Global commodity price adjustments
Global commodities: neutral on base metals but prefer copper and zinc
Post a strong cyclical recovery in 2016 and early 2017, our global commodities
team still expects positive momentum, but believes we are entering the mature
part of the cycle, with most base metal prices well above their long-run real
averages. Of the industrial metals most relevant to our equity universe, copper
and zinc see the biggest rises in price forecasts, of ~10% for 2017, but current
investor positioning and spot prices are already factoring in a bullish outlook.
However, the "end of decade" fundamentals for copper look compelling and
thus garner a +20% rise in 2019-21. Our commodities team also cut its gold
price forecast by 2% in next few years, to factor in stronger US growth.
Following the +11.8%/+8.0% increase in copper price estimates and the
+0.2%/-2.0% change in gold price estimates for 2017/2018 respectively, we
have revised 2017/2018 earnings for JXC by +14.6%/+5.4% and earnings for
Zijin by +15.5%/+3.2%.
JXC- more constructive medium term earnings, but maintain Sell on valuation
The company has announced preliminary earnings for 2016 up between 40-
60% YoY, indicating lower-than-expected NPAT as a result of factors such as
accrued bad debt provisions during 4Q. Although 2018 is forecast to be a
surplus year for copper, the large increases in copper price forecasts near the
end of the decade will significantly boost the performance of JXC’s self-mined
copper segment from 2019 and beyond. Our newest TP of RMB11.5 is valued
based on DCF life-of-mine methodology, in which we assume 9.6% WACC.
The company’s A share is currently trading well above our target price with
30%+ downside, thus we maintain our Sell rating on JXC A share. Upside risks
include higher-than-expected copper price, lower production costs, and largerthan-expected RMB depreciation.
Zijin- better end-of-decade performance expected from DRC copper mines
Despite the decrease in gold price forecasts, Zijin is a major beneficiary of the
improved mid-term copper price outlook, as the company’s Kolwezi copper
mine is planned for commission during 2018 (Zijin holds 72% interest). After
Kolwezi reaches the maximum utilization rate, we believe the mined copper
segment will likely surpass the company’s mined gold segment in terms of
gross profit contribution. Additionally, the company has a 43.5% interest in
Kamoa, a world-class copper deposit currently undergoing preliminary
economic assessment with planned initial production around 2020; over time,
the company’s largest segment should shift from gold to copper, in our view.
Our target price of RMB3.3 for Zijin is based on DCF life-of-mine methodology,
where we assume 7.9% WACC. We adopt 11.2% as cost of equity, implying a
risk-free rate of 3.9%, market risk premium of 5.6% and beta of 1.3. We
upgrade Zijin’s A share recommendation from Sell to Hold on valuation, with
the stock trading in line with our TP. Risks to our valuation include
higher/lower-than-expected gold and copper price and higher/lower-thanexpected
production volumes, both of which could impact near term
profitability of the company.