We maintain the investment rating for Zhaojin Mining (the "Company") as "Buy", with TP of HK$15.05. Our TP represents 34.8x 2023 PER and 27.5x 2024 PER. Net profit of Zhaojin Mining has great growth potential and will be driven by higher gold price and decreasing mined gold production costs.
We expect gold price to continue to rise and Zhaojin Mining’s net profit to gold price is highly elastic. The US Federal Reserve is approaching the terminal point of interest rate hike, which will significantly relieve the pressure weighing on gold price. Actual yield-curve of US Treasuries is expected to decline in the future and thus increasing attractiveness of gold assets. As the US inflation is improving while macro economy is still under great pressure, we believe the time of interest rate cut may come soon. We believe the attractiveness of gold assets is growing and investment demand for gold assets may grow largely in the cycle of interest rate cut. Gold mining business is the main business of the Company, and it plans to produce about 420,000 oz of mined gold from its own mines in 2023. The production of the Company had resumed normal and its mining output is expected to grow steadily in 203-2025. As gold constitutes about 90% of its revenue, net profit of the Company is highly elastic to the gold price. We believe that the Company will benefit greatly when the gold price rises.
Decreasing mined gold production costs will be another driver for profit growth in 2023-2025. Zhaojin Mining produced 8.4 tons of mined gold in 1H2023, and the production costs of mined gold increased by 1.7% yoy to RMB 214.67/g. The rise in production costs of mined gold was mainly attributed to higher safety production requirements and higher material costs. Generally speaking, production costs of the Company remained high and were about 30% higher than the production costs before 2020. Mined gold production costs of Zhaojin Mining are closely related to its production scale and we expect production costs to decline with expanded production scale. The production of gold mines of the Company in Shandong Province resumed to normal, and the Company is still expanding the production capacity of Xiadian and Dayingezhuang gold mines. Haiyu Gold Mine, which is under construction, is the largest gold mine of the Company. It has a designed production capacity of 15-20 tons of mined gold and is expected to commence production in 2025. Hence, total mined gold output of the Company is expected to grow steadily in 2023-2025, and the rate of growth will accelerate from 2025 after Haiyu Gold Mine commences production. We expect production costs of the Company to continue to decline as mined gold output grows.
The growth in net profit was mainly attributable to higher gold prices in 1H2023. Total net profit of the Company increased 74.6% yoy to RMB365 million, mainly due to higher ASP of mined gold. Average gold price increased 3.09% yoy to US$1,934/oz and gross margin of the Company was up 1.34 ppts to 39.0%. The Company produced 209,600 oz of mined gold from its own mines, which was generally flat.
Catalyst: Increase in gold price; the US Fed to end interest rate hikes; bank crisis in the US and EU.
Risks: Decline in gold price; gold mine production impact from external factors.