Zijin Mining, the bet was won
Listing | 妙投APP
Author | Ding Ping
Header | Movie "God of Gamblers"
Zijin Mining is undoubtedly one of the most eye-catching targets of large-capitalization stocks in recent years.
Despite the poor overall market performance in the past year, there are still some targets, such as Zijin Mining, that have successfully attracted the attention of the market. Just recently, the heavyweight gold and copper resources company's share price hit a new high since its A-share listing. In the longer term, its share price has increased fourfold in the past four years.
(Image source: Oriental Fortune)
Not only that, Zijin Mining's opening has also brought tens of billions of income to Deng Xiaofeng, a private equity boss of the value investment faction.
Zijin Mining has long been a favorite investment object for Deng Xiaofeng. Since the stock price began at about 3 yuan per share in 2019, Deng Xiaofeng has been holding about 15 yuan per share today, during which he has hardly reduced his holdings and has maintained a heavy position.
The question is, how does Zijin Mining stand out from the cyclical fluctuations of the non-ferrous metals industry and exude the charm of growth stocks?
The reason for the large volatility of the stock price of cyclical stocks is none other than the cyclical changes in product prices and sales volumes, which directly affect the stability of the company's performance. The reason why Zijin Mining has been able to show unique growth is mainly due to the steady growth of its performance.
As shown in the chart below, compared with Chifeng Gold and Jiangxi Copper, Zijin Mining's revenue and profit growth have maintained a more stable growth trend.
(Data source: company announcement)
(Data source: company announcement)
Zijin Mining's steady growth in performance has supported the steady rise in its share price. As of March 28, Zijin Mining's market capitalization reached 414 billion yuan, up nearly 30% this year.
However, at this juncture, some market funds are beginning to be "afraid of heights", fearing that it will not be able to maintain its growth momentum, but for those investors who are optimistic about its long-term potential, the future of Zijin Mining is still full of attractiveness.
Before discussing this optimistic outlook, let's take a closer look at the secret of Zijin Mining's steady growth.
Contrarian low-cost expansion
Historically, one of the key strategies for mining companies to scale up has been to continue to engage in resource acquisitions. Zijin Mining's ability to become a global mining giant also relies on this strategy.
As a multinational giant focusing on the exploration and development of precious metal resources such as copper, gold, zinc and lithium, Zijin Mining has accumulated 2,998 tons of gold resources, 74.56 million tons of copper resources and more than 13.47 million tons of lithium carbonate resources by the end of 2023, becoming one of the fastest-growing large-scale mining enterprises in the world.
However, there is a long history behind this magnificent achievement. It started as Shanghang County Mining Company in June 1986, and underwent a shareholding reform in 2000, and finally evolved into today's Fujian Zijin Mining Co., Ltd. Since its successful listing on the Hong Kong Stock Exchange in 2003 and the Shanghai Stock Exchange in 2008, Zijin Mining has embarked on a journey of global expansion and has become an "M&A freak" in the mining industry.
It is worth mentioning that Zijin Mining is good at adopting low-cost M&A strategies during countercyclical periods.
During the period from 2014 to 2016, Zijin Mining acquired a 51% stake in the Kolwezi Copper Project, a 49.5% stake in Kamoa Holding in the DRC, and increased its stake in Kolwezi Copper to 72% in 2016, reinforcing its significant position in the global copper industry.
Before copper prices recovered in 2018-2020, Zijin Mining extended its tentacles to Europe.
In 2018, Zijin Mining successfully acquired a 63% stake in Serbian BOR Copper and fully controlled a 100% interest in the Upper Belt Mine and a 60.4% interest in the Lower Belt Mine of the Timok Gold Mine in Serbia.
Zijin Mining has also adopted the same strategy, expanding its gold mine through countercyclical mergers and acquisitions.
In 2015, gold entered a downward cycle, when Zijin Mining bucked the trend and acquired several high-quality minerals, including Tibet Julong Copper, Buritika Gold Mine, Barrick (New Guinea) Company, Australian Phoenix Gold Company and Norton Gold Field.
Entering 2022, Zijin Mining continued its countercyclical acquisition strategy in the face of another downturn in gold prices. During the year, Zijin Mining completed the acquisition of a 95% stake in the Rosebel Mine in Suriname, a 20% stake in Zhaojin Mining and a 30% stake in the Haiyu Gold Mine.
