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Equity Bottom-Up

Jinchuan Group International Resources / Equity Bottom-Up

Jinchuan Group International Resources (2362 HK)

<a target="_blank">Based on our model estimates, revenues for Jinchuan Group International Resources Co. Ltd. [2362_HK; HK$15.76 billion/US$2.04 billion market cap] should increase from US$665 mn in FY2020 to US$1184 mn in FY2022 at a CAGR of 33% while earnings should increase from a profit of US$31.5 mn in FY2020 to a profit of US$297 mn in FY2022 at a CAGR of 207%. Similarly, the EPS is expected to increase at a CAGR of 207% from US0.24 cents in FY2020 to US2.23 cents in FY2022. We have a 12-month price target of HK$2.00 on the stock, suggesting an upside of 60% from the current levels. Once the revenue growth picks up we will revise the target on the higher side.</a>&nbsp;
12.7x/7.1x FY2021/FY2022 P/E; 2x/1.56x FY2021/FY2022 P/B; 2.88x/1.70x FY2021/FY2022 P/S
We believe that the stock is currently at a multiyear inflection point and expect earnings to increase significantly in FY2021 and beyond, supported by continuously rising copper and cobalt prices. Based on our model forecasts, the stock is trading at a P/E of just 12.7x and 7.1x on FY2021 and FY2022 earnings. Similarly, on FY2020 numbers, P/B basis, the stock is trading at 2.3x and the current book value of the company is low due to large levels of impairments taken in the earlier years. We believe that with record high levels of copper and cobalt prices and strong sales results in 2021 and beyond, there will be substantial impairment reversal in the coming year, suggesting an even lower P/B multiple. Given that the stock is trading at attractive valuations with multiple catalysts in place, we believe that the stock offers compelling growth potential for investors.&nbsp;
10.7x/6.9x FY2021/2022 EV/EBITDA, Robust EBITDA Growth
The company reported an EBITDA of US$163 mn in the first half of 2021, an increase of 296% as compared to US$41 mn in the first half of 2020. In FY2018 and FY2019, EBITDA was US$214.2 mn and US$116.2 mn respectively. With rapidly increasing capacity utilization at the Ruashi and Kinsenda mines and economies of scale kicking in, we expect EBITDA to increase further going forward supported by upward trend in price of copper and cobalt. For FY2021 and FY2022, we forecast EBITDA of US$313 mn and US$533 mn, respectively. Based on our model estimates, the stock is trading at FY2021 EV/EBITDA of 10.7x and FY2022 EV/EBITDA of 6.9x. &nbsp;
For mining companies EBITDA is the appropriate measure to evaluate their financial performance which can otherwise seem distorted if the impact of items that are non-recurring in nature is to be taken into consideration.&nbsp; The impairment loss and fair value gains are non-recurring in nature and are not relevant to core business operations.&nbsp; We believe that EBITDA reflects the true nature of the company’s financial performance and is a better indicator of its expected performance in the future. &nbsp;
Stellar Growth in Gross and Net Profit, Sales Growth Resilient at +4%; Tight Cost Control 
Jinchuan International Resources reported resilient revenue growth along with robust operating and financial performance for the first half of 2021, inline with of our expectations. The company’s revenues from its mining operations increased by 57% YoY for 1H2021 to US$324 mn, in comparison to US$207 mn for 1H2020.&nbsp; Higher average price per ton of copper and cobalt along with higher volume of cobalt were the primary reasons for a resilient growth witnessed during 1H2021. LME copper price reached an all-time high of US$10,720 per ton in May 2021 and closed at US$9,385 per ton at the end of June 2021. Compared to 1H2020 the average LME copper price increased by 66% from US$5,490 per ton to US$9,095 per ton in 1H2021. Compared to 1H2020 the average MB cobalt price increased by 28% from US$34,605 per ton to US$44,313 per ton in 1H2021. The company’s results were positively impacted by the higher prices which offset the impact of lower sales volumes.
