news

한어Русский языкEnglishFrançaisIndonesianSanskrit日本語DeutschPortuguêsΕλληνικάespañolItalianoSuomalainenLatina

This article is written based on public information and is only for information exchange purposes. It does not constitute any investment advice

Note: This figure was generated by AIGC.

The international gold price has been soaring. On July 17, the COMEX gold price once approached the $2,500 mark, setting a new record high and a substantial increase of $400 from the beginning of the year.

The amazing performance of gold prices has driven the A-share gold sector to continue to strengthen against the trend. Among them, Zijin Mining, with a market value of 490 billion yuan, continues to be sought after by the capital market, with its share price rising by more than 50% this year.

Looking at the long term, since June 2014, Zijin Mining's share price has risen by 970%, and it has transformed from a cyclical stock to a growth stock.

Is there still hope for the future?

01

moat

After more than 30 years of development, Zijin Mining has grown from a small mining company in Shanghang County, Fujian to a global multinational mining giant. By the end of 2023, Zijin Mining has 30 mines in 16 countries around the world, with copper, gold, and zinc (lead) resources of 95.47 million tons, 3,456 tons, and 12.4 million tons, ranking 5th, 7th, and 4th in the world respectively. In addition, it also has 22,773 tons of silver resources and 14.11 million tons of lithium resources.

In 2023, the company's copper and gold business revenue accounted for 25% and 42% respectively, but the gross profit accounted for 47% and 25%. The gross profit margin of copper and gold produced by mines is 55% and 45%, significantly higher than other smelting products. By region, overseas revenue increased from 3.2% in 2015 to 21.2% in 2023.

In the long term, from 2005 to 2023, Zijin Mining's revenue will expand from 3.07 billion yuan to 293.4 billion yuan, with a compound annual growth rate of 28.8%, and maintain positive growth every year. Net profit attributable to the parent company will increase from 700 million yuan to 21.1 billion yuan, with a compound annual growth rate of 20.86%. Except for the negative growth from 2012 to 2015, the remaining years have also been positive.

Zijin Mining's revenue performance over the years, source: Wind

To achieve such results, there must be something extraordinary. After research and observation, it was found that low-cost mining resources are one of Zijin Mining's core competitiveness. Because most of the mineral resources involved in the company are bulk commodities, the price is determined by the commodity market. The company can only maintain its competitive advantage by reducing resource costs, so that it can obtain more profits when the industry is in a favorable cycle and ensure its survival when the industry is in a counter-cyclical cycle.

In fact, it is not easy to maintain a low-cost competitive advantage in the mining industry. Zijin Mining is a typical example, with two main tricks.

First, bargain hunting and mergers and acquisitions against the trend, with good resources and low prices. As copper and other commodities continued to fall, most mining companies were in the red, and "survival" became a realistic goal, but Zijin Mining carried out large-scale mergers and acquisitions. For example, a number of world-class mining projects such as Kamoa Copper Mine, Julong Copper Mine, Bor Copper Mine, and Page Copper and Gold Mine were all acquired at a relatively low price during the downturn in the mining market.

Second, low-cost mining and exploration technology. Zijin Mining has unconventional mining technology that its peers do not have, which can make low-grade ores profitable.

The most typical example is Zijinshan, which was almost sentenced to death by the Ministry of Geology and the China Gold Association in the early stage of development, as it was considered a poor mine with no economic development benefits. Zijin Mining, through a series of mining technology breakthroughs, eventually made Zijinshan the "largest gold mine in China" with the largest single reserve, the largest gold output, the lowest ore cost and the best economic benefits.

In addition, the company has significantly increased its reserves through its own exploration technology. For example, after acquiring the Kamoa copper mine, it explored and discovered the Kakula ultra-large high-grade copper deposit with 18.88 million tons of copper metal.

In fact, more than 50% of Zijin Mining's copper and gold resources and more than 90% of its zinc (lead) resources are obtained through independent exploration, and its unit exploration cost is significantly lower than that of its global peers.

