According to its announcement earlier
this month, the company plans to purchase La Arena for $245 million. La Arena
owns two mining projects, the first a heap leach gold mine currently in
production, while the second is a porphyry copper and gold project still in the
exploration stages. The first mine, La Arena I, contains gold at an average
grade of 0.33 grams per ton, while the second, La Arena II, averages 0.24 grams
per ton.
La Arena has a total of 25 mineral concessions covering approximately
33,100 hectares, Zijin said. Its total assets are valued at $320 million, and
it recorded revenue of $190 million and a net profit of $10 million last year.
Not long before the Peruvian purchase, Zijin acquired another gold
project called Akyem in Ghana for $1 billion in October. The Akyem mine is
located in one of the world’s major gold metallogenic belts and is a typical
orogenic gold deposit. It generated an impressive $128 million in profits last
year.
But the buying spree didn’t start there. In September, Zijin disclosed
that it would invest in Chinese gold miners Longyan Kaolin
Clay (605086.SH) and Wanguo Gold
Group (3939.HK). And in July, it announced a 300 million
yuan ($41.4 million) strategic investment for 9.9% of Canada-listed Montage Gold
Corp. (MAU.V).
High gold prices have clearly boosted Zijin’s appetite for new projects
this year.
Acquisitions aside, high gold prices have also lifted Zijin’s broader
business. Its net profit reached 24.36 billion yuan in the first nine months of
the year, up 50.7% year-on-year. It did especially well in the third quarter
when its profit rose 58.2% to 9.27 billion yuan, mainly on strong sales of its
core gold and copper products, whose prices rose 25.5% and 13.9%, respectively,
lifting its sales for the two metals by 3.4% and 2.3%.
Many investors mistakenly believe Zijin’s gold is bigger than its copper
business, probably due to its name. In fact, the company is more prone to
changes in the price of copper than gold. In this year’s third quarter, its
gold sales accounted for 32.5% of gross profit, behind the 44.4% contribution
for copper. Copper’s contribution was even bigger in the second quarter at 51%,
while gold supplied 30.1%. But the recent acquisitions could potentially close
the gross profit contribution gap.
Gold rallies on Trump win
Donald Trump’s victory in the U.S. presidential election has also been
positive for gold, given his business friendliness that makes him prefer lower
interest rates. Current treasury future prices show investors believe the
federal funds rate will fall to the 3.75% to 4% range by June next year, down
three quarters of a percentage point from the current level.
Trump has also promised to revitalize U.S. manufacturing, proposing to
cut the corporate tax rate by 6 percentage points, from the current 21% to 15%.
As a result of lost tax revenue from that and other spending, the market
estimates the federal debt will increase by $1 trillion every year to exceed
$40 trillion four years from now.
Such surging debt and falling interest rates could combine to undermine
the U.S. dollar. That could help to push up the price of gold, which is often
seen as one of the best hedges against dollar depreciation. As China’s top gold
miner, Zijin Mining is sitting pretty to benefit if prices indeed keep rising.
Meanwhile, a weak dollar will also inflate the prices of commodities
like copper, Zijin’s other mainstay. Copper is widely used as the best material
for conducting electricity, and demand could rise sharply on the need for new
capacity in the U.S. and Europe to accommodate the rapid rise of power-hungry
applications like AI and electric vehicles (EV).
If and when copper demand grows, another factor that could work to
Zijin’s advantage is the limited capacity of copper mines around the world.
According to estimates from the International Copper Study Group, the world’s
productive capacity of copper can grow by 1.7% to 22.75 million tons this year,
and by another 3.5% to 23.55 million tons in 2025. Those figures are well below
the estimated market demand for 27.15 million tons of refined copper this year
and 27.88 million tons in 2025, which could drive up copper prices due to the
gap between supply and demand
In addition to its traditional copper and gold businesses, Zijin is also
expanding into the new energy materials industry, with a particular focus on
lithium. Its current portfolio includes the 3Q Lithium Salt Lake Project in
Argentina, the Lakkor Tso Lithium and Xiangyuan Lithium Projects, both in
China, and the Manono Lithium Project in the Democratic Republic of Congo.
The Argentinian project is about to start production, with a planned
output of 250,000 tons to 300,000 tons of lithium annually by 2028. Once these
projects are all completed and deployed, the company might establish itself as
a leading global lithium miner.
However, overseas acquisitions also have certain risks, especially in
developing countries where law enforcement can be weak and business conflicts
often occur. That reality was evident last year when 3.2 tons of gold worth
$200 million was stolen through illegal mining from Zijin’s Buriticá gold mine
in Colombia, equal to 38% of the mine’s total production.
Valuation underperformer
As gold and copper prices climb and its lithium business grows, Zijin
could see its gross margin reach 18.9% and 19.9% this year and next,
respectively, according to Bloomberg forecasts, representing improvements of
3.1 percentage points and 1 percentage point over that period. Its net profit
is also forecast to rise 51.8% this year to 32.05 billion yuan and 21% to 38.8
billion yuan in 2025.
Zijin Mining is known for high efficiency among its global peers. It
boasts a projected return on equity (ROE) ratio of 25.8%, much higher than Newmont Corp.’s (NEM.US)
11.8%, Barrick Gold’s (GOLD.US) 8.8%
and Freeport-McMoRan’s (FCX.US)
11.9%. But stockholders don’t seem to appreciate that, awarding its Hong Kong
shares a price-to-earnings (P/E) ratio of only 12.7 times, lower than the
others whose ratios vary from 14.5 for Newmont and Barrick and 31 times for
Freeport-McMoRan. Perhaps that may change with the latest acquisitions,
especially if gold and copper prices rise as some believe they will.
