Lowest-cost producer. Zijin's unit gold and copper production costs in 2010 were US$310/oz and US$1.9/lb, respectively, among the world's lowest, thanks to large-scale open-pit mining at its flagship mine Zijinshan, and a low strip-ratio and high recovery ratio. Even factoring in an aggressive cost outlook, we expect Zijin's unit gold and copper cost to remain competitive in a range of US$335-356/oz for gold and US$2.1-2.2/lb for copper in 2011F-2013F, underpinned by stable gold operations and new output contribution from the Duobaoshan copper mine.
Redoubling of gold-focused M&A. As at end-2010, Zijin has 750 tonnes of gold and 10.6mt copper capable of supporting a mine-life of 25 years for gold production and 92 years for copper mining. While copper makes up 47% of Zijin's current NAV by our estimate, Zijin's redoubling of gold-focused M&A, including in recent months, Kazakhstan Summer Gold, Australian Norton Gold (NGF AU, Not Rated), Gansu Lixian Gold and Tibet Gold Eagle. This could boost the company's gold NAV in near term. Announced M&As could enhance Zijin's gold reserves by over 40%. Having already acquired mines in Russia, Mongolia, Indonesia and Tajikistan, Zijin is building global brand, that would enhance its credibility and mining know-how by meeting international standards.
Greater financial flexibility. Zijin raised a five-year corporate bond of US$480m at a 4.25% coupon rate and maturing in June 2016. The bond is rated investment grade of A1 by Moody's, and is in part backed by a standby letter of credit worth of US$200m issued by the Bank of China. We believe the bond issuance gives Zijin added financing flexibility to make acquisitions.
Re-rating underway. The stock has de-rated by 39% since December 2009, as it has been hurt by tailing system leakages, M&A delays, and concerns over the depletion of Zijinshan's gold reserves. Zijin is keen to restore investor confidence by voluntarily conducting technical reviews of its gold assets. A JORC-compliant technical report, to be published in 1Q12, could serve as near-term catalyst. A reacceleration of gold-focused M&A and the revamping of its mines should restore investor confidence
and warrant a re-rating.
David Fuller's view China is the world's largest gold producer and among the largest consumers. It is notable that China Construction Bank's international division has initiated coverage of a number of Chinese gold shares. It may suggest an effort to improve international investor perceptions of the domestic mining industry. We will be guided by the price action.
Zijin Mining yields 2.29% and has been ranging with a downward bias since late 2009. It rebounded impressively from HK$2 over the last couple of months but needs to sustain a move above HK$4 to break the medium-term progression of lower rally highs and suggest a return to demand dominance beyond the short term.
Zhaojin Mining yields 1.25% and has performed more in line with international gold miners. It rallied impressively from the late 2008 low, broke upwards to new highs in 2010 and hit a medium-term peak in April of this year. The share pulled back violently in September but steadied above HK$10 and has rallied back towards the 200-day MA. It will need to sustain a move above HK$15 to break the progression of lower rally highs and suggest a return to medium-term demand dominance.
China Gold International Resources has been trending lower since its IPO but has at least stabilised near HK$20. A sustained move above HK$25 would suggest the emergence of medium-term demand dominance.
Lingbao doubled its dividend this year and analysts expect it to sustain the payout next year. The share currently yields 3.3% and has been trending lower for most of the year. It has retuned to an area of at least short-term support near HK$3 and a sustained move above HK$4 would break the progression of lower rally highs.