Overview

Zhaojin Mining (1818.HK) is a comprehensive gold producer and gold smelting enterprise that integrates exploration, mining, mineral processing and smelting operations and focuses on developing the gold industry. The company's main products are 񕜯 gold" and 񕜫 gold" standard gold ingots; its main production technology and equipment have reached domestic leading and international advanced levels. The company is located in Zhaoyuan City, Shandong Province, China. This place is rich in resources, has a unique geographical location and a long history of gold mining. According to statistics from the China Gold Association, Zhaoyuan City's gold resources account for about one-tenth of China's total remaining gold resources. It is an important gold production base which is known as the "Gold Capital of China". The company has a number of subsidiaries and joint-stock companies nationwide, and its business covers major gold-producing regions across the country. As of December 31st, 2022, the company had a total of approximately 38.29 million ounces of gold mineral resources and approximately 15.50 million ounces of mineable gold reserves. In the first half of 2023, a total of 13.92 tons of new gold metal were completed in exploration.

Company Performance review

As of September 30, 2023 (Jan-Sep), the company's revenue was 6.39 billion yuan (RMB, the same as below), an increase of 10.3% YOY. Operating costs were 3.91 billion yuan, a slight increase YOY. Operating profit was 791 million yuan, an increase of 29.6% YOY. Net profit was 538 million yuan, an increase of 29.7% YOY. The company's Q3 performance achieved substantial year-on-year growth, mainly due to the increase in gold sales prices.

Industry Analysis

According to statistics from the China Gold Association, supply: in the first three quarters of 2023, domestic raw material gold production was 271.2 tons, an increase of 0.47% YOY, which included 214.9 tons of mined gold and 56.4 tons of non-ferrous by-product gold. In the first three quarters of 2023, 96.3 tons of gold were produced from imported raw materials, an increase of 11.5% YOY. If the gold produced from imported raw materials was included, the country produced a total of approximately 367.5 tons of gold, an increase of 3.1% YOY. Consumption: In the first three quarters of 2023, national gold consumption was 835.1 tons, an increase of 7.32% YOY, which include 552 tons of gold jewelry, an increase of 5.72%YOY; 222.4 tons of gold bars and gold coins, an increase of 15.98% YOY; 60.7 tons of industrial and other gold, a decrease of 5.53% YOY. In the first three quarters, the economy continued to recover slowly and market demand continued to expand. According to data from the National Bureau of Statistics, the growth rate of retail sales of gold, silver and jewelry commodities continues to lead above other categories of products. In addition, as of the end of September 2023, China's gold reserves reached 2,191.6 tons. In the first three quarters of 2023, People's Bank of China increased its gold holdings by a total of 181 tons. It has increased its gold holdings for eleven consecutive months. In conclusion, the growth of gold supply is smaller than the growth of consumption. In addition, Fed will subsequently start an interest rate cut cycle, the economy will continue to improve, and the price of gold is expected to continue to rise.

Company Business

The company has the advantage of state-owned background. In November 2022, Jinshan (Hong Kong) International Mining Co., Ltd., a wholly-owned subsidiary of Zijin Mining, acquired 654,078,741 H shares of Zhaojin Mining Co., Ltd., holding a total of approximately 20.00% of the issued share capital of Zhaojin, became the second largest shareholder of Zhaojin Mining, which showed that Zijin Mining is optimistic about the future development of Zhaojin Mining, which also meant the two leading domestic gold companies had achieved a strong alliance. The flagship project of Zhaojin Mining is the Shandong Haiyu Gold Mine, the largest single gold mine in China. It has 562 tons of gold resources and an average grade of 4.2 g/ton. The project has complete licenses and obtained a mining license in July 2021. The scale of mining and collecting is 3.96 million tons/year. It is expected to be put into operation in 2025. The annual gold output will be about 15-20 tons. It will become the largest gold mine in China. The joining of Zijin Mining will further deepen the synergy between the two parties, and the construction process of maritime gold mines will be further pushed.

In the first half of 2023, the company's total gold output was approximately 11,768.8 kg, a decrease of approximately 12.9% YOY, of which mined gold was 8,419.3 kg, a decrease of approximately 2.7% YOY, and metallurgy gold was approximately 3,349.5 kg, a decrease of approximately 31.1% YOY. The company's total copper output was approximately 2,648 tons, a year-on-year increase of approximately 7.5%.

The company has unique advantages in terms of resource volume and output. As of the end of 2022, Zhaojin Mining ranked third in the country in terms of gold resources. In terms of mining gold, the output in the past three years was 20.10 tons, 12.62 tons and 19.24 tons respectively. The decrease of output in 2021 was mainly affected by the safety supervision and rectification of gold mines, but the output in 2022 increased significantly.

Valuation and recommendation

At the end of December last year, the dot plot and meeting minutes after Fed meeting both showed that this round of interest rate hikes may come to an end. Many investment banks are expected to start cutting interest rates as early as March this year, but the rate cutting cycle has been determined to start this year. Generally speaking, during the period of the interest rate cutting cycle, gold is relatively more attractive; cutting interest rates is equivalent to increasing the money supply, which may cause inflation to rise, and gold has a strong ability to resist inflation. In terms of geopolitics, the Russia-Ukraine war and the Israeli-Palestinian conflict are still continuing, and gold can be regarded as a good hedging asset. In conclusion, it can be determined that gold prices will maintain an upward trend in 2024. As can be seen from Figure 4, the price of gold had been rising since October last year and is currently close to 2100. The next target price is expected to be around 2150. Given that gold price had been rising for some time now, there may be a certain retracement before March, and then the rising cycle will officially begin.

We predict that the company's revenue will be 8.70 billion yuan, 10 billion yuan and 11.5 billion yuan respectively in 2023-2025, with a compound annual growth rate of 15%, earnings per share (EPS) are projected to be 0.13/0.23/0.26 yuan, and BVPS are projected to be 6.3/6.5/ 6.7, corresponding to a price-to-book ratio (P/B) of 1.02/0.99/0.96x. The company's earnings are expected to continue to improve in 2024. The company's average P/B in the past three years is approximately 1.63. With a forecasted 2 times P/B in 2023 and a valuation of HKD 13.84, we recommend a "buy" rating. (Current price as of January 31st)

Risk factors

Political factors, monetary policy, gold supply and demand, and the impact of safety accidents.

* The analyst has a financial interest in the listed corporation covered in this report.

Financial

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