Copper sector review - another year of surplus

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1 Deutsche Bank Markets Research Asia China Resources Industry Date 24 February 215 Industry Update Copper sector review - another year of surplus Another year of surplus ample capacity with decelerating demand growth We expect another year of refined copper surplus in China given strong capacity addition and moderate consumption growth overall. We forecast China s refined copper output to grow by 1%/8% in 215/216. However, demand growth is expected to be only 5.7%/5.6% during the same period. Despite potential improvement of smelting profits resulting from the utilization rate increase, we expect the weak copper price to continue to drag down profits for Jiangxi Copper and Zijin. We believe Jiangxi Copper (14x 215E PE) and Zijin (18x 215E PE) are currently fairly valued and maintain Hold for both. Deceleration of growth in major downstream sectors We expect Chinese copper consumption growth to continue to decelerate, reaching 5.7%/5.6% in 215/216 from 6.8%/6.3% in 213/214. We attribute the demand weakness mainly to the moderated growth rate in power investments (China State Grid investment growth of c.9% in 215 vs. c.14% in 214) and the focus of these investments is on UHV projects, which are less copper-intensive. Other main factors for demand weakness are a slowdown of the property sector and general Chinese economy. Our monthly trackers (shown in Figure 7 to Figure 12) demonstrate that downstream sectors are either having sluggish growth or the growth rate is starting to slow. However, excessive capacity addition continues While Chinese demand (accounting for more than 45% of global demand) growth will slow, there is still excessive capacity addition for copper mining and smelting/refining in China. Our global commodity team sees 5.1%/6.8% of copper mine production growth in 215/216. Our local checks with SMM and Antaike on Chinese smelting/refining capacity also show /9% growth in 215. As such, we believe there will be surplus of refined copper in China. We forecast 1%/8% of refined copper output growth in 215/216. Smelters profitability could continue to improve and benefit Jiangxi Copper 215 TCRCs were settled at US$17/t & 1.7c/lb, up c.16% from US$92/t & 9.2c/lb in 214. With abundant concentrates supply globally (DBe 5.1% /6.8% in 215/16E) resulting in higher smelter utilization rates, we expect TCRCs to reach US$115/t & 11.5c/lb in 216. With Jiangxi Copper s smelting breakeven point at US$7/t & 7.c/lb, we expect the company to make a gross profit of RMB.6bn/1.1bn/1.3bn from its smelting business (incl. c..6mt smelting and c.1.2mt refining capacity) in 214/15/16E. However, we are aware that TCRC is at a decade high and can trigger more supply response. Maintaining Hold for Jiangxi Copper and Zijin Despite the improving profitability of Jiangxi Copper s and Zijin s smelting businesses, we expect Jiangxi Copper s bottom line to decline by 4.4%/4.5% in 215/216, and Zijin s bottom line to decline by 4.3%/3.7% in 215/216, respectively, mainly dragged by weak copper/gold prices. JXC s target price (HKD13., 5% cut) is based on its two-year average forward PE multiple of 13.6x and 215DBe EPS. Our target price for Zijin (HKD2.1, unchanged) is based on a life-of-mine DCF method with an 8.3% WACC. With JXC and Zijin currently trading at 215E PEs of 14x and 18x, valuations are not attractive. With ~% and ~7% downside potential, we rate both stocks as Hold. Major risk: stronger-/weaker-than-expected copper/gold prices. James Kan Sharon Ding Research Analyst Research Associate (+852) (+86) james.kan@db.com sharon.ding@db.com Key Changes Company Target Price Rating 358.HK 13.7 to 13.(HKD) - Source: Deutsche Bank Companies Featured Jiangxi Copper (358.HK),HKD12.94 Hold 213A 214E 215E P/E (x) EV/EBITDA (x) Price/book (x) Zijin Mining (2899.HK),HKD2.24 Hold 213A 214E 215E P/E (x) EV/EBITDA (x) Price/book (x) Source: Deutsche Bank Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/4/214.