In addition to copper and gold mines, Zijin Mining is also involved in a wide range of resources, including the acquisition of a 65% interest in the Xiangyuan Hard Rock Lithium Mine in Daoxian County, Hunan Province, a 70% interest in the Lagoco Salt Lake Lithium Mine in Tibet, a 100% interest in the 3Q Lithium Salt Mine in Argentina, and a 15.02% stake in Longking Environmental Protection.
Key to Zijin Mining's core growth strategy is to increase reserves and expand production capacity through continuous acquisitions of high-quality assets, a strategy that directly shapes its expansion potential.
This strategy not only depends on the company's "innate conditions", that is, the background and strength of the group behind it, but also depends on the company's "acquired ability", that is, its own capital operation ability and financing ability.
In terms of "innate conditions", Zijin Mining is backed by the Finance Bureau. As we all know, continuous large-scale mergers and acquisitions of mineral resources require huge financial support, and the deep background of state-owned enterprises provides Zijin Mining with solid financial support.
As of December 31, 2023, Fujian Xinghang State-owned Assets Investment and Operation Co., Ltd. (100% controlled by Shanghang County Finance Bureau) held 23.16% of the company's shares, making it the largest shareholder, and the second largest shareholder was Hong Kong Securities Clearing (Agency Co., Ltd.), holding 21.73% of the shares.
In terms of "acquired capabilities", Zijin Mining has demonstrated its extensive experience in large-scale mineral project mergers and acquisitions, as well as its flexible and efficient decision-making mechanism.
The reason why Zijin Mining has become a global mining leader is not only after years of resource mergers and acquisitions, but also because of the support of independent exploration.
In China, Zijin Mining has discovered and developed a number of valuable deposits through its own exploration techniques, including the Zijin Mountain Gold Mine, which was initially considered uneconomically viable. The Purple Mountain Gold Mine has not only successfully reversed expectations, but has also become one of the largest single gold mines with the highest yield, the highest production, the lowest cost and the best economic benefits.
In terms of overseas exploration, Zijin Mining's acquisition of the Kamoa-Kakula Copper Project (DRC) and the Timok Copper-Gold Project (Serbia) through mergers and acquisitions has significantly enhanced the resource and economic value of the deposits through extensive follow-up exploration work.
By the end of 2021, Zijin Mining had added 31.16 million tons of copper, 12.95 million tons of gold and 8.19 million tons of zinc (lead) resources through independent exploration. This significantly strengthens the company's mineral resource reserves, which account for more than 40% from copper and gold and more than 70% from lead-zinc.
At the end of the day, Zijin Mining's track record is based on a unique business philosophy: looking for low-cost expansion opportunities in the face of market headwinds, and making independent exploration part of its core competencies.
This strategy has not only driven Zijin Mining's stable growth, but also brought it significant cost advantages.
As shown in the chart below, Zijin Mining has a clear advantage in mining costs in both copper and gold, which creates greater profit margins for Zijin Mining.
(Data source: company announcement)
Gold and copper support each other
Zijin Mining's business structure reveals another of its strategic wisdom.
Although Zijin Mining is listed as a seller in the precious metals sector, its business is much more than that. In particular, the company's revenue in the field of copper smelting and copper concentrate reached 30 billion yuan, second only to its gold business.
In 2023, Zijin Mining's revenue composition shows that gold, copper and other businesses accounted for 47.15%, 29.03% and 23.82% respectively, and in terms of gross profit contribution, mineral copper ranked first, followed by mineral gold and mineral zinc, accounting for 52.9%, 28.4% and 3.4% of the total gross profit, respectively.
In 2023, Zijin Mining's mine produced 1.01 million tonnes of copper (including Kamoa's interest), up 11% year-on-year, equivalent to 54% of China's 2022 copper production of 1.87 million tonnes, making it the only company in China to have exceeded the million-dollar copper mark and the world's fastest-growing large-scale copper mining company in recent years.
Another secret to Zijin's steady growth in different market cycles is that gold and copper prices can be effectively hedged.
