gross margins in mined gold during 9M21. The company is the one of the largest producers of mined gold in China and its reserve has increased to 2,334 tonnes in 2020 from 1,728 tonnes in 2018 following its acquisition of overseas gold mines and the exploration of gold mines in China. The company expects the gold production volume to increase to 67~72 tonnes in 2022 and 80~90 tonnes in 2025 from 40.5 tonnes in 2020 as a result of technological upgrade and ramping up of production capacity. To note, its Buritica Gold Mine in Colombia, which was acquired in Mar 2020 for C$1.4bn, increased production of gold to 500kg/month in Aug 2021 from 350kg/month in 2020. According our sensitivity analysis, 1% ASP hikes in gold could lead to an increase of 0.7% in gross profit. 

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4Q21 to record quarterly high earnings due to volume growth and intact metal prices.We expect 4Q21 earnings to likely register a historical high thanks to strong copper prices and production volume growth. LME copper price has averaged US$9,780/tonne since Oct which is c. 4% higher than that in 3Q21. Meanwhile, its sales volume will grow from its new projects: i) the Kamoa-Kakula copper mine in the DRC started commission in May and will add 40k tonnes to mined copper production in 2H21, ii) on 12 Oct, the company obtained the permits for operation of the Upper Zone of the Timok copper-gold mine, expected to add 50k tonnes of copper and 3 tonnes of gold in 2021, and iii) the completion of upgrading of two new processing lines (40k tonne capacity each) in Serbia, Zijin Bor will add copper output by 10k-20k tonnes in 2H21. The sales volume growth will enable the company to maintain its earnings growth momentum going forward. 

Especially, Kamoa-Kakula mine in DRC has turned to operating profit in 3Q21 which is just in its first quarter of commercial production and will complete the Phase 2 concentrator plant expansion, expected to start production in 2Q22. The mine will be the first net-zero operational carbon emitter equipped with hydrogen renewable power generation according to its key shareholders. Of note, Zijin mining has 49.5% stake in Kamoa-Kaula mine. 

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M&A with Neo Lithium Corp to strengthen growth potential.Zijin Mining entered into an agreement with Neo Lithium to acquire all of the outstanding shares of Neo Lithium at a price of CAD$6.50 per share for all cash acquisition on 8 Oct. Neo Lithium is a listed company on the Toronto Stock Exchange of Canada and its total consideration is CAD$960m (RMB 4.94bn), and it is subject to the approval of at least 66% of the votes cast by Neo Lithium’s shareholders. The core asset of Neo Lithium is the Tres Quebradas Salar lithium brine lake project (3Q Project) located in Catamarca Province in the northwestern part of Argentina. The total mineral resource of lithium carbonate equivalent for the 3Q Project is about 7.565m tonnes (lithium ion concentration at 400 mg/L cut-off). Among which, the total measured and indicated resource volume of lithium carbonate equivalent is 5.304m tonnes, with an average lithium ion concentration of 636 mg/L. The project is rich in resources, high-grade, low-impurity, and has favourable development conditions and relatively large potential for production expansion according to the company and industry experts. We believe it would strengthen its growth potential with the expansion of the EV market. 

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Retain BUY call for H-share and HOLD call for A-share. We maintain our BUY call with HK$13 TP for H-share and HOLD call with RMB12.1 TP for A-share. Our TP for its A-share is derived from a DCF model using 8% WACC and a 3% terminal growth rate. Our TP for its H-share is derived by factoring in a 10% discount to its A-share TP to account for its historical trading discount. Our TP of HK$13 implies a 25x PE and 4.1x P/BV based on the 2021 earnings forecast. 

Zijin Mining’s production target of major products 

 2020202120222025
Mine-produced gold (tonne)40.553-5667-7280-90
Mine-produced copper (m tonnes)0.4530.54-0.580.80-0.851.00-1.10
Mine-produced zinc (lead) (m tonnes)0.3780.45-0.480.47-0.50
Iron ore (m tonnes)3.873.50-3.802.90-3.30
Mine-produced silver (tonne)299240-300270-310
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Lithium mineral resource estimate results of the 3Q Project (lithium-ion concentration at 400 mg/L cut-off) 

At 400 mg/L cut-offAverage Li concentration (mg/L)Li (tonne)Li2CO3 equivalent (tonne)
Measured790346,0001,839,000
Indicated576651,0003,465,000
Total M & I636996,0005,304,000
Inferred561425,0002,261,000

Source: Company, DBS HK