The company recorded a consolidated net profit of US$79 million in 1H2021 as compared to a loss of US$25 million in 1H2020 due to the combined effect of rebound in prices of copper and cobalt and strict cost control measures implemented during 2021. &nbsp;
The revenue from trading of metal and mineral products however witnessed a drastic fall of 74% to US$37 million in 1H2021 from US$141 million in 1H2020 as a result of tighter risk control measures made due to Covid-19 pandemic. As an overall effect, the total revenues increased by 4% in 1H2021 as compared to 1H2020. The revenue from trading of metal and mineral products is expected to gradually recover in 2021 and beyond to ultimately contribute in much higher proportion as compared to this year’s performance.&nbsp;
Reduction in Finance Costs; Significant Improvement in Gross Margins
Net finance costs have decreased by 46% from US$7.8 million in 1H2020 to US$4.1 million in 1H2021 due to significant reduction in bank loan interest rates. The company has entered into interest rate swap agreements for bank loans with principal amount of US$194 million in December 2020, to swap the remaining interest payments from floating interest payments to fixed interest payments aiming to lock down the future interest payment amount. The decrease in finance cost was due to the effective interest rate for 1H2021 being lower than that in 1H2020. Also, the company has gradually repaid its bank loan using cashflow from the Kinsenda mine, leading to a decrease in principal outstanding. With interest rates expected to remain low due to the ongoing pandemic, the finance costs would remain stable in the near future.&nbsp;
The gross profit has increased by a whopping 814% from US$15 million in 1H2020 to US$134 million in 1H2021. As copper and cobalt prices recovered in the second half of 2020 and surged ahead in the first half of 2021, the gross profit margin improved to 37% in the first half of 2021 as compared to 7% in 1H2020. The company was able to reduce the overall mining costs as it was able to reduce costs in its operations. For example, the plan to sell copper blister from the Kinsenda mine led to an increase in gross profit in the first half of 2021.
Healthy Balance Sheet and Comfortable Gearing Ratio
The company had cash and cash equivalent to the tune of US$108.3 million in FY2020 as compared to US$45.2 million in FY2019, a strong increase of 140%. At the end of June 2021, the company reported cash and cash equivalents of US$250.9 million a stellar increase of 131% in just six months’ time. The effective fixed interest rate for the remaining loan term ranges from 2.5% to 3.9%. The gearing ratio was 23.4% in FY2020 as compared to 33.0% in FY2019. The decrease in the gearing ratio was due to the decrease in bank borrowings and increase in cash in FY2020. The gearing ratio has further reduced to 16.6% at the end of June 2021 due to increase in cash in the first half of 2021. The company’s capital structure is in a comfortable position and even if the need arises for borrowing in the near future due to any possible acquisitions or mergers then it would still have the flexibility to borrow further.
For further details, please see our attached Earnings Update Report.

