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Equity Bottom-Up

Jinchuan Group International Resources / Equity Bottom-Up

Jinchuan Group International Resources (2362 HK)

<a target="_blank">Jinchuan International Resources [2362_HK; HK$15.26 billion/US$1.98 billion market cap] reported robust revenue growth along with sharp recovery in the operating and financial performance for the FY2021, much ahead of our expectations. The company’s revenues increased by 25% YoY in FY2021 to US$832 million, in comparison to US$665 million in FY2020.&nbsp; Higher average price per ton of copper and cobalt was the primary reason for higher double-digit growth witnessed in 2021. LME copper price reached an all-time high of US$10,720 per ton in May 2021 and closed at US$9,550 per ton at the end of December 2021. The average LME copper and MB cobalt prices for the year ended 31st December 2021 were US$9,315 per ton (2020: US$6,169 per ton) and US$52,714 per ton (2020: US$33,954 per ton) respectively, representing an increase of 51% and 55% respectively.</a>
Financial Highlights for FY2021
<ul type="disc">
<li>Growth Parameters: Net Profit +282%, Gross Profit +188%, EBITDA +122%, Revenue +25%</li>
<li>Average LME Copper price per ton in 2021 at US$9,315: 51% Up YoY</li>
<li>Average MB Cobalt price per ton in 2021 at US$52,714: 55% Up YoY</li>
<li>Average price realized per ton of Copper for the company increased by 58% YoY</li>
<li>Average price realized per ton of Cobalt for the company increased by 103% YoY</li>
<li>Reversal of Impairment Losses Up 256%</li>
<li>Gross Profit Margin 30% in FY2021 (13% in FY2020)</li>
<li>Capital Expenditure Rises 79% YoY</li>
<li>Net Finance Costs Down 32% YoY</li>
<li>Cash and Cash Equivalents Up 100% YoY</li>
<li>Significant Improvement in Gearing Ratio to 12.1% in FY2021 from 23.4% in FY2020</li>
<li>Recommended Dividend of HK0.2 cents per share for FY2021: 100% Increase YoY</li>
</ul>
Compared to 2020 the average copper price realized per ton for the company increased by 58% from US$5,721 per ton to US$9,018 per ton in 2021. Compared to 2020 the average price realized per ton for cobalt increased by 103% from US$20,031 per ton to US$40,738 per ton in 2021. 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$162 million for FY2021, an increase of 282% as compared to US$43 million in FY2020. The sharp rise in the net profit was recorded due to the combined effect of rebound in prices of copper and cobalt along with strict cost control measures implemented during 2021.
The revenue from trading of metal and mineral products witnessed a rise of 27% to US$211 million in FY2021 from US$167 million in FY2020. The trading of metal and mineral products is derived by trading commodities such as copper cathode, copper matte and cobalt hydroxide. As an overall effect, the total revenues increased by 25% in FY2021 as compared to FY2020. The revenue from trading of metal and mineral products is expected to post continued recovery in 2022 to ultimately contribute in much higher proportion as compared to this year’s performance.
The Board of Directors has recommended a final dividend of HK0.2 cents per share for FY2021 (2020: HK0.1 cent per share), totaling approximately HK$25.22 million (2020: approximately HK$12.61 million). Subject to obtaining the approval at the forthcoming annual general meeting, the final dividend is expected to be paid on or before 29th June 2022.
Stock at a Multiyear Inflection Point, Strong Revenue and EPS Growth to Continue
Based on our model estimates, revenues should increase from US$832 million in FY2021 to US$2,642 million in FY2026 at a CAGR of 26% while earnings should increase from a profit of US$120 million in FY2021 to a profit of US$504 million in FY2026 at a CAGR of 67%. Similarly, the EPS is expected to increase at a CAGR of 70% from US0.9 cents in FY2021 to US3.7 cents in FY2026. We have a 12-month price target of HK$2.00 on the stock, suggesting an upside of 70% from the current levels. Once the sales volume growth picks up, we will revise the target on the higher side.
9.4x/7.7x FY2022/FY2023 P/E; 1.6x/1.3x FY2022/FY2023 P/B; 1.7x/1.4x FY2022/FY2023 P/S
We believe that the stock is currently at a multiyear inflection point and expect earnings to witness further increase in 2022 and beyond, supported by continuously rising copper and cobalt prices along with expected recovery in production volume of copper and cobalt by the company. Based on our model forecasts, the stock is trading at a P/E of just 9.4x and 7.7x on FY2022 and FY2023 estimated earnings. Similarly, on FY2021 numbers, P/B basis, the stock is trading at 1.9x and with an expectation that the price of copper will rise at a healthy pace in the coming years there will be an upward revision in the amount of mineral rights, which will increase the book value per share for the company. 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.
4.3x/3.5x FY2022/2023 EV/EBITDA, Robust EBITDA Growth
The company reported an EBITDA of US$312 million for FY2021, a stellar increase of 122% as compared to US$140 million in FY2020. In FY2018 and FY2019, EBITDA was US$214.2 million and US$116.2 million 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 an upward trend in the price of copper and cobalt along with rising production volumes of copper and cobalt by the company. For FY2022 and FY2023, we forecast EBITDA of US$508 million and US$626 million, respectively. Based on our model estimates, the stock is trading at FY2022 EV/EBITDA of 4.3x and FY2023 EV/EBITDA of 3.5x.
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.
For further details, please see our attached Earnings Update Report.

