What's new
　　After Zijin announced its 1H20 results, we invited companyexecutives to discuss business operations and strategies.
　　Comments
　　Earnings contribution from Timok mine looks promising once it goeson-stream, thanks to its high-grade ore. Timok’s upper zone hashigh-grade copper-gold deposits. With depth of about 200–300meters, this mine has 360,000t of copper (a grade of 12.3%), and 25tof associated gold (a grade of 8.67g/t). This project is scheduled tostart production in mid-2021. Zijin expects this mine to contributecopper and gold output of 135,000t and 6t annually. Give the highgrade of the deposits, we believe earnings may surprise to the upsidein 2021 after on-stream production of this project.
　　Project progress in line with expectations; output has substantialgrowth potential. Zijin believes output of mineral copper will exceed430,000t in 2020. Given that copper output exceeded expectations in1H20, we believe mineral copper output may reach 460,000t in 2020.
　　The company believes output of mineral copper may reach 800,000–900,000t in 2022, up approximately 130% from 2019. The companyexpects output of mineral gold to reach 60–70t in 2022, an increaseof about 59% from 2019.
　　Cash flow remains strong and debt ratio may fall. Cash outflow frominvestment activities was Rmb16.6bn in 1H20, mainly includingprepayment of Rmb10bn for the acquisition of Continental Gold andJulong Copper. As of 1H20, the company’s net debt ratio anddebt-to-asset ratio were approximately 93% and 60%. Given theacquisition of Guyana Goldfields announced in 1H20, we believe thecompany’s debt-to-asset ratio may increase YoY in 2020. That said,we expect the debt ratio to decline and cash flow to continue to growas projects under construction start to make cash flow contributions.
　　Valuation and recommendation
　　We keep our 2020 earnings forecast unchanged, but raise our 2021earnings forecast 4% to Rmb8.3bn to reflect possible on-streamproduction of Timok’s upper zone in 2Q21. Zijin-A is trading at 28.4x2020e and 19.9x 2021e P/E, and Zijin-H at 20.1x 2020e and 14.1x2021e P/E. For Zijin-A, we maintain OUTPERFORM but raise TP 12.5%to Rmb9 (39.1x 2020e P/E and 27.5x 2021e P/E), offering 37.8%upside. For Zijin-H, we maintain OUTPERFORM but raise TP 16.7% toHK$7 (27.0x 2020e P/E and 19.0x 2021e P/E), offering 34.9% upside.
　　Risks
　　Projects under construction proceed more slowly than we expect;sharp drops in metal prices.