2 Another year of surplus Surplus continues in 215 As shown in Figure 1, in 215 we expect another year of refined copper surplus in China on excessive capacity additions and moderating growth in the downstream sectors. Capacity: Based on our channel checks, we expect Chinese smelting and refining capacity to grow by 1,8kt and 85kt in 215 (Figure 2 and Figure 3), representing ~ and ~9% growth. Despite the tight scrap supply, we still envision 1% refined output growth in 215 on the back of robust Chinese smelting capacity growth (Figure 1). Demand: We expect Chinese copper consumption growth to continue to decelerate in the coming years, reaching 5.7% and 5.6% in 215 and 216, respectively. We attribute the general weakness mainly to the moderated growth rate in power investments and the focus on UHV projects, which are less copper-intensive, as well as concerns about the property sector and the broader slowdown in China s economy. We lay out a detailed breakdown in Figure 4. Figure 1: China refined copper demand and supply E 215E 216E Refinery capacity kt 5,29 5,98 7,3 7,88 8,96 9,86 1,71 1,91 Net addition kt ,5 85 1, Capacity growth % 6.7% 13.% 17.6% 12.1% 13.7% 1.% 8.6% 1.9% Refined copper production kt 4,123 4,578 5,185 5,617 6,179 6,849 7,534 8,137 growth % 9.1% 11.% 13.3% 8.3% 1.% 1.8% 1.% 8.% Capacity utilization % 8.4% 81.2% 79.7% 75.3% 73.4% 72.8% 73.3% 75.3% Net imports kt 3,95 2,872 2,676 3,129 2,91 3,324 2,7 2,2 Refined copper consumption kt 6,1 6,8 7,33 7,68 8,2 8,72 9,219 9,731 growth % 19.6% 11.5% 7.8% 4.8% 6.8% 6.3% 5.7% 5.6% Supply demand deficit kt -1,977-2,222-2,145-2,63-2,21-1,871-1,685-1,595 Balance* kt 1, , ,453 1,15 65 Average LME cash price USD/t 5,178 7,498 8,829 7,953 7,354 6,838 6,625 6,388 growth % -25.6% 44.8% 17.8% -9.9% -7.5% -7.% -3.1% -3.6% Source: Deutsche Bank estimates, Wood Mackenzie, Antaike, Bloomberg Finance LP,*A large portion of surplus in 29 and 212 was absorbed by SRB buying and bonded warehouse building up. We estimate~ 5kt Chinese SRB buying in 214. Based on the projects we have identified (Figure 2 and Figure 3), there is another 1,8kt smelting capacity and 85kt refining capacity to come on line this year, representing ~ and ~9% growth in 215, respectively. The smelting capacity growth has been quite strong in recent years on higher contract TCRCs, which recorded 25%, 31% and 16% rate hikes in 213, 214 and 215, respectively. In addition, the higher TCRCs are encouraging higher utilization rates at existing smelters, in our view. Page 2

3 Figure 2: New copper smelting capacity in 215 Region Province Copper Refinery Launch New Capacity time (kt) Northwest Gansu Baiyin Nonferrous Metals 3Q 2 East China Shandong Fangyuan Nonferrous 1Q 3 Mid China Hunan China Minmetals Hunan Nonferrous 2Q 1 Northwest Qinghai Western Mining Qinghai Copper 3Q 1 South China Guangxi Guangxi Nanguo Copper 3Q 15 Mid China Henan China National Gold Group 2Q 2 Northwest Inner Mongolia Huading Copper 4Q 3 Total 1,8 Source: Deutsche Bank, Company data, SMM, Antaike Figure 3: New copper refinery capacity in 215 Region Province Copper Refinery Launch New Capacity time (kt) Northwest Gansu Baiyin Nonferrous Metals 3Q 2 Northwest Qinghai Western Mining Qinghai Copper 3Q 1 East China Jiangsu Lianhe Copper 2Q 1 Mid China Hunan China Minmetals Hunan Nonferrous 2Q 1 South China Guangxi Guangxi Nanguo Copper 3Q 15 Mid China Henan China National Gold Group 2Q 2 Total 85 Source: Deutsche Bank, Company data, SMM, Antaike In contrast to the strong capacity growth, we expect refined copper demand growth to slow to 5.7% and 5.6% in 215 and 216, respectively (shown in Figure 4). Figure 4: China refined copper demand breakdown E 215E 216E Power infrastructure & kt equipment 2,94 3,14 3,39 3,63 3,95 4,25 4,565 4,893 growth % 6.8% 8.% 7.1% 8.8% 7.6% 7.4% 7.2% Home appliances kt ,14 1,16 1,24 1,36 1,442 1,528 growth % 23.8% 15.2% 3.% 6.9% 9.7% 6.% 6.% Transportation kt growth % 21.% 2.7% 3.% 4.4% 4.2% 4.2% 4.% Building construction kt growth % 8.5% 6.3% 2.9% 3.6% 2.1% 2.% 2.% Electronics kt growth % 13.3% 6.9% 5.% 5.3% 3.3% 3.3% 3.% Others kt growth % 1.% 4.5% 3.1% 3.6% 3.5% 3.5% 3.% Total kt 6,1 6,8 7,33 7,68 8,2 8,72 9,219 9,731 growth % 19.6% 11.5% 7.8% 4.8% 6.8% 6.3% 5.7% 5.6% Source: Deutsche Bank estimates, Antaike As illustrated in Figure 5, nearly 5% of refined copper demand comes from the power sector in China, of which power cables account for the majority, with the rest coming from grid equipment. Page 3

