Company Highlights
This report focuses on Zijin Mining Group, a leading player in the mining sector, primarily engaged in gold, copper, and lithium production. The company ranks among the top 10 global producers of gold and copper, making it a standout in the materials sector. With impressive financial performance and potential for further growth, Zijin Mining Group is well-positioned to benefit from rising commodity prices.
Investment Recommendation
Recommendation: BUY
As of September 12, 2024, the recommendation for Zijin Mining Group is a Buy. The stock is currently priced at HKD 13.78, with a fair value target of HKD 21.00, representing significant upside potential. Investors are encouraged to enter at current levels to capitalize on the anticipated rise.
Investment Thesis
Zijin Mining Group offers a compelling investment opportunity driven by multiple factors:
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Robust Financial Performance: In the first half of 2024 (1H24), Zijin’s earnings surged 60% year-on-year (YoY), largely supported by increased sales volumes and higher average selling prices for both gold and copper. Gold production volumes increased by 9% YoY, and the rise in commodity prices (22% for gold and 15% for copper) enhanced gross profit margins.
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Cost Efficiency: Zijin has demonstrated its ability to manage costs effectively, with cost of goods sold (COGS) decreasing by 2.5% for gold and 5.4% for copper. The company’s stringent cost controls led to a 3% reduction in selling, general, and administrative (SG&A) expenses, further boosting profitability.
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Improving Balance Sheet: The company improved its financial position through a HKD 3.9 billion H-share placement and strong operational cash flow. Net gearing reduced to 80%, reflecting a solid balance sheet with increased free cash flow.
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Benefiting from Commodity Price Upswings: As commodity prices rise, particularly for gold and copper, Zijin is well-positioned to leverage this upward trend. The company’s forward price-to-earnings ratio (P/E) of 9x indicates undervaluation compared to historical averages, reinforcing its investment potential.
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Production Resilience: Despite challenges such as disruptions in copper and gold output in 1H24, the company’s new capacities in Xinjiang and Shanxi, as well as resuming production in disrupted regions, offer a positive outlook for the second half of 2024.
Detailed Company Analysis
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Financial Results: For 1H24, Zijin’s recurring earnings surged 60% YoY, reflecting strong performance in both sales volume and price appreciation for gold and copper. The gross profit margin expanded to 19.2%, thanks to a disciplined cost control strategy that also reduced unit COGS. Operating cash flow saw a significant 28% YoY rise, while capital expenditures decreased by 16% YoY, allowing for positive free cash flow of CNY 4.5 billion.
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Stock Impact: Year-to-date, Zijin’s share price has risen by 10.7%, demonstrating strong market confidence. With a fair value target of HKD 21.00, the stock offers a promising return on investment, supported by an earnings multiple of 9x, which is below its historical average.
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Earnings Revisions/Risks: Although Zijin’s performance has been stellar, risks remain. The company’s earnings are highly sensitive to fluctuations in commodity prices, especially gold and copper. Additionally, any unforeseen disruptions in production or higher-than-expected operating costs could pose risks to the earnings outlook.
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Valuation: Based on a discounted cash flow (DCF) model, the fair value estimate for Zijin Mining Group is set at HKD 21.00, significantly higher than the current price of HKD 13.78, offering attractive potential upside for investors. The stock trades at a 9x forward P/E, which is below its historical average, providing a buying opportunity.
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Share Price Catalysts: Potential catalysts for the stock include further increases in gold and copper prices, lower-than-expected operating costs, and smoother-than-expected production ramp-ups in its existing and new facilities.
Financial Targets
- Target Price: HKD 21.00
- Stop-Loss Price: Not explicitly mentioned, but investors should consider a threshold below HKD 13.00 as a precautionary measure, depending on individual risk tolerance.
Recommendation Date
The investment recommendation was issued on September 12, 2024.
Broker Information
This report is provided by OCBC Investment Research, an equity research arm of Oversea-Chinese Banking Corporation Limited (OCBC Bank).