In short, the core of Zijin Mining's business is to possess scarce mineral resources, expand the amount of resources through continuous mergers and acquisitions, independent exploration, etc., keep surplus resources in hand, and maintain long-term sustainability of the business. At the same time, low-cost mining resources are a killer weapon and one of the core logics for maintaining long-term growth in performance.

02

Driving force

Before the big surge at the beginning of this year, Zijin Mining had been consolidating at a high level for three years, which also indirectly shows that the fundamentals of its performance are relatively hardcore. After all, the macro market beta is extremely bad, and many big white horses have been cut in half.

Later, with the market crowding cycle and the sharp rise in gold and copper prices that set new records that had not been broken in many years, Zijin Mining ushered in a new wave of sharp rises, and its market value was recognized by more investors.

Next, the focus of Zijin Mining is whether the gold and copper prices can maintain the upward trend on an annual basis (the company expects the copper and gold production to increase by 16% and 32% in 2025 compared with 2023). If so, the upward space will be opened up, otherwise there is not much imagination.

Let’s first look at the medium- and long-term trends in copper prices.

The last round of copper price trend plunge was from 2012 to 2015. At that time, capital expenditures of global copper companies fell sharply, and in 2016 they even returned to the level of 2009 after the subprime mortgage crisis. Later, as copper prices continued to rise, capital expenditures of copper companies recovered, but were far less than the peak in 2013.

The main logic is that the global high-quality mine resources are decreasing, the overall grade is showing a downward trend, and the operating costs and mining benefits of copper companies are declining, which has constrained the supply side. It can be expected that even if the copper price has set a new record high this year, capital expenditures will not rise significantly in the future, and the annual copper output will not increase significantly.

Capital expenditure of major global copper companies, source: Soochow Securities

On the demand side, China consumes more than 50% of the world's copper. In the past, the main consumer industries were electricity, home appliances, real estate, etc. The demand will increase very little in the future, but new energy will increase significantly. According to CRU's forecast, the demand for copper will be 30 million tons in 2030, with a compound annual growth rate of 2.4% from 2022 to 2030. During the same period, the demand for new energy copper increased by 14.5%, which will contribute most of the increase.

Overall, there is a high probability that the central price of copper will remain high in the next few years, or even set a new high, which basically rules out the possibility of a trend-based plunge like the previous round.

Looking at the international gold price, it is more certain that it will fluctuate upward in the next few years. There are two main driving logics.

On the one hand, the mainstream view is that it is almost certain that the Federal Reserve will start a cycle of interest rate cuts this year.

In June this year, the Federal Reserve decided to reduce the three rate cuts expected in March to one, and also lowered the rate cut range for next year, showing a very hawkish side. This panicked the capital market and gold adjusted in a short period of time.

But this expectation soon changed significantly. First, judging from Powell's speeches over the past week, his attitude has clearly turned dovish. Second, in terms of economic data, non-farm payrolls and CPI released earlier this month also showed a cooling trend, supporting the change in the Fed's interest rate expectations.

As of the latest, according to the CME Fed Watch tool, the probability of the Fed cutting interest rates in September has risen to 90%. This wave of rising expectations for rate cuts has driven the international gold price to a new record high after a lapse of two months.

If the Fed cuts interest rates by 25bp in September as expected, it will be like opening Pandora's box, and the interest rate cut will be maintained for a long time in the future. Then, the US Treasury bond interest rate is expected to maintain a high downward trend, and the real interest rate of the US dollar will rise, which will drive the gold price in the medium term. Although the previous surge in gold prices has also partially priced in the interest rate cut, it is not sufficient and thorough.

On the other hand, the continued gold purchasing behavior of global central banks has become an important driving force for future increases in gold prices.

