20181029-高盛-紫金矿业-02899.HK-Earnings_Review__3Q18_inline_with_consensus__Solid_operations_9页_786kb

Zijin Mining (2899.HK) Summary

Core Content

Zijin Mining (2899.HK) is a major player in the mining industry, primarily focused on gold and copper production. The report outlines its financial performance for the third quarter of 2018 and provides forecasts for the full year and future periods, highlighting its operations, earnings, and potential for growth through expansion and M&A activities.

Main Points

Financial Performance

• 3Q18 Net Profit (NP): Rmb708 million (PRC GAAP), up 8% YoY.
• 3Q18 EPS: Rmb0.031 per share, up 7% YoY.
• 9M18 Recurring NP: Rmb3.7 billion, representing 82% of the full-year 2018E Bloomberg consensus and 93% of the GSe forecast.
• Revised Net Profit Estimates:
  • 2018E: Up 3%.
  • 2019E: Up 9%.
  • 2020E: Up 7%.
• Operating Cash Flow (9M18): Rmb6.6 billion, up 15% YoY due to lower A/R and inventory days.
• Net Gearing (9M18): Increased slightly to 92% from 89% at the end of 2017.

Production and Output

• Gold Production (9M18): Reached 71–75% of full-year estimates, with a 8% YoY decline.
• Copper Production (9M18): Grew 19% YoY, mainly due to contributions from Kolwezi.
• Expected Copper Output Growth:
  • 2018E: 244kt.
  • 2019E: 304kt (13% growth).
  • 2020E: 344kt (25% growth).
• Kamoa Mine: Expected to contribute significantly by 2022E, with an estimated 41% increase in copper output to 487kt.

Price Targets

• Zijin-H (HK$): Revised from HK$3.8 to HK$3.9 (34% upside).
• Zijin-A (Rmb): Revised from Rmb4.8 to Rmb4.9 (38% upside).
• Price Targets Based On: Historical P/B vs. ROE correlation and 2019E P/B of 2.0x/2.8x and ROE of 12.5%.

M&A Activities

• RTB Bor Group Acquisition: Zijin won a bid for a 63% interest in RTB Bor Group, with a commitment to invest an additional US$1.26 billion for technical upgrades and expansions.
• Nevsun Acquisition: Proposed cash purchase of all shares for C$6/share (C$1.84 billion total), pending approval from Chinese and Canadian authorities.
• Potential Impact: If both deals complete, Zijin would gain at least 268kt of additional copper output.

Valuation Metrics

• P/E (2018E): 14.1x (down from 15.3x in 2017).
• P/B (2018E): 1.6x (down from 1.6x in 2017).
• EV/EBITDA (2018E): 6.4x (down from 6.5x in 2017).
• ROE (2018E): 11.7% (up from 11.2% in 2017).
• CROCI (2018E): 21.1% (up from 21.1% in 2017).
• Dividend Yield (2018E): 3.6% (up from 3.8% in 2017).

Key Risks

1. Commodity Price Volatility:
   • FY19E earnings change 10% for every US$100/oz change in gold price.
   • FY19E earnings change 4.4% for every US$0.01/lb change in copper price.
2. Project Execution: Critical to sustaining growth, especially for new or upgraded projects.

Key Financials

Income Statement Highlights

• Total Revenue (9M18): Rmb75,098 million, up 23% YoY.
• Cost of Goods Sold (COGS): Rmb65,936 million, up 25% YoY.
• EBITDA (9M18): Rmb5,718 million, up 15% YoY.
• Pre-Tax Profit (9M18): Rmb4,959 million, up 42% YoY.
• Net Profit (9M18): Rmb3,352 million, up 51% YoY.

Balance Sheet Highlights

• Cash & Cash Equivalents (9M18): Rmb11,613.8 million.
• Net Debt (9M18): Rmb33,062 million.
• Total Liabilities & Equity (9M18): Rmb90,393.1 million.
• BVPS (9M18): Rmb1.61 per share.

Cash Flow Highlights

• Operating Cash Flow (9M18): Rmb6,620 million, up 15% YoY.
• Free Cash Flow (9M18): Rmb5,714 million.
• Free Cash Flow as % of Net Income: 1.9%.

Growth and Margins

Revenue Growth

• 2013–2018: Total revenue growth from 19.9% to 4.3% (as % of net revenue).
• EBITDA Growth: From 66.4% to 11.8% (as % of net revenue).
• EPS Growth: From 83.1% to 21.1% (as % of net revenue).

Margins

• EBIT Margin (2018E): 7.5%.
• EBITDA Margin (2018E): 11.8%.
• Net Income Margin (2018E): 3.7%.

Investment Outlook

• Rating: Buy for both H and A shares.
• Investment Strategy: Goldman Sachs believes Zijin is well-positioned to benefit from rising gold and copper prices, as well as volume growth.
• M&A Rank: Zijin is ranked as a potential acquisition target, with a high probability of being acquired.

Conclusion

Zijin Mining is showing solid operational performance and is expected to benefit from rising commodity prices and increased production. The company is actively pursuing M&A opportunities, which could further enhance its growth trajectory. Despite some challenges in gold production due to mine life and natural disasters, the outlook for copper remains positive with significant expansion plans. Goldman Sachs maintains a Buy rating and revised price targets for both the H and A shares, based on its valuation models and growth expectations.