Specifically, during 2017, copper prices experienced a period of correction while gold prices showed an upward trend, in 2020, despite the decline in gold prices, copper prices rose significantly, and in 2021, gold prices remained stable in the face of sharp declines.
Recently, Zijin Mining's share price has reached a new high, and the fundamental reason is that the gold and copper prices have risen simultaneously.
First of all, starting from February 29, the international gold price started a series of rising mode, constantly hitting a record high, as of March 11, COMEX spot gold prices climbed to 2184 US dollars / ounce, a cumulative increase of 6.6% during the period, is the early overdraft of the Federal Reserve interest rate cut expectations, risk aversion increased and the central bank increased gold reserves and other three factors.
Secondly, copper prices have continued to rise recently, London copper futures recently exceeded $9,000, a new high in 11 months, in addition to the Federal Reserve interest rate cut expectations, the supply and demand side has also changed: overseas copper supply is tight, domestic smelters have reported production cuts, the market is worried about copper supply shortages, at the same time, the global manufacturing recovery and the acceleration of the green energy transition have also promoted the growth of copper demand.
It is Zijin Mining's contrarian low-cost expansion, as well as the effective hedging of gold and copper price fluctuations, that has enabled it to show its unique growth charm and achieve 4 times the stock price in 4 years.
It can be said that Zijin Mining won the bet.
However, the continued rise in Zijin Mining's share price has caused a large divergence in the market, and the key point of divergence is whether Zijin Mining's growth momentum can be sustained.
Gold and copper prices resonate
Zijin Mining's performance growth is indeed closely related to its mine production and price trends, and considering that the gold and copper business contribute more than 70% of revenue, the performance growth of Zijin Mining is mainly determined by the production and price trends of its gold/copper mines.
First, with the continuous expansion of its asset scale, Zijin Mining's asset-liability ratio has risen, reaching 59.66% by the end of 2023, slightly higher than the industry average, making it face a greater financial test and it is difficult to continue the high-speed expansion strategy of the past. However, from the company's future production capacity planning, Zijin Mining expects its copper and gold resources to still be expected to achieve a growth rate of about 10% or more.
Second, the recent strength of gold and copper is not a short-term trend, and the certainty that their prices will continue to rise in the medium and long term is also relatively strong.
(1) Gold will rise and fall in 2024
Gold has three major attributes: commodity, financial and currency, and the real interest rate is the main indicator that affects the financial attributes of gold. Historical data shows that gold prices are highly negatively correlated with US Treasury yields.
Put simply, the rise in real yields on US Treasuries increases the cost of holding gold, causing capital to flow to higher-yielding US bonds, causing the price of gold to fall, and vice versa, pushing the price of gold higher.
The real interest rate of U.S. bonds is directly affected by the inflation rate and the nominal interest rate, and the specific formula is: real interest rate = nominal interest rate - inflation rate.
The Fed's interest rate cut this year is already a high probability event, nominal interest rates will be lowered, and inflation will be relatively stable.
All things considered, Miaotou expects that there is still room for real interest rates in the United States to fall, which will provide support for gold's rise.
In addition, frequent geopolitical conflicts and global economic uncertainty have further enhanced gold's safe-haven attributes. At the same time, with the instability of the US dollar credit system and the continuous increase of gold holdings by central banks, entering the process of "de-dollarization", gold prices are good for further upside.
However, in the near term, gold prices may remain volatile, mainly affected by changes in the Fed's policy stance, US inflation and non-farm payrolls. For example, on 12 March, COMEX gold prices closed down 1.13% on March when US CPI rose more than market expectations in February.
Overall, although gold prices may experience some ups and downs in the short term, multiple factors will support the upward trend in gold prices in the medium to long term.
(2) The pivot of copper prices is expected to move up in 2024
In recent years, global copper has been in a state of tight supply and demand, but copper prices have not continued to rise. This is because, in addition to supply, there are other factors that affect the fluctuation of copper prices, including the macro environment, global economic conditions, geopolitics, etc.
The volatility of copper prices in 2022 reflects the interweaving of these complex factors:
In the early part of 2022, copper prices hit record highs, driven by economic recovery and accommodative monetary policy, coupled with ongoing geopolitical risks and the energy crisis pushing inflation higher. However, the subsequent recurrence of domestic epidemics and the expectation of interest rate hikes by global central banks exacerbated recession fears, causing copper prices to fall sharply.