4 Figure 5: Chinese refined copper consumption breakdown, 214 Electronics 7% Others 1% Construction 8% Transportati on 1% Power 49% Home appliance 16% Source: Deutsche Bank estimates, Antaike Power Earlier this year, Chinese State Power Grid announced a power grid budget of RMB42bn in 215, representing a 9% increase over actual grid investments of RMB385.5bn in 214 (Figure 6). Despite this record-high investment amount, the growth rate of power investments is set to decelerate in the coming years on the slower pace of China s GDP growth. Figure 6: China State Power Grid s power grid investments (actual vs. budget) RMBbn except % E Actual Target Actual -14% 14% 1% 11% 14% 9%* Target -9% 29% 6% 3% 1% Source: Deutsche Bank, Company data, * 215 target divided by 214 actual Home appliances Euromonitor, a third-party intelligence research company, forecasts that air conditioner volumes will grow by only single digits in 215 and 216, compared to low teens in 214. Transportation DB s auto team expects overall auto sales to grow by about 8-9% in 215 and 216, compared to 7% in 214. On the other hand, railway spending growth is expected to decelerate to 4% and % in 215 and 216. Overall, we expect more moderate copper consumption growth in 215 than in 214. In addition, we lay out the monthly (3mma) growth of major end-use demand sectors to track the recent momentum (Figure 7 to Figure 12), which shows a general downtrend in almost every sector. Page 4

5 Figure 7: Power equipment monthly output (3mma) Figure 8: Power FAI monthly (3mma) 8% Power Generating Equipment Power Cable Voltage Transformer 1% Electrical Machinery & Equipment FAI Power grid investment 6% 6% 8% 6% % % % - Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Jun-12 Dec-12 Jun-13 Jun-14 Dec-14 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Mar-14 Jun-14 Sep-14 Dec-14 Source: Deutsche Bank, CEIC Source: Deutsche Bank, CEIC Figure 9: Home appliances monthly output (3mma) 1% 8% 6% % % Air conditioner Household Refrigerator Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Jun-12 Dec-12 Jun-13 Jun-14 Dec-14 Figure 1: Railway FAI and auto monthly output (3mma) Railway FAI Auto output 8% 6% % % Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Mar-14 Jun-14 Sep-14 Dec-14 Source: Deutsche Bank, CEIC Source: Deutsche Bank, CEIC Figure 11: Property monthly sales and starts (3mma) Figure 12: Communication cable output and electronics FAI monthly (3mma) 1 1% GFA sold GFA started Cable for Communication & Net Electronics FAI (RHS) 8% 8% 6% 6% % % Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Jun-12 Dec-12 Jun-13 Jun-14 Dec-14 - Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Mar-14 Jun-14 Sep-14 Dec-14 % Source: Deutsche Bank, CEIC Source: Deutsche Bank, CEIC Page 5

