20140630-美银美林-Reinstating_at_Buy_with_HK_5_PO__Most-leveraged_gold_name_18页_960kb

Summary of Zhaojin Mining Investment Report

Core Content

This report from Bank of America Merrill Lynch (BofAML) discusses the investment case for Zhaojin Mining (ZHAOF / HKG), highlighting its potential as a most leveraged gold name. The firm is reinstated at Buy with a Price Objective (PO) of HK$5, offering a 16% total return. The analysis emphasizes the firm's low production costs, volume growth, cost control, and favorable valuation in a rising gold price environment.

Main Points

• Zhaojin is a pure-play gold producer and is one of China's largest gold producers, with 68% of production from Zhaoyuan area.
• Zhaojin is more leveraged to gold price than Zijin Mining, with a net profit sensitivity of 5.3% per 1% gold price change versus 3.0% for Zijin.
• Zhaojin's production costs are lower (RMB131.8/g or US$672/oz) compared to Zijin (RMB152.3/g or US$720/oz).
• Zhaojin's mined gold volume is expected to grow by 14% in 2014, while Zijin's growth is 4%.
• Zhaojin has better cost control, with mined gold cost rising by 6.7% in 2013 versus 26.1% for Zijin.
• Gold price is forecasted to rise to US$1,300/oz in 2014, US$1,341/oz in 2015, and US$1,428/oz in 2016, with 6% and 9% increases in the coming two years.
• 3Q is historically a strong period for gold, with average 4% price increase and 7% equity rise due to seasonal Indian buying.
• Zhaojin's valuation is at a multiple-year low, trading at 1.2x P/B 2014E, compared to its historical range.
• The PO of HK$5 is based on 1.35x P/B 2014E, reflecting a cautiously optimistic outlook for gold prices.
• Risks include unexpected weak gold price, interest rate hikes, and cost inflation.

Key Information

• Price: HK$4.39
• Price Objective: HK$5.00
• Date Established: 30 June 2014
• Investment Opinion: C-1-7
• Volatility Risk: HIGH
• 52-Week Range: HK$4.12 - HK$7.64
• Market Value: HK$13,016 million
• Free Cash Flow Yield (2014E): -0.443%
• ROE (2014E): 7.3%
• Net Debt to Equity (2013A): 58.0%
• Est. 5-Yr EPS Growth: 4.1%
• Est. 5-Yr DPS Growth: -1.9%

Valuation Comparison

Investment Thesis

• Zhaojin benefits the most from a rising gold price due to its high leverage.
• It has lower production costs and better volume growth compared to Zijin.
• The current valuation is considered attractive in an up-cycle.
• The firm is underpriced relative to its peers, and a valuation premium is expected.

Gold Price Forecast

• BAML Forecast: US$1,300/oz (2014E), US$1,341/oz (2015E), US$1,428/oz (2016E)
• Seasonal Outlook: Gold prices may rise to US$1,400/oz in early autumn due to seasonal Indian demand.
• Gold Price Trends: Gold prices have shown seasonal strength in 3Q, with 4% average increase in the quarter and 7% average rise for gold equities in July-September.

Risks

• Gold price weakness could negatively impact earnings.
• Interest rate hikes may affect the firm's profitability.
• Cost inflation could reduce margins.

Conclusion

Zhaojin Mining is a highly leveraged gold producer with favorable cost structure, volume growth, and low valuation. The firm is expected to benefit significantly from a rising gold price, and the reinstatement of a Buy rating is based on its attractive valuation and strong fundamentals. Investors should consider the seasonal strength of gold in 3Q and the potential for price recovery in 2014.