Zijin(2899.HK):Growing value

Expect strong volume growth; beneficiary of RMB devalue

Zijin delivered strong volume growth and cost reductions in 1H15,resulting in stable operating profit in spite of falling commodity prices.Zijin’s valuations have derated to 0.66x P/NPV after a 43% share-pricecorrection in the past three months. We expect more value to be createdby potential acquisitions, continuous production growth, and likely goodcost control, and it’s also a beneficiary of Rmb depreciation. Maintain BUYwith revised target price of HK$2.60 (from HK$3.00).

Operating profit flat in spite of falling commodity prices

Zijin’s Ebitda was flat YoY at Rmb3.36bn in 1H15, and we believe that thiswas a strong result, as prices of most commodities produced by the companywere down sharply YoY: the gold price fell 7%, copper was down 12%, andthe iron ore price dropped 46%; zinc was the only exception, up 7% YoY. Thestrong performance was a result of rising volume and cost reduction.

Strong volume, falling costs

Production of mined gold, copper, zinc and iron ore increased sharply by 12%,10%, 48% and 29% YoY in 1H15. Unit production costs of mined gold, copperand iron ore fell by 7%, 5% and 17% YoY, while we were expecting lowsingle-digit cost inflation. We forecast attributable mined gold production torise by 20% and 33% in 15-16CL thanks to the acquisition of the Porgeramine, and forecast equity mined copper output to double in four years withcommissioning of the Kamoa and Kolwezi mines.

Beneficiary of Rmb depreciation

The company is a beneficiary of Rmb devaluation, as a lower exchange ratewill increase the gold price on Rmb terms, assuming there are no changes inthe USD gold price. The Rmb has depreciated by 3% in late July, as theChinese government became more concerned about its exports. We estimatethat a 10% depreciation in Rmb will lead to a 15% earnings increase for Zijin.

Value from growth

We maintain a BUY recommendation on Zijin, as we expect more value to becreated by potential acquisitions, continuous production growth, and likelygood cost control. We increase our 15CL earnings by 14% with higherinvestment gains, and slightly revise higher the earnings in 16-17CL. Ourtarget price is lowered by 14% to HK$2.60, as we decrease the multiples to6-year averages: 0.9x NPV, 16x 16CL PE and 8x EV/Ebitda, reflecting a recentpeer group derating.