6 Smelters profitability to improve on TCRC hike (16% in 215) Negotiations between Freeport McMoRan and major Chinese and Japanese smelters regarding 215 TCRCs were settled at US$17/t & 1.7c/lb in the concentrate market, up ~16% from US$92/t & 9.2c/lb in 214 (Figure 13). Freeport s settlements have been adopted by other buyers and sellers as a benchmark price in recent years and most China domestic smelters have signed their contract prices based on it, according to our channel checks. Figure 13: Copper combined TC/RC c/lb 4. Monthly spot price Annual benchmark LT contract Source: Deutsche Bank, Wood Mackenzie, Note: assume 25% Cu in concentrate and monthly spot price represents mine to trader representative average As mentioned above, Chinese smelting capacity is expected to register strong growth (~18%) again in 215. Moreover, DB s global commodity team estimates strong mined supply growth of 5.1% and 6.8% in 215 and 216, respectively. With concentrates likely to be in plentiful supply globally and higher TCRCs encouraging higher smelter utilization rates, we expect another year of growth in China copper concentrate imports. Figure 14: China copper concentrate and scrap imports Figure 15: China copper scrap imports and spread kt Copper ore & conc imports (3mma) kt 1,2 copper scraps imports (3mma, RHS) 5 1, Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Jun-12 Dec-12 Jun-13 Jun-14 Dec-14 kt Jan-11 Jul-11 Imported Copper Scrap 1 month average spread (refined copper - scrap) RHS Jan-12 Jul-12 Jan-13 Narrowing spread led domestic scrap imports decline Jul-13 Jan-14 Jul-14 Jan-15 RMB/t 6, 5, 4, 3, 2, 1, -1, Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP, WIND Page 6

7 On the other hand, China copper scrap import volumes have decreased for nearly two years owing to the declining refined copper/copper scrap spread (Figure 15). According to Antaike, copper scrap contributed more than onethird of total China domestic refined copper output in 212, compared to ~3% and ~26% in 213 and 214, respectively. In 215, we envision an even lower percentage of copper scrap usage given the downward pressure on the copper price. Figure 16: Copper price and TC/RCs assumptions E 216E LME cash price* USD/t 7,354 6,866 6,625 6,388 TC _LT contract $/t RC _LT contract c/lb Source: Deutsche Bank estimates, *Deutsche Bank Global Commodity Jiangxi Copper (358.HK, Hold) Jiangxi Copper engages in copper mining, smelting, processing and trading, as well as by-product businesses (gold, silver, sulphuric acid, rare metals, etc). Copper-related revenue and gross profit account for almost 9% of its total revenue and ~7% of its total gross profit. Figure 17 illustrates the major components of Jiangxi Copper s copper-related business. Figure 17: Major components of JXC s copper-related business Self-mined conc. Most profitablesegment - Volume 21kt - GP per tonne at ~RMB15k in 214 Trading business Copper Smelting and refining Profitability to improve on TCRCs hike - TCRC at $17/t & 1.7c/lb in 215 (16%); - JXC GP breakeven point at $7/t & 7.c/lb; - smelting capacity ~6kt, refining capacity ~1,2kt; - GP at RMB/.6bn/1.3bn in 213/14/15 Almost breakeven at GP level Copper processing products Segment gross profit at about RMB5-1m. Source: Deutsche Bank estimates, Company data Mined copper - GM to drop to ~35%/3%/24% in 214/15/16E from 42% in 213. Based on our calculations, the total unit cost (incl. mined concentrate cost and smelting cost) of Jiangxi Copper s mined copper should be about RMB28k-3k in E. With limited room for further cost reduction and weak fundamentals in these two years, we forecast the company s mined copper gross margin will drop to 34%/3%/24% in 214/15/16E, respectively. Page 7

8 Figure 18: JXC mined copper gross margin 6% 56% 5% 47% 42% 3% 35% 3% 24% 1% 211E 212E 213E 214E 215E 216E Source: Deutsche Bank estimates Smelting and refining profit improvement, but hard to make up for the earnings drop in mined copper. Jiangxi Copper currently has c.6kt smelting capacity and 1,2kt refining capacity (incl. 1,1kt in Guixi and 1kt in Qingyuan). The company is able to charge TCRCs on the concentrates and only refining charges on the blister, anode and scrap. According to the company, its smelting business could reach breakeven at US$7/t & 7.c/lb TCRCs. With 214 and 215 TCRCs set at US$92/t & 9.2c/lb and US$17/t & 1.7c/lb and estimated 216 TCRCs at US$115/t & 11.5c/lb, we expect its smelting business to make RMB.6bn/1.1bn/1.3bn gross profit in 214/15/16E, respectively. As a result, we expect stable gross profit in 215 compared to that in 214 from copper-related businesses. Still, this is not enough to offset the margin decline in the mined copper segment in 216. Meanwhile, we should also be aware that current TCRC is at a decade high and likely to trigger more smelting capacity addition. If that happens, it might create more downside risks to Jiangxi Copper s profits. Copper processing minor profit contribution at about RMB5-1m. Copper trading almost breakeven at the gross profit level and even accounts for more than 5% of its total top line. Coupled with price weakness in other by-products such as gold, silver, sulphuric acid and rare metals, we revise down our bottom line by 13.9%/1.9%/7.5% in 214/15/16E, respectively (Figure 19). Figure 19: JXC Deutsche Bank estimate revisions 214E 215E 216E RMB m New Old Change% New Old Change% New Old Change% Revenue 181, ,765.1% 198, ,782.8% 215,625 21, % EBIT 4,155 4, % 3,829 4, % 3,558 4, % NP 2,778 3, % 2,656 2, % 2,537 2, % Source: Deutsche Bank estimates Our estimates stand at 98%/14%/87% of Bloomberg Finance LP market consensus in 214/15/16E, respectively (Figure 2). Page 8

