China Gold Int’l is the sole overseas listed entity under China NationalGold Group, which is undervalued in terms of reserves and production atpresent. its focus on copper and gold mining provides it with significantflexibility in response to copper and gold price changes. With the gradualresumption of production at the Jiama Mine, we anticipate that theCompany’s earnings will fully benefit from the upward resonance incopper and gold prices. We estimate the Company’s 2023E/24E/25Eattributable net profit (ANP) at US$-31mn/164mn/306mn and assign 13x2024E PE to derive a target price of HK$42. We initiate coverage with a“BUY” rating.
　　 A medium-sized miner with focus on copper and gold mining, facing ashort-term downturn due to the suspension of Jiama Mine.
　　China Gold Int’l is the only overseas entity under China National Gold Group,which focuses on copper and gold mining and owns two mediumto-large-sized copper and gold mines, ie Jiama Copper-Gold PolymetallicMine (Jiama Mine) and Chang Shan Hao Gold Mine (CSH Mine). We estimatethat in 2022, copper and gold businesses contributed 71% and 29%,respectively, to the Company’s gross profit. In 2021 and 2022, as theCompany enters into a stable production period, coupled with the boost bycopper and gold price increases, the Company's revenue and ANP reachedhistorical peaks of more than US$1.1bn and US$0.2bn, respectively.
　　However, the Company has turned negative due to the suspension of JiamaMine in 2Q23.
　　 Likely uptick of copper and gold prices against the expectation ofliquidity improvement.
　　As US inflation recedes and signals of economic recession emerge, the Fed'scurrent interest rate hike cycle may be approaching its end. With expectationsof improved liquidity, a declining US dollar index, and real yields on USTreasuries (UST), the financially resilient gold and copper prices are likely tomove upward accordingly. Additionally, long-term supply-demand imbalancesfavor copper prices, while gold prices continue to benefit from risk aversionand the global de-dollarization trend. We project average copper prices ofUS$8,500/9,000/10,000 per tonne and gold prices of US$1,950/2,050/2,100per ounce from 2023 to 2025.
　　 Guaranteed resource advantage and long-term growth by reserveincrease and group asset injections.
　　By the end of 2022, the Company possessed equity-based copper/goldreserves of 6.81mt/344t, ranking sixth/fifth among domestically listed miningcompanies. Jiama Mine with abundant resources and CSH Mine with nearly70% YoY growth by the end of 2022 support the extension of mining servicelife. Meanwhile, the Company’s major shreholder China National Gold Group,which possesses many overseas quality copper and gold mines, commits toprioritizing the Company in terms of the asset injection. If all assets areinjected, the Company’s copper/gold production will likely grow by 49%/110%compared to 2022, highlighting significant growth potential.
　　Outstanding production and operational capabilities.
　　From 2011 to 2021, with the commissioning of CSH Mine and Jiama MinePhase II, the Company achieved a 24%/6% CAGR in copper/gold production.
　　During the production release periods of 2011-13 and 2018-20, the Companyoutperformed production guidance by over 120%, showcasing excellentproduction and operational capabilities. Jiama Mine was suspended in 2Q23due to a damaged tailings dam, and the repairs and reinforcements have beencompleted. With measures such as tailings backfill and the construction ofPhase III tailings storage, Jiama Mine is likely to resume production, bringingthe Company's performance back to pre-suspension levels.
　　 Undervalued mineral resources and outputs, and visible uptick in linewith copper and gold prices.
　　As of Dec 1, the Company's market cap-to-resource ratio for copper/goldresources are only 43%/23% of the industry average level, and the Company'smarket cap-to-output ratio for copper/gold outputs are only 52%/35% of theindustry average level, meaning that the Company’s market cap is significantlyundervalued. The Company focuses on copper and gold mining, exhibitingnotable performance and stock price elasticity during periods of rising copperand gold prices. We believe that the future uptrend of copper and gold pricesis likely to enhance the Company's investment attractiveness.
　　 Potential risks:
　　Earnings fluctuations caused by sharp changes in copper or gold prices;slower-than-expected resumption of Jiama Mine; disappointing cost controls;lower-than-expected increase in reserves; production shutdown or reductioncaused by environmental issues or safety accidents; slower-than-expectedinjections of group assets.
　　 Investment strategy:
　　China Gold Int’l is the only overseas listed company of China National GoldGroup. The Company remains undervalued in terms of resources and output,and its focus on copper and gold mining businesses ensures its high copperprice elasticity and gold price elasticity. We believe that as Jiama Mineresumes production, the Company will benefit from future upward resonanceof copper and gold prices. We estimate its 2023E/24E/25E ANP atUS$-31mn/164mn/306mn. Considering the impact of Jiama Mine suspensionin 2Q23 on this year's earnings, we choose 2024 as the basis for valuation.
　　We select Zijin Mining (601899.SH/02899.HK), Zhongjin Gold (600489.SH),MMG Limited (01208.HK), China Nonferrous Mining (01258.HK) and ZhaojinMining Industry (01818.HK) as comparable companies. Taking the averagecomps valuation of 12.9x 2024E PE (based on the Wind consensus estimates)as a reference, we assign 13x 2024E PE to derive a target price of HK$42. Weinitiate coverage with a “BUY” rating.