Zhaojin Mining is a well-established gold miner in China with a relatively high concentration on the gold mining business. We expect the commissioning of Haiyu gold mine, China’s largest undersea gold mine, to create growth upside in output ramp-up and cost reduction for the Company. Meanwhile, Zhaojin Mining remains undervalued in market cap-to-resource ratio and market cap-to-output ratio, and the multiples will likely be recovered in the upward cycle of gold price. We forecast its 2023E/24E/25E attributable net profit (ANP) to be Rmb790mn/980mn/1,880mn and assign 15x 2023E EV/EBITDA to derive a target price of HK$14 per share. We initiate coverage with a “BUY” rating.
A top Chinese gold miner with a high concentration on the gold mining business posted continuous earnings recovery.
Zhaojin Mining is the core mining subsidiary of Zhaojin Group, one of the four major gold industry leaders in China. In the recent ten years, the Company has maintained an average mined gold output of 20tpa, where it holds a steady position among the top four Chinese listed gold miners. As one of the few listcos with a high concentration on the gold business, the Company relies on gold mining as its main source of earnings. Its earnings have gradually recovered from the disruptions earlier, achieving ANP of Rmb400mn in 2022.
In 1Q23, it posted ANP of Rmb100bn, up 17% YoY.
Gold prices may trend upward, benefiting from rate hikes coming to an end and a trend of gold purchases by global central banks.
From the macro perspective, as US inflation falls and the negative impact induced by rate hikes on US economy becomes evident stepwise, we expect that rate hikes may come to an end. Based on historical patterns, we anticipate a significant rise in the gold sector from the moment the Fed releasing signals of rate cuts till the actual implementation of rate cuts, indicating good entry points ahead for the gold sector. On the demand side, the global de-dollarization trend and geopolitical tensions have led to a continuous trend of gold purchases by global central banks, which has become a vital support for gold demand. China’s central bank has increased its god reserves for nine consecutive years since Oct 2022. Taken together, we believe that gold prices may trend upward and estimate the average gold price at Rmb450/460/470 per gram for 2023/24/25.
Haiyu gold mine is poised to create growth upside in output ramp-up and cost reduction for the Company: Haiyu gold mine boasts dual advantages of resources magnitudes and grades, and has become a main highlight for Zhaojin Mining for the next 2-3 years. Commenced in Nov 2022, the project is likely to be put into production in 2025. We expect the project to boost potentials of output growth and cost reduction for the Company. In terms of output growth, based on the Company’s project annual output forecasts of 10-15 tonnes at full capacity and the expansion of other existing projects in compliance, we expect the Company to double its annual mined gold output. In terms of cost reduction, Zhaojin Mining estimates Haiyu gold mine’s total costs at less than Rmb120 per gram (ranking among the top 10% of the global gold cost curve in 2023), and thus we expect that the Company’s average cost per gram to fall by 20% cumulatively at full capacity, which is conducive to regaining a cost advantage.
Resource endowment boosts organic reserve increase, while the M&A strategy drives acquisitions: Zhaojin Mining reported an equity-based gold reserve of 954 tonnes as of the end of 2022, ranking the top three among the Chinese listed gold miners. The growth of resources is driven by both organic reserve increase and acquisitions. In terms of organic reserve increase, the Company’s resource endowment has the potential for sustained growth, and it has proactively invested in mine exploration and reserve expansion. It has posted an annual reserve increase of more than 20 tonnes in the recent ten years, with cumulative reserve expansions by over 100% in a number of major mine sites.
As for acquisitions, historically, the Company had demonstrated competence in external M&As. The M&A strategy focusing on both domestic and overseas markets may signal the resumption of acquiring high-quality overseas mines.
An undervalued top gold miner benefits from the gold price uptrend.
Zhaojin Mining remains undervalued in terms of resources and output. As of 14 Aug, the Company has a market cap-to-resource ratio of Rmb32mn/t and a market cap-to-output ratio of Rmb1.817bn/t, significantly lower compared to the industry averages of Rmb155mn/t and Rmb3.982bn/t respectively. History has shown that companies with a low market cap-to-output ratio tend to gain more traction amid the gold price surge. We expect the Company to benefit from the upward gold price cycle going forward.
Potential risks: Earnings fluctuations caused by volatile gold prices; slower-than-expected progress of the construction of the Haiyu gold mine project; production shutdown or reduction caused by environmental issues or safety accidents; a lower-than-expected increase in reserves; the magnitude of cost control missing expectations.
Investment strategy: Zhaojin Mining is a well-established gold miner in China with a relatively high concentration on the gold mining business. We expect the commissioning of Haiyu gold mine to create growth upside in output ramp-up and cost reduction for the Company. Meanwhile, Zhaojin Mining remains undervalued in market cap-to-resource ratio and market cap-to-output ratio, and the multiples will likely be recovered in the upward cycle of gold price. We forecast its 2023E/24E/25E ANP to be Rmb790mn/980mn/1,880mn. With the average comps valuation of 14x EV/EBITDA as a reference, and considering the Company’s high concentration on the gold mining business, we assign 15x 2023E EV/EBITDA to derive a target price of HK$14 per share. We initiate coverage with a “BUY” rating.