9 Figure 2: JXC Deutsche Bank estimates vs. consensus RMB m 214E 215E 216E DBe Cons. DBe/Cons. DBe Cons. DBe/Cons. DBe Cons. DBe/Cons. Revenue 181, ,518 12% 198, , % 215, , % EBIT 4,155 4,286 97% 3,829 3,984 96% 3,558 4,317 82% NP 2,778 2,836 98% 2,656 2,558 14% 2,537 2,918 87% Source: Deutsche Bank estimates, Bloomberg Finance LP Jiangxi Copper Hold, HKD13. TP Our target price of HKD13. for Jiangxi Copper is based on its two-year average forward PE of 13.6x, applied to FY15E EPS. Currently, Jiangxi Copper is trading at 14x FY15E PE and.8x FY15E PB, respectively. With its current price equivalent to our TP, we maintain our Hold rating for Jiangxi Copper. Figure 21: JXC s short-term forward PE chart Figure 22: JXC s long-term forward PE chart M forward PE (LHS) Average = STD = STD = M forward PE (LHS) Average=1.5x +1 STD=15.4x -1 STD=5.5x Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Feb-4 Aug-4 Feb-5 Aug-5 Feb-6 Aug-6 Feb-7 Aug-7 Feb-8 Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data Risks A significant increase in copper prices would affect the company's bottom line. As Jiangxi Copper is a net smelter, weaker/stronger concentrate supply would affect the utilization of the company's smelting operations. An increase/decrease in mine concentrate production would have a positive/negative impact on the company's profits. Zijin Mining (2899.HK, Hold) We have tweaked Zijin s bottom line by -7%/-1%/3% in 214/15/16E, respectively, due to the mixed impacts of lower realized gold prices in 214, higher unit cost pressure and stronger volume in the coming years (shown in Figure 23). As shown in Figure 24, we revise up our gold unit cost assumption by 1%/5%/6% in 214/15/16E, respectively. Zijin`s preliminary result indicated that its FY14 unit cost of mined-gold is likely to be higher than we expected. We believe there is limited room to further cut its mined-gold costs in the coming years given that: 1) Zijinshan Gold Mine is already in a very late stage, with declining ore grades and rising maintenance expenses pushing up unit costs; and 2) the major cost-cutting contributor, Australia Norton Gold Mine, is stepping into a relatively mature stage after three years of mining operation. Page 9

