Zijin Mining, which has mines at home, is in a liquidity crisis

Since February, Zijin Mining has shown a trend of ups and downs. Under the stimulus of procyclical stocks and the surge in international copper prices, Zijin Mining’s share price once rose to a record high of 15 yuan per share. In fact, Zijin Mining Starting from 4 yuan per share in June 2020, the increase has been close to 275%.

Zijin Mining, which has mines at home, is in a liquidity crisis

The reason for this is not only because of its leading position in the industry and its heavy holdings in many public and private equity funds, but also its continuous expansion of its business and the accumulation of mine resources on a global scale. It can be described as “a mine at home.”

Copper prices have risen, and resource reserves have become one of its core “moats”

Analyzing the logic of Zijin Mining’s rise, first of all, looking at the world, global inflation expectations have increased. In February this year, the US $1.9 trillion quantitative easing stimulus plan officially landed. Last year, the world had released 19.5 trillion US dollars of water to deal with the impact of the epidemic. At this time, the total government deficits of various countries were higher than at any time in history. The direct consequence of quantitative easing is inflation. With the global epidemic under control and the trend of economic recovery gradually becoming clear, the demand for production and investment will increase immediately, and inflation expectations will further increase on the basis of quantitative easing.

Secondly, for procyclical products such as non-ferrous metals, on the one hand, prices will rise in line with inflation expectations. On the other hand, economic recovery has stimulated an increase in demand for non-ferrous metals, resulting in a shortage of inventories, leading to the same increase in “futures and cash.” . The production capacity of non-ferrous metals will directly affect the downstream industrial chain.

Take metallic copper as an example. From 2021 to 2025, the increase in demand for copper in the clean energy sector alone will increase from 1.66 million tons to 2.7 million tons, but the current copper inventory is at a historically low level, as of 2021. On the 26th, the global LME copper inventory was only 73,500 tons, which was the lowest point in history in the past ten years.

In view of this, there is currently a demand gap of 500,000 tons for copper, the largest in the past 10 years. The new copper mine will not be put into production until 2023. The demand for copper has suddenly increased sharply, but the capacity expansion cannot be realized in a short period of time. Therefore, the price of metal copper has risen significantly, which in turn drives up the non-ferrous sector. Zijin Mining Benefit.

As of February 23, 2021, the closing price of LME copper has reached US$9,231/ton, which is close to the highest level in the past decade. Some brokerages even raised their expectations for copper prices in the coming year to US$12,000/ton.

The business model of Zijin Mining is to purchase gold, copper and other non-ferrous metal mines at home and abroad through mergers and acquisitions, and then mine through exploration or directly obtain mining rights, and sell after rough processing. Therefore, the company’s main source of profit is the sales and trading income after ore mining.

From the disclosure in the 2019 annual report, it can be seen that about 58% of the company’s profits are derived from copper and gold. Coupled with the particularity of the company’s industry, as an upstream company, the company’s gold resource reserves in 2019 are about 1,887 tons, accounting for about 13.8% of the domestic total. ; Copper resource reserves are about 57.25 million tons, accounting for about 50% of the national total; zinc resource reserves are about 8.558 million tons, accounting for about 4.6% of the domestic total. Resource reserves have become one of its core “moats”.

Zijin Mining announced in its annual performance forecast on January 30, 2021 that its net profit attributable to its parent in 2020 will be between 6.45 billion yuan and 6.65 billion yuan, a year-on-year increase of 50.56% to 55.23%.

The underlying logic of the performance increase is that the volume and price of non-ferrous metals are rising. Taking advantage of this cycle of non-ferrous metals, Zijin Mining “strikes while the iron is hot”, on the day of the performance forecast, at the same time released the plan for the next five years and the development goal for 2030. Outline. This planning document gives short-term quantitative indicators. The output of mineral gold and copper will increase significantly in 2021 and 2022, and the output of mineral zinc (lead), mineral silver and iron concentrates will also start from scratch. Gives clear production goals. In the long-term plan, by 2030, the company’s main economic indicators will reach the level of a world-class mining company, including control of resource reserves, sales revenue, asset scale, profit and other comprehensive indicators, and rank among the top 5 in the world.

With the rapid rise in copper prices, Zijin Mining, which has a copper reserve of 50% of the total domestic total, will undoubtedly become the biggest beneficiary and become a leading non-ferrous metal company with a wealth of benefits.

The short-term debt repayment pressure is high, and the net profit margin is only 4.44%, which is much lower than the world’s leading mining companies

Opportunities and risks coexist, and the liquidity risk of Zijin Mining also needs investors’ attention.

Since Zijin Mining is in a stage of substantial expansion, its own asset-heavy attributes have put a lot of pressure on its funds, and the funding gap basically depends on “borrowing the new to repay the old” to make up for it. The company used private placement and public placement to ease debt pressure in 2017 and 2019. But by 2020, in the first three quarters alone, about 14 billion yuan of long-term interest-bearing bonds and about 6 billion yuan of short-term interest-bearing bonds have been added.

The third quarter report of 2020 shows that Zijin Mining’s asset-liability ratio is 59.54%, and the book’s long-term interest-bearing debt and short-term interest-bearing debt are 39.854 billion yuan and 26.156 billion yuan, respectively. Current liabilities account for 47.19% of the total liabilities, while the book currency funds are only 7.501 billion yuan. Compared with the current ratio of more than 1.5 times and the quick ratio of more than 1.0 of the top three international mining companies, the current ratio of Zijin Mining is only 0.72 times, and the quick ratio is only 0.33 times. It can be seen that the company is under great short-term debt repayment pressure. Relieving funding pressure is currently the most important problem.

 

In order to ease the financial pressure, Zijin Mining issued 6 billion yuan of convertible bonds in October 2020, and another 2 billion yuan of medium-term notes in November. Continuous blood transfusion has become the main way for Zijin Mining to repay debts, but the essential way to solve the problem is to improve the company’s own hematopoietic capacity to increase liquidity.

Under the premise of limited and declining global resources, Zijin Mining’s future strategy is to “increase geological exploration and at the same time acquire medium and large gold and copper production mining companies to increase the reserves and output of major mineral resources” to achieve this A strategic development goal means that a large amount of cash flow is needed behind it. In August 2020, Zijin Mining increased its leverage ratio due to capital expenditures on acquisitions and construction. Fitch rated Zijin Mining’s long-term issuer default rating and senior unsecured rating. Adjust from “BBB-” to “BB+”.

Judging from Zijin Mining’s financial data, the revenue scale of 136 billion yuan in 2019 is 49% of Rio Tinto’s and 56% of Vale’s. It can be seen that there is still some gap with the giants.

Zijin Mining’s net profit margin is only 4.44%. Compared with the world’s leading mining companies, BHP Billiton, Rio Tinto, and Vale’s 15%-23% net profit margin, there is still a considerable gap, and the net profit margin is the most substantial. It reflects that sales revenue can finally return to an important indicator for the company to form net profit and operating cash flow for business development.

From the perspective of operating costs, the company has been striving to achieve “low-cost investment and operational control capabilities” to reduce costs, but the results were minimal. The changes in the company’s three fees did not substantially change the total cost, and the three fees only accounted for 3% of the total operating cost, which is also a characteristic of the domestic non-ferrous metal mine exploration and mining industry. Want to really reduce operating costs, increase net profit margins, and improve company management capabilities is just one of them. The breakthrough point is technology.

 

On the one hand, borrowing the new to repay the old, on the other hand, it requires continuous expansion of cash flow. Zijin Mining has a long way to go in the future to resolve capital pressure and mitigate liquidity risks.

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