After the fourth quarter of 2022, copper prices gradually stabilized and rebounded, supported by the optimization of domestic epidemic prevention policies and the expectation of a slowdown in the Fed's interest rate hikes.
Since February 2023, copper prices have fallen again, and this trend has continued until the end of August 2023. However, since the end of November 2023, copper prices have risen rapidly.
First, the weakening of the manufacturing PMI in Europe and the United States and the United States, as well as the larger-than-expected decline in inflation data, strengthened the market's expectations for the end of the Fed's interest rate hikes, and the second is the increase in overseas copper supply disruptions, including the strike of truckers in the Democratic Republic of the Congo (DRC) and the blockade of the transportation port of First Quantum's Cobre Panama mine, which has raised market concerns about tighter supply.
Looking ahead to 2024, we expect copper prices to start an upward cycle, based on the resonance of copper's financial and commodity attributes.
Financial attributes: Copper prices are closely related to the trend of the US dollar. In 2024, the Federal Reserve is likely to enter a cycle of interest rate cuts, and the dollar index will turn from strong to weak, which will be positive for commodity prices and provide support for copper prices. At the same time, the decline in interest rates will stimulate demand, but the high interest rate in the early stage will inhibit the capital expenditure of the industry, and the demand will be boosted in the later stage and the effective supply will be insufficient;
Commodity attributes: In the face of sluggish long-term capital expenditure growth and declining copper ore grades, the future supply increment of copper is limited, and at the same time, due to the impact of the disturbance rate, the copper mine supply release is likely to be less than expected.
The global copper belt is mainly located in central Chile and southern Peru, accounting for about 25% of the total reserves. However, Chile has been facing a severe drought for a long time, while Peru has been affected by protests and political factors, which have posed challenges to copper production.
Throughout 2024, there are still many uncertainties overseas, including the global major economies facing general elections, rising resource nationalism, insufficient capital expenditure, extreme weather, declining ore grades and other factors, and the overall supply growth rate is expected to slow down.
Market participants widely expect that around 400,000 tonnes of copper production will be affected in 2024. Among them, the unconstitutional shutdown of the First Quantum Panama mine will lead to a 750,000-tonne reduction in global copper supply next year from previous estimates, and Anglo American's 2024 copper production target has been lowered from 1 million tonnes to 790,000 tonnes.
On the demand side, the growth rate of traditional demand such as real estate and home appliances has slowed down, but the demand for copper in emerging areas of new energy is more obvious, and the overall performance is average.
Although the demand is not strong enough, the supply growth rate of copper will slow down in 2024, and the gap between supply and demand will increase due to low inventories.
As Goldman Sachs said in the report, it predicts that there will be a gap of 534,000 tons in the refined copper market in 2024 (the previous forecast is 155,000 tons), which means that the market will tighten sharply from a state of "near equilibrium" to a "clear gap".
Recently, Goldman Sachs also updated its forecast for commodities, expecting copper prices to continue to rise, reaching $10,000/ton by the end of 2024 and $12,000/ton in the first quarter of 2025.
The resonance of gold and copper prices will form a strong support for the stable growth of Zijin Mining's performance.
However, while we consider the opportunities, we must not ignore the potential risks. In addition to the risk that the Fed will cut interest rates less than expected, there are two other risks to consider:
The first is the risk of overseas policy changes. Zijin Mining has numerous mining rights overseas. According to its 2023 semi-annual report, Zijin Mining's overseas assets account for 45% of its total assets, and changes in mineral resources-related policies in overseas countries may also bring certain policy risks to the company.
The second is the risk of mineral accidents. Since 2009, Zijin Mining's gold mine has had a total of five safety incidents, resulting in a total of three deaths, six missing contacts and loss of equipment and property. In the event of a shutdown due to a safety incident, Zijin Mining faces the risk of not delivering as expected.
In conclusion, an in-depth analysis of industry trends reveals a broad long-term perspective, but we also cannot ignore the risk of a possible market correction in the short term. On the road to investing, it is important to continuously pay attention to and learn from market dynamics, such as short-term market fluctuations are often affected by the latest economic data, changes in policy expectations, unexpected events and other factors.