10 These factors will likely easily offset management s efforts in cost cutting. We thus believe its gold unit cost will increase slightly in the coming years. However, we increase our mined-gold volume forecasts by 2%/3%/3% and mined copper volume forecasts by 1%/7%/7% in 214/15/16E, respectively. Management is quite confident of achieving its 34 tonne gold (7% growth) and 14 kt (12% growth) copper production targets in 214, even though the Altynken gold project has been delayed to mid-215 and there was no new capacity addition for copper in 214 and 215. The company s higher-thanexpected outputs both in mined-gold and mined-copper are mainly due to its mining utilization improvement. According to the company`s 215 guidance, Zijin has set 36t mined-gold and 15kt mined-copper production targets, which are c.6% and c.7% above the targets for FY14. Moreover, two gold mine technical upgrade projects are likely to expand Zijin s mined gold capacity by 8.5 tonnes in 215. We thus revise up our 215 production volume assumptions and believe the utilization rate is likely to be sustained at a high level in these two years. Figure 23: Zijin Deutsche Bank estimate revisions 214E 215E 216E RMB m New Old Change% New Old Change% New Old Change% Revenue 58,752 53,996 9% 55,857 52,56 7% 55,66 5,273 11% EBIT 3,936 4,645-15% 4,316 4,388-2% 4,25 4,183 2% NP 2,346 2,525-7% 2,245 2,275-1% 2,162 2,11 3% Source: Deutsche Bank estimates Figure 24: Zijin Key changes in assumptions E 215E 216E ASP Mined gold - New RMB/g Old RMB/g Change % -1% % % Mined copper - New RMB/t 43,622 49,466 42,3 39,422 35,629 34,64 33,59 - Old RMB/t 43,622 49,466 42,3 39,422 35,629 34,64 33,59 Change % % % % Unit cost Mined gold - New RMB/g Old RMB/g Change % 1% 5% 6% Mined copper - New RMB/t 12,527 13,318 14,511 17,98 17,79 16,737 16,737 - Old RMB/t 12,527 13,318 14,511 17,98 17,79 16,737 16,737 Change % % % % Volume Mined gold - New kg 29,43 28,698 33,16 32,5 33,499 35,999 4,382 - Old kg 29,43 28,698 33,16 32,5 32,78 35,28 39,91 Change % 2% 2% 3% Mined copper - New t 89,82 86,897 16, , , ,98 154,98 - Old t 89,82 86,897 16, , , , ,916 Change % 1% 7% 7% Source: Deutsche Bank estimates, company data Page 1

11 As shown in Figure 25, our 214E/15E/16E estimates for Zijin s bottom line stand at 95%/93%/75% of Bloomberg Finance LP market consensus. Figure 25: Zijin Deutsche Bank estimates vs. consensus RMB m 214E 215E 216E DB estimates Consensus DBe/Cons. DB estimates Consensus DBe/Cons DB estimates Consensus DBe/Cons Revenue 58,752 49, % 55,857 5,33 112% 55,66 52,568 16% EBIT 3,936 4,714 83% 4,316 4,949 87% 4,25 4,979 85% NP 2,346 2,473 95% 2,245 2,421 93% 2,162 2,896 75% Source: Deutsche Bank, Bloomberg Finance LP Zijin Mining Hold, HKD2.1 TP We use a life-of-mine DCF to derive Zijin s target price. We adopt 8.3% as the cost of equity for Zijin, reflecting an updated risk-free rate of 3.9%, a market risk premium of 5.6% and a beta of We keep our target price for Zijin of HKD2.1, which implies 16x FY14E PE and 17x FY15E PE. The target price also translates into c.1.3x FY14E PB and c.1.3x FY15E PB with an 8.4% ROE. Currently, Zijin is trading at 18x 214E PE and 1.4x 214E PB, which implies about 7% downside potential. We maintain our Hold rating. Figure 26: Forward P/B vs. ROAE Figure 27: Forward P/E band M forward PB (LHS) Average=4.2x +1 STD=7.1x -1 STD=1.3x ROE %(RHS) 7% 16. Stock Price Max=63.4x Min=5.9x Average=18.x +1 STD=27.x -1 STD=9.x 14. 6% Dec-3 May-4 Oct-4 Mar-5 Jul-5 Dec-5 May-6 Oct-6 Mar-7 Jul-7 Dec-7 May-8 Oct-8 Feb-9 Jul-9 Dec-9 May-1 Sep-1 Feb-11 Jul-11 Apr-12 Sep-12 Feb-13 Jul-13 Apr-14 Sep-14 Feb-15 5% 3% 1% % Jan-4 May-4 Oct-4 Mar-5 Aug-5 Dec-5 May-6 Oct-6 Mar-7 Aug-7 Dec-7 May-8 Oct-8 Mar-9 Jul-9 Dec-9 May-1 Oct-1 Feb-11 Jul-11 May-12 Sep-12 Feb-13 Jul-13 May-14 Sep-14 Feb-15 Source: Deutsche Bank, Company data, Bloomberg Finance LP Source: Deutsche Bank, Company data, Bloomberg Finance LP Risks Given that over 6% of Zijin s revenue exposure is to gold and 2-3% to copper, higher-than-expected gold and copper prices are the main upside risks to our outlook. Other risks include lower-than-expected raw material and other operating costs. Meanwhile, downside risks include lower-than-expected mined copper/gold production volumes and further expansion development issues. Page 11