In 2022-2023, the global central banks will net purchase 1,081.9 tons and 1,037.4 tons of gold, which is close to 30% of global gold production and more than 20% of demand. In 2011-2021, the central bank purchased 510 tons per year, accounting for 10% of gold demand.

Specifically, from 2022 to May 2024, China, Turkey, Poland, Singapore and India became the top five countries in this round of gold holdings increase, with a cumulative increase of more than 700 tons.

The amount of central bank holdings since 2022, source: Everbright Securities

However, the People's Bank of China did not continue to increase its gold holdings in May and June this year, ending the previous 18 consecutive increases. But this does not mean that the trend of global central banks buying gold has reversed. In the first quarter of this year, global central banks purchased 290 tons of gold, setting a new record for quarterly gold purchases. Turkey, China and India ranked in the top three. Looking at the year, the net gold purchases of the Central Bank of India have exceeded those of the Central Bank of China, becoming the largest buyer.

Why did many central banks around the world start to increase their holdings after the Russia-Ukraine conflict?

In 2022, the United States froze Russia's $600 billion foreign exchange reserves, causing emerging market countries to lose confidence in U.S. dollar assets, impacting the original foreign exchange reserves configuration that was mainly U.S. debt. Therefore, it will be a medium- and long-term trend for many central banks around the world to diversify their foreign exchange reserves, and gold will become an important asset choice.

From the above two logics, the general trend of gold price increase is relatively clear. Many international major banks are also firmly bullish on gold prices. For example, Citigroup recently stated that its basic expectation for gold prices in 2025 is US$2,700-3,000 per ounce.

Judging from the medium- and long-term trends of gold and copper prices, Zijin Mining's previous rise has a relatively solid logical support. In addition, in the medium and short term, it is unlikely that the risk appetite of A-shares will improve significantly (as reflected by the bottoming out of the real estate market and the good recovery of the macro economy), and the market style will still focus on cyclical stocks led by high dividends, and Zijin Mining will also be one of the beneficiaries.

03

end

Zijin Mining, with a market value of 490 billion yuan, has created many billionaires, including Chairman Chen Jinghe, Fujian's richest man Chen Fashu, Xiamen's richest man Ke Xiping, etc. In the capital market, it has also created many private equity celebrities, including star fund managers such as Deng Xiaofeng, Dong Chengfei, and Zhou Weiwen who entered the market in 2019.

Nowadays, major domestic and foreign institutions are flocking to Zijin Mining. As of Q1 2024, among the top ten shareholders, Hong Kong Central Clearing (H shares) accounted for 21.7%, northbound funds accounted for 5.98% (the latest is 7.77%, with a shareholding value of 29.6 billion, ranking eighth in A shares), Abu Dhabi Investment Authority accounted for 0.55%, and HHLR under Hillhouse Capital held 0.54%.

In terms of domestic public offerings, as of Q1 2024, there were a total of 1,106 funds holding the stock, with a total shareholding of 3.15 billion shares and a shareholding value of 58 billion (calculated based on the latest stock price), ranking it the fifth largest holding among public offerings, second only to Moutai, Wuliangye, Luzhou Laojiao and CATL.

Such a luxurious lineup of institutional shareholdings is rare in A-shares, which actually implies the potential space for Zijin Mining in the future. Good performance expectations can also support such a group.

Currently, Zijin Mining's latest PB is 4.36 times, which is within the upper limit of valuation in the past 10 years. A certain valuation premium has appeared, but it has not reached the valuation bubble stage in June 2015 and February 2021.

Zijin Mining PB trend chart, source: Wind

Even so, Zijin Mining may still be a good choice in the structured market of A-share cyclical stocks. Of course, the valuation is now premium, and the investment cost performance is not as suitable as before the big rise at the beginning of the year. Be careful of the risk of retracement and turbulence.

Reprinting is allowed | Business cooperation | Content exchange

Please add WeChat: jinduan008

Please add WeChat and indicate your name, company and purpose of visit

Previous recommendations