DBS: Zijin Mining Group Co Ltd – Buy target Price HK$12.60

< Results Analysis > Record quarterly earnings in 2Q22, negative impact from lower metal prices largely priced in.

Stellar results in 2Q22 driven by sales volume growth and metal prices hikes, in line with our expectation
Expect 3Q22 earnings to head lower q o q due to the drop in metal prices
Long term growth outlook intact supported by demand for copper and lithium
Retain BUY call and unchanged HK$12.6 TP, decline in metal prices largely priced in

Stellar 2Q22 results driven by higher sales volume and metal price hikes. Zijin Mining’s (Zijin) revenue and operating profit (OP) came in at RMB67.7bn (+8.5% y-o-y, +4.5% q-o-q) and RMB8.5bn (+21.9% y-o-y, -1.0% q-o-q) respectively in 2Q22, marking another strong set of results that were in line with our expectations. This was largely driven by (i) ASP hikes on mined zinc (+18.8% y-o-y), mined copper (+7.4% y-o-y) and mined gold (+6.1% y-o-y) and (ii) sales volume growth for mined gold (+47.4% y-o-y), mined copper (+36.9% y-o-y), mined silver (+26.2% y-o-y). In particular, the gross profit from mined gold/copper/zinc climbed by 68.8%/43.4%/22% to RMB2,908m, RMB6,467m and RMB848m with 51.3%/64.4%/53.5% gross margins. Mined copper contributed 60.6% to total gross profit, followed by mined gold (27.3%) and mined zinc (8%). Accordingly, Zijin’s net profit surged 57.2% y-o-y and 6.2% q-o-q to RMB6.5bn, a quarterly record.

Expect 3Q22 earnings to head lower q-o-q due to lower metal prices. The average LME copper price in Jul-mid of Aug has fallen by 18.9% y-o-y from US$9,455/tonne to US$7,670/tonne and the average price in 3Q22 is estimated to decline by c. 15% q o q. The gold price is expected to decline c 5% in 3Q22 vs. 2Q22. However, higher sales volume should be able to mitigate earnings decline from the drop in metal prices. Of note, management guided that the production volume of mined gold and mined copper will grow by 26% and 47%, respectively, in 2022. We had already revised down our earnings forecasts in July to reflect the drop in metal prices.

Long term growth outlook intact for copper and lithium. Higher volumes is thanks to a series of M&As, which would support the company’s earnings amid volatile metal prices. The output of copper and gold are 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. 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 are scheduled to produce battery-grade lithium carbonate from 2023 and 2025 onwards, respectively. This should enhance Zijin’s earnings growth potential given that the estimated IRR of the project is around 50%.

Copper price to recover on improved demand outlook. According to WMBS, the refined copper production and consumption in 5M22 increased by 2.6% and 6.1% y-o-y to 10,273k tonnes and 10,517k tonnes, respectively. As a result, the refined copper market in 5M22 registered a deficit of 245k tonnes. We forecast LME copper prices to decline by 2.3% in 2022 to US$9,100/tonne, which is revised down from our previous forecast of US$9,500/tonne. LME copper price has dropped by 32.6% from the peak of US$10,390/tonne on 9 Apr to a low of US$7,000/tonne on 15 Jul and has since increased by 15.2% to US$8,065/tonne as of 12 Aug led by improving demand prospects. As China could launch a real estate fund worth US$44bn to support selected property developers and facilitate a US$147bn special bond for shanty town development, we expect copper demand and prices to recover in 4Q22 from the current level together with easing of Covid-19 restrictions and sustainable growth in the EV market.

Retain BUY call and unchanged TP; decline in metal prices largely priced in. We maintain BUY call and HK$12.6 TP for H-shares and RMB11.8 TP for A-shares. We believe the drop in metal prices has largely been priced in as H-share price has corrected by 41% to HK$8.2 on 15 Jul from the peak of HK$13.9 on 13 Apr, and since rebounded by 16% to HK$9.5 as of 12 Aug. Our TP for the A-share is derived from a DCF model using 8.8% WACC and 3% terminal growth rate. Our TP for the H-share is derived by factoring in a 10% discount to its A-share TP, in line with its historical trading discount. Our TP of HK$12.6 implies 16x PE and 3x P/BV based on FY23 earnings estimates

Quarterly Income Statement (RMBm)