12 Model updated:24 February 215 Running the numbers Asia China Jiangxi Copper Reuters: 358.HK Hold Bloomberg: 358 HK Price (24 Feb 15) HKD Target Price HKD Week range HKD Market Cap (m) HKDm 44,88 USDm 5,777 Company Profile Jiangxi Copper is the largest integrated copper company in China. The company's main scope of operations includes mining, milling, smelting, and processing of non-ferrous metal and rare metals. Jiangxi Copper has a large reserve/resource base, which accounts for around onethird of China's copper reserves/resources. The company owns six mines, one smelter, and six copper productprocessing plants. Price Performance Feb 13May 13Aug 13Nov 13Feb 14May 14Aug 14Nov 14 Margin Trends Jiangxi Copper HANG SENG INDEX (Rebased) E 15E 16E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 15E 16E Sales growth (LHS) ROE (RHS) E 15E 16E Fiscal year end 31-Dec E 215E 216E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 3,463 3,463 3,463 3,463 3,463 3,463 Average market cap (CNYm) 64,845 52,687 43,624 36,131 36,131 36,131 Enterprise value (CNYm) 59,994 47,62 37,734 29,129 27,142 26,56 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 117, ,6 175, , , ,625 Gross profit 1,96 8,713 7,973 6,682 6,494 6,352 EBITDA 9,16 7,726 6,343 5,663 5,41 5,212 Depreciation 1,141 1,23 1,396 1,459 1,532 1,65 Amortisation EBIT 7,827 6,448 4,92 4,155 3,829 3,558 Net interest income(expense) ,159-1,87-1,51 Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) ,9 Profit before tax 7,79 6,274 4,732 3,831 3,689 3,524 Income tax expense 1,6 1,26 1,1 1,73 1, Minorities Other post-tax income/(expense) Net profit 6,587 5,17 3,556 2,778 2,656 2,537 DB adjustments (including dilution) DB Net profit 6,495 4,349 3,113 2,778 2,656 2,537 Cash Flow (CNYm) Cash flow from operations 9,396 5,233 5,536 6,492 5,213 4,165 Net Capex -2,468-2,33-1,465-1,5-1,726-1,714 Free cash flow 6,928 2,93 4,71 4,992 3,486 2,451 Equity raised/(bought back) 66 5 Dividends paid -1,393-1,741-1,731-1,111-1,62-1,15 Net inc/(dec) in borrowings 6,28 2,479 Other investing/financing cash flows -4,663 1, Net cash flow 7,218 5,595 2,16 3,548 2,275 1,393 Change in working capital 688-1, , Balance Sheet (CNYm) Cash and other liquid assets 11,82 16,678 19,666 23,214 25,489 26,883 Tangible fixed assets 18,299 2,569 2,668 2,79 2,93 21,12 Goodwill/intangible assets Associates/investments 9,677 8,75 9,132 9,15 9,168 9,186 Other assets 28,244 31,274 38,429 37,651 37,788 38,979 Total assets 68,15 78,88 88,759 91,541 94,166 96,877 Interest bearing debt 15,45 18,716 21,791 24,265 24,572 24,897 Other liabilities 12,938 15,51 21,336 22,722 23,837 25,3 Total liabilities 28,344 34,226 43,127 46,987 48,48 49,9 Shareholders' equity 39,33 42,775 44,516 43,457 44,661 45,881 Minorities 53 1,88 1,117 1,97 1,97 1,97 Total shareholders' equity 39,86 43,863 45,632 44,554 45,758 46,977 Net debt 4,323 2,38 2,125 1, ,986 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) James Kan james.kan@db.com Page 12

