Volume growth a buffer to volatile metal prices
- Revise down FY22F/FY23F estimates after inputting lower copper and gold price forecasts
- Strong sales volume growth to weather earnings decline
- Continuous acquisitions focused on lithium to enhance growth potential; operations to commence in 2023
- Reduce TPs but retain BUY call for both A and H-share
Reduce TP of A/H-share to RMB11.8/HK$12.6 but retain BUY.
Our lower TP is backed by a downward revision of FY22F/FY23F earnings estimates by 10%/14%, respectively, after inputting lowered metal price forecasts. However, we retain our BUY call, given that i) FY22F EPS still expect a positive growth and FY23F EPS would decline only by small margins, supported by sales volume growth; ii) ample growth potential with the lithium business from 2023 onwards; and iii) recent plummet of share prices were mostly priced in fall in metal prices, and cooper prices are likely to rebound in 4Q22.
Support from production growth in key mines.
The volume growth is thanks to a series of M&As, which support the company’s earnings sustainability amid volatile metal prices. The management guided that the production volume of mined gold and mined copper will grow by 26% and 47%, respectively, in 2022. The output of copper and gold is expected to double in 2025 vs. 2021, driven by a ramp-up in its key mines globally. In addition, the recently developed key mines would enhance profitability by producing high-grade ores.
More growth from lithium business.
Zijin Mining has acquired a 100% stake in Neo Lithium valued at RMB4.9bn in Jan and a 70% stake in Lakkor Tso Lithium Brine in Tibet in Apr 2022 valued at CAD960m. Neo Lithium and Lakkor Tso will produce battery-grade lithium carbonate from 2023 and 2025 onwards, respectively. This should enhance its earnings growth potential given that the estimated IRR is 50%.