Based on our model estimates, revenues for Jinchuan Group International Resources Co. Ltd. [2362_HK; HK$15.76 billion/US$2.04 billion market cap] should increase from US$665 mn in FY2020 to US$1184 mn in FY2022 at a CAGR of 33% while earnings should increase from a profit of US$31.5 mn in FY2020 to a profit of US$297 mn in FY2022 at a CAGR of 207%. Similarly, the EPS is expected to increase at a CAGR of 207% from US0.24 cents in FY2020 to US2.23 cents in FY2022. We have a 12-month price target of HK$2.00 on the stock, suggesting an upside of 60% from the current levels. Once the revenue growth picks up we will revise the target on the higher side.&nbsp;
12.7x/7.1x FY2021/FY2022 P/E; 2x/1.56x FY2021/FY2022 P/B; 2.88x/1.70x FY2021/FY2022 P/S
We believe that the stock is currently at a multiyear inflection point and expect earnings to increase significantly in FY2021 and beyond, supported by continuously rising copper and cobalt prices. Based on our model forecasts, the stock is trading at a P/E of just 12.7x and 7.1x on FY2021 and FY2022 earnings. Similarly, on FY2020 numbers, P/B basis, the stock is trading at 2.3x and the current book value of the company is low due to large levels of impairments taken in the earlier years. We believe that with record high levels of copper and cobalt prices and strong sales results in 2021 and beyond, there will be substantial impairment reversal in the coming year, suggesting an even lower P/B multiple. Given that the stock is trading at attractive valuations with multiple catalysts in place, we believe that the stock offers compelling growth potential for investors.&nbsp;
10.7x/6.9x FY2021/2022 EV/EBITDA, Robust EBITDA Growth
The company reported an EBITDA of US$163 mn in the first half of 2021, an increase of 296% as compared to US$41 mn in the first half of 2020. In FY2018 and FY2019, EBITDA was US$214.2 mn and US$116.2 mn respectively. With rapidly increasing capacity utilization at the Ruashi and Kinsenda mines and economies of scale kicking in, we expect EBITDA to increase further going forward supported by upward trend in price of copper and cobalt. For FY2021 and FY2022, we forecast EBITDA of US$313 mn and US$533 mn, respectively. Based on our model estimates, the stock is trading at FY2021 EV/EBITDA of 10.7x and FY2022 EV/EBITDA of 6.9x. &nbsp;
For mining companies EBITDA is the appropriate measure to evaluate their financial performance which can otherwise seem distorted if the impact of items that are non-recurring in nature is to be taken into consideration.&nbsp; The impairment loss and fair value gains are non-recurring in nature and are not relevant to core business operations.&nbsp; We believe that EBITDA reflects the true nature of the company’s financial performance and is a better indicator of its expected performance in the future. &nbsp;
Stellar Growth in Gross and Net Profit, Sales Growth Resilient at +4%; Tight Cost Control 
Jinchuan International Resources reported resilient revenue growth along with robust operating and financial performance for the first half of 2021, inline with of our expectations. The company’s revenues from its mining operations increased by 57% YoY for 1H2021 to US$324 mn, in comparison to US$207 mn for 1H2020.&nbsp; Higher average price per ton of copper and cobalt along with higher volume of cobalt were the primary reasons for a resilient growth witnessed during 1H2021. LME copper price reached an all-time high of US$10,720 per ton in May 2021 and closed at US$9,385 per ton at the end of June 2021. Compared to 1H2020 the average LME copper price increased by 66% from US$5,490 per ton to US$9,095 per ton in 1H2021. Compared to 1H2020 the average MB cobalt price increased by 28% from US$34,605 per ton to US$44,313 per ton in 1H2021. The company’s results were positively impacted by the higher prices which offset the impact of lower sales volumes.
The company recorded a consolidated net profit of US$79 million in 1H2021 as compared to a loss of US$25 million in 1H2020 due to the combined effect of rebound in prices of copper and cobalt and strict cost control measures implemented during 2021. &nbsp;
The revenue from trading of metal and mineral products however witnessed a drastic fall of 74% to US$37 million in 1H2021 from US$141 million in 1H2020 as a result of tighter risk control measures made due to Covid-19 pandemic. As an overall effect, the total revenues increased by 4% in 1H2021 as compared to 1H2020. The revenue from trading of metal and mineral products is expected to gradually recover in 2021 and beyond to ultimately contribute in much higher proportion as compared to this year’s performance.&nbsp;
Reduction in Finance Costs; Significant Improvement in Gross Margins
Net finance costs have decreased by 46% from US$7.8 million in 1H2020 to US$4.1 million in 1H2021 due to significant reduction in bank loan interest rates. The company has entered into interest rate swap agreements for bank loans with principal amount of US$194 million in December 2020, to swap the remaining interest payments from floating interest payments to fixed interest payments aiming to lock down the future interest payment amount. The decrease in finance cost was due to the effective interest rate for 1H2021 being lower than that in 1H2020. Also, the company has gradually repaid its bank loan using cashflow from the Kinsenda mine, leading to a decrease in principal outstanding. With interest rates expected to remain low due to the ongoing pandemic, the finance costs would remain stable in the near future.&nbsp;
The gross profit has increased by a whopping 814% from US$15 million in 1H2020 to US$134 million in 1H2021. As copper and cobalt prices recovered in the second half of 2020 and surged ahead in the first half of 2021, the gross profit margin improved to 37% in the first half of 2021 as compared to 7% in 1H2020. The company was able to reduce the overall mining costs as it was able to reduce costs in its operations. For example, the plan to sell copper blister from the Kinsenda mine led to an increase in gross profit in the first half of 2021.
Healthy Balance Sheet and Comfortable Gearing Ratio
The company had cash and cash equivalent to the tune of US$108.3 million in FY2020 as compared to US$45.2 million in FY2019, a strong increase of 140%. At the end of June 2021, the company reported cash and cash equivalents of US$250.9 million a stellar increase of 131% in just six months’ time. The effective fixed interest rate for the remaining loan term ranges from 2.5% to 3.9%. The gearing ratio was 23.4% in FY2020 as compared to 33.0% in FY2019. The decrease in the gearing ratio was due to the decrease in bank borrowings and increase in cash in FY2020. The gearing ratio has further reduced to 16.6% at the end of June 2021 due to increase in cash in the first half of 2021. The company’s capital structure is in a comfortable position and even if the need arises for borrowing in the near future due to any possible acquisitions or mergers then it would still have the flexibility to borrow further.
For further details, please see our attached Earnings Update Report.

Jinchuan [2362]: 1H Results: Mining Revenue +57% YoY, EBITDA Growth +296% YoY, Net Profit US$79 Mn