13 Model updated:24 February 215 Running the numbers Asia China Zijin Mining Reuters: 2899.HK Hold Bloomberg: 2899 HK Price (24 Feb 15) HKD 2.24 Target Price HKD Week range HKD Market Cap (m) HKDm 48,859 USDm 6,299 Company Profile Zijin Mining is a mining conglomerate in the PRC. It is engaged primarily in the exploration, mining and sale of gold and other non-ferrous metals. The company is one of the largest and most efficient mine-produced gold producers in the PRC. Price Performance Feb 13May 13Aug 13Nov 13Feb 14May 14Aug 14Nov 14 Zijin Mining Margin Trends HANG SENG INDEX (Rebased) E 15E 16E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 15E 16E Sales growth (LHS) ROE (RHS) E 15E 16E Fiscal year end 31-Dec E 215E 216E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 21,812 21,812 21,812 21,812 21,812 21,812 Average market cap (CNYm) 84,41 52,398 36,491 39,398 39,398 39,398 Enterprise value (CNYm) 89,34 62,184 48,751 59,71 57,24 58,828 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm.9 nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 39,382 47,874 49,772 58,752 55,857 55,66 Gross profit 13,158 13,27 1,646 9,633 1,119 1,244 EBITDA 1,881 1,826 6,891 6,672 7,316 7,456 Depreciation 1,313 1,78 2,44 2,736 3, 3,26 Amortisation EBIT 9,567 9,118 4,451 3,936 4,316 4,25 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 9,276 8,556 3,835 3,335 3,66 3,473 Income tax expense 2,366 2, Minorities 1, Other post-tax income/(expense) Net profit 5,713 5,211 2,126 2,346 2,245 2,162 DB adjustments (including dilution) DB Net profit 5,75 5,28 1,834 2,346 2,245 2,162 Cash Flow (CNYm) Cash flow from operations 6,39 5,48 8, ,56 5,37 Net Capex -6,885-7,571-8,519-4,47-4,99-3,587 Free cash flow , ,9 5,461 1,72 Equity raised/(bought back) Dividends paid -2,652-4,35-3,687-1,732-1,71-1,637 Net inc/(dec) in borrowings 5,546 9, , 8, Other investing/financing cash flows -1,273-1, ,58-1,248-1,447 Net cash flow 1,126 1,398-2,27-1,879 2,53 6,637 Change in working capital 2,335-1,79 4,27-6,33 2,67-1,95 Balance Sheet (CNYm) Cash and other liquid assets 6,18 7,473 4,492 2,56 5,66 6,299 Tangible fixed assets 18,378 24,127 29,529 31,684 33,175 33,954 Goodwill/intangible assets 7,477 9,33 8,995 8,786 8,545 8,299 Associates/investments 4,46 5,658 5,854 5,854 5,854 5,854 Other assets 15,879 21,64 18,29 24,395 2,472 23,379 Total assets 52,32 67,354 66,898 73,278 73,111 77,785 Interest bearing debt 1,393 17,516 17,133 22,133 22,133 24,727 Other liabilities 11,795 16,256 16,68 16,965 15,85 16,917 Total liabilities 22,188 33,771 33,813 39,98 37,938 41,644 Shareholders' equity 25,9 28,182 27,612 28,226 28,761 29,286 Minorities 5,124 5,41 5,473 5,954 6,413 6,856 Total shareholders' equity 3,133 33,583 33,85 34,18 35,174 36,142 Net debt 4,213 1,42 12,641 19,573 17,67 18,428 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) James Kan james.kan@db.com Page 13

14 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Zijin Mining 2899.HK 2.24 (HKD) 24 Feb Jiangxi Copper 358.HK (HKD) 24 Feb *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. James Kan Historical recommendations and target price: Zijin Mining (2899.HK) (as of 2/24/215) 3. Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating.5 *New Recommendation Structure as of September 9,22. Feb 13 May 13 Aug 13 Nov 13 Feb 14 Date May 14 Aug 14 Nov /4/213: Buy, Target Price Change HKD /1/214: Sell, Target Price Change HKD /5/213: Downgrade to Sell, Target Price Change HKD /1/214: Upgrade to Hold, Target Price Change HKD /6/213: Sell, Target Price Change HKD1.2 Page 14

15 Historical recommendations and target price: Jiangxi Copper (358.HK) (as of 2/24/215) 2. Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,22. Feb 13 May 13 Aug 13 Nov 13 Feb 14 Date May 14 Aug 14 Nov /4/213: Hold, Target Price Change HKD /9/213: Downgrade to Sell, Target Price Change HKD /6/213: Downgrade to Sell, Target Price Change HKD /4/214: Sell, Target Price Change HKD /6/213: Upgrade to Hold, Target Price Change HKD /5/214: Upgrade to Hold, Target Price Change HKD13.7 Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 27 were: Buy: Expected total return (including dividends) of 1% or more over a 12-month period Hold: Expected total return (including dividends) between -1% and 1% over a 12- month period Sell: Expected total return (including dividends) of -1% or worse over a 12-month period Equity rating dispersion and banking relationships % 24 % 41 % 21 % Buy Hold Sell Companies Covered Asia-Pacific Universe 7 % 15 % Cos. w/ Banking Relationship Page 15

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