20181122-中国银河国际证券-招金矿业-01818.HK-Low-Cost_Gold_Miner_Growing_Production_12页_735kb

ZHAOJIN MINING [1818.HK] Summary

Core Content

Zhaojin Mining is a leading Chinese gold producer and is positioned to benefit significantly from a potential rise in gold prices. The company is expected to see a substantial increase in its earnings due to its high sensitivity to gold price movements and the upcoming ramp-up of production from its Shandong Haiyu mine.

Main Points

• Gold Price Outlook: The analysts are positive about gold prices, expecting a 5% increase in 2019. This would lead to a 24% boost in Zhaojin Mining's net profit compared to the 2019E consensus.
• Production Growth: Zhaojin's Haiyu mine, which is 63% owned, is expected to add approximately 9.5mtpa to the company's gold production once it reaches full capacity, increasing total production by ~50%.
• Cost Efficiency: The Haiyu mine is projected to have a lower cash cost (~RMB100/gram) than Zhaojin's current average (~RMB146/gram), which will improve its margin profile.
• Earnings Sensitivity: For every 10% increase in gold prices, Zhaojin Mining's 2019E earnings are expected to rise by ~48%, making it highly leveraged to gold price movements.
• Valuation: Zhaojin Mining is valued at HK$8.5 per share, representing a 20% upside from its current closing price of HK$7.06. The valuation is based on a 25x multiple of its 2019E PER.
• Market Position: Zhaojin is the fourth-largest gold producer in China, with ~5% of the country's total gold production, and is considered one of the best China gold plays due to its sensitivity to gold prices and production growth.
• Financials: The company's revenue and net profit are expected to grow significantly from 2018 to 2020, with a projected 35%+ EPS CAGR under a 5% gold price increase scenario.
• Debt and Liquidity: Zhaojin has a substantial debt burden (~RMB14.5bn) but has been actively refinancing. The company's free float is limited, with only ~33% of shares listed, contributing to lower liquidity.

Key Information

Gold Production and Earnings

Production Growth and Impact

• Haiyu Mine: Expected to add ~9.5mtpa to Zhaojin's production, increasing total production by ~50%.
• Production Costs: The Haiyu mine is expected to have a significantly lower cash cost (~RMB100/gram) than Zhaojin's current average (~RMB146/gram).
• Production Timeline: The mine is expected to ramp up production in 2020, reaching ~6 tons in the first year and eventually 15mtpa at full capacity.

Valuation and Investment Highlights

• Target Price: HK$8.5, representing a 20% upside from the current price.
• Valuation Metrics:
  • 20.9x 2019 PER
  • 13.5x EV/EBITDA
• Key Risks:
  • Decline in international gold prices
  • Delays in Haiyu mine development
  • Increasing debt burden
  • Limited trading liquidity

Shareholder Structure

• Major Shareholders:
  • Shandong Zhaojin Group (36.68%)
  • Shanghai Yuyuan Tourist Mart (23.70%)
  • Institutional investors (Schroders, BNY Mellon, etc.)

Conclusion

Zhaojin Mining is viewed as a strong investment opportunity due to its potential for significant earnings growth driven by rising gold prices and the development of the Haiyu mine. However, the company faces risks related to gold price volatility, mine construction delays, debt management, and limited liquidity. The analysts have initiated a "Buy" rating with a target price of HK$8.5, based on its favorable valuation and growth prospects.