Jinchuan International Resources [2362_HK; HK$15.26 billion/US$1.98 billion market cap] reported robust revenue growth along with sharp recovery in the operating and financial performance for the FY2021, much ahead of our expectations. The company’s revenues increased by 25% YoY in FY2021 to US$832 million, in comparison to US$665 million in FY2020.&nbsp; Higher average price per ton of copper and cobalt was the primary reason for higher double-digit growth witnessed in 2021. LME copper price reached an all-time high of US$10,720 per ton in May 2021 and closed at US$9,550 per ton at the end of December 2021. The average LME copper and MB cobalt prices for the year ended 31st December 2021 were US$9,315 per ton (2020: US$6,169 per ton) and US$52,714 per ton (2020: US$33,954 per ton) respectively, representing an increase of 51% and 55% respectively.
Financial Highlights for FY2021

Growth Parameters: Net Profit +282%, Gross Profit +188%, EBITDA +122%, Revenue +25%
Average LME Copper price per ton in 2021 at US$9,315: 51% Up YoY
Average MB Cobalt price per ton in 2021 at US$52,714: 55% Up YoY
Average price realized per ton of Copper for the company increased by 58% YoY
Average price realized per ton of Cobalt for the company increased by 103% YoY
Reversal of Impairment Losses Up 256%
Gross Profit Margin 30% in FY2021 (13% in FY2020)
Capital Expenditure Rises 79% YoY
Net Finance Costs Down 32% YoY
Cash and Cash Equivalents Up 100% YoY
Significant Improvement in Gearing Ratio to 12.1% in FY2021 from 23.4% in FY2020
Recommended Dividend of HK0.2 cents per share for FY2021: 100% Increase YoY

Compared to 2020 the average copper price realized per ton for the company increased by 58% from US$5,721 per ton to US$9,018 per ton in 2021. Compared to 2020 the average price realized per ton for cobalt increased by 103% from US$20,031 per ton to US$40,738 per ton in 2021. 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$162 million for FY2021, an increase of 282% as compared to US$43 million in FY2020. The sharp rise in the net profit was recorded due to the combined effect of rebound in prices of copper and cobalt along with strict cost control measures implemented during 2021.
The revenue from trading of metal and mineral products witnessed a rise of 27% to US$211 million in FY2021 from US$167 million in FY2020. The trading of metal and mineral products is derived by trading commodities such as copper cathode, copper matte and cobalt hydroxide. As an overall effect, the total revenues increased by 25% in FY2021 as compared to FY2020. The revenue from trading of metal and mineral products is expected to post continued recovery in 2022 to ultimately contribute in much higher proportion as compared to this year’s performance.
The Board of Directors has recommended a final dividend of HK0.2 cents per share for FY2021 (2020: HK0.1 cent per share), totaling approximately HK$25.22 million (2020: approximately HK$12.61 million). Subject to obtaining the approval at the forthcoming annual general meeting, the final dividend is expected to be paid on or before 29th June 2022.
Stock at a Multiyear Inflection Point, Strong Revenue and EPS Growth to Continue
Based on our model estimates, revenues should increase from US$832 million in FY2021 to US$2,642 million in FY2026 at a CAGR of 26% while earnings should increase from a profit of US$120 million in FY2021 to a profit of US$504 million in FY2026 at a CAGR of 67%. Similarly, the EPS is expected to increase at a CAGR of 70% from US0.9 cents in FY2021 to US3.7 cents in FY2026. We have a 12-month price target of HK$2.00 on the stock, suggesting an upside of 70% from the current levels. Once the sales volume growth picks up, we will revise the target on the higher side.
9.4x/7.7x FY2022/FY2023 P/E; 1.6x/1.3x FY2022/FY2023 P/B; 1.7x/1.4x FY2022/FY2023 P/S
We believe that the stock is currently at a multiyear inflection point and expect earnings to witness further increase in 2022 and beyond, supported by continuously rising copper and cobalt prices along with expected recovery in production volume of copper and cobalt by the company. Based on our model forecasts, the stock is trading at a P/E of just 9.4x and 7.7x on FY2022 and FY2023 estimated earnings. Similarly, on FY2021 numbers, P/B basis, the stock is trading at 1.9x and with an expectation that the price of copper will rise at a healthy pace in the coming years there will be an upward revision in the amount of mineral rights, which will increase the book value per share for the company. 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.
4.3x/3.5x FY2022/2023 EV/EBITDA, Robust EBITDA Growth
The company reported an EBITDA of US$312 million for FY2021, a stellar increase of 122% as compared to US$140 million in FY2020. In FY2018 and FY2019, EBITDA was US$214.2 million and US$116.2 million 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 an upward trend in the price of copper and cobalt along with rising production volumes of copper and cobalt by the company. For FY2022 and FY2023, we forecast EBITDA of US$508 million and US$626 million, respectively. Based on our model estimates, the stock is trading at FY2022 EV/EBITDA of 4.3x and FY2023 EV/EBITDA of 3.5x.
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.
For further details, please see our attached Earnings Update Report.

Jinchuan [2362]: +282% EPS, +122% EBITDA on +25% Sales