China: Metals & Mining: Base Metals -...

May 14, 2013

China: Metals & Mining: Base Metals

Equity Research

Weak supply growth to improve zinc/lead outlook; resume on 2 cos

Supply-demand for zinc/lead to be balanced over medium/long term

We expect supply growth from zinc and lead mines to slow down over

the medium-to-long term. We note that several zinc and lead miners have

announced either closure of mines or cutting production during 2013-2015

due to resource depletion. Furthermore, supply from potential projects

coming onstream and small mines in China will be limited before 2015. Our

GS commodities research team estimates that global zinc mine production

CAGR will slow to 2.4% over 2013E-2015E, and demand will increase to 4.3%

on the back of urbanization in China and consumption upgrades, thereby

restoring the supply-demand balance for zinc.

We expect zinc/lead prices to rise in 2014-2015 as fundamentals improve.

Our GS commodities research team’s 2013E/2014E/2015E price forecasts per

ton for zinc are US$2,013 / US$2,175/US$2,200 and lead are

US$2,163/US$2,338/US$2,365.

Industry consolidation and environmental protection should help

alleviate excess capacity in China’s zinc and lead industry, in our view. We

note tougher environmental norms and emissions targets are likely to

reduce zinc and lead refining capacity by 2 mn tons (government’s plan of

1.3mt lead and 0.65mt zinc) during the 12th Five-Year Plan, which we

believe will help support zinc and lead prices in China.

Resume coverage on Lingnan and Chihong, both with Neutral

Lingnan: We believe overseas expansion (Perilya/GlobeStar) and subsequent

improvement in mining operations indicate strong execution skills. Further,

the company is now back to normal operations, post the environmental

accidents over 2010-2012. We resume coverage with Neutral as its valuation

is not attractive, and our 12-month Director’s Cut-based TP of Rmb8.6.

Chihong: Resource allocation is complete and earnings growth is now

awaited. Rapid resource expansion generated a large increase in capex

over the past 3 years, and we see its CROCI improving at a slow pace

(2013/2014 CROCI of 9.3%/9.1% down from 10.5% in 2012). We resume

coverage with Neutral and our 12-m Director’s Cut-based TP of Rmb10.41.

Key risks

Downside: Environmental accidents impacting operations; weak zinc/ lead

prices; Upside: Potential government stimulus package boosting demand.

RATINGS/TP SUMMARY

Note: (1) Target prices are in Rmb. (2) Share prices as of

May 10, 2013. (3) 12-m TPs are based on EV/GCI vs.

CROCI/WACC (Director’s Cut).

Source: Datastream, Gao Hua Securities Research

estimates.

KEY 2013E ZINC AND LEAD A-SHARE ESTIMATES

Source: Gao Hua Securities Research estimates.

RELATED RESEARCH

Metal Detector: Zinc finding its floor, April 23, 2013

Global Commodities Research: GS Mining Commodity

Forecasts for 2013, and Beyond, January 16, 2013

Global Commodities Research: The Old Economy Renaissance:

2013-2014 Issues and Outlook, December 5, 2012

Jefferson Zhang +86(21)2401-8945 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with

companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Yong Han, CFA +86(21)2401-8948 [email protected] Beijing Gao Hua Securities Company Limited

The Goldman Sachs Group, Inc. Global Investment Research

Company TickerCurrent POT UP/DOWN

Jiangxi Copper (A) 600362.SS Buy 23.32 21.2 10.3%Zhongjin Gold 600489.SS Neutral 13.86 12.4 12.2%Zhongjin Lingnan 000060.SZ Neutral 8.60 9.0 -4.1%Zijin (A) 601899.SS Neutral 3.09 3.1 -0.9%Shandong Gold 600547.SS Neutral 30.96 32.1 -3.6%Tongling 000630.SZ Neutral 14.30 15.4 -7.0%Chihong 600497.SS Neutral 10.41 11.9 -12.5%Chalco (A) 601600.SS Sell 3.30 4.1 -19.3%Yunnan Copper 000878.SZ Sell 6.85 12.6 -45.5%

Rating 12M TP Price

Net profitgrowth

Productiongrowth

PE PB ROE

Lingnan 23% 16% 34.9 3.1 9.1%

Chihong -8% 8% 48.9 4.0 8.2%

May 14, 2013 China: Metals & Mining: Base Metals

Goldman Sachs Global Investment Research 2

Table of Contents

Slowdown in supply growth for zinc and lead, resume on 2 stocks 3

Zinc and lead supply-demand to be balanced over the next 3 years 4

China zinc/lead industry: Consolidation likely to cut excess capacity 8

Operations comparison for A-share zinc and lead firms 13

Using Director’s Cut to value zinc and lead firms 15

Chihong (600497.SS, Neutral): Resources acquired, awaiting profits 18

Zhongjin Lingnan (000060.SZ, Neutral): Back to normal operations 24

Disclosure Appendix 31

The prices in this report are as of the market close of May 10, 2013.

Exhibit 1: Valuation table for selected global non-ferrous metal companies under GS/GH coverage

*This stock is on our regional Conviction List Note: US stocks are assigned 6-month target prices

Source: DataStream, Goldman Sachs research estimates, Gao Hua Securities Research estimates.

GS/GH 10-May-13

Ticker Rating Price Ccy 12M TP 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

China-A share

Jiangxi Copper (A) 600362.SS Buy 21.15 CNY 23.32 1.46 1.36 14.5 15.6 1.6 1.5 9.4 9.6 11% 10%

Zhongjin Gold 600489.SS Neutral 12.35 CNY 13.86 0.55 0.46 22.4 27.0 3.1 2.8 9.4 10.4 15% 11%

Zhongjin Lingnan 000060.SZ Neutral 8.97 CNY 8.60 0.26 0.28 34.9 31.6 3.1 2.8 11.7 10.9 9% 9%

Zijin Mining (A) 601899.SS Neutral 3.12 CNY 3.09 0.24 0.19 13.3 16.1 2.2 2.0 7.5 8.4 17% 13%

Shandong Gold 600547.SS Neutral 32.13 CNY 30.96 1.36 1.18 23.6 27.3 4.9 4.2 12.2 13.2 23% 17%

Tongling Non-ferrous 000630.SZ Neutral 15.38 CNY 14.30 0.77 0.82 20.0 18.8 1.9 1.7 12.7 11.4 10% 10%

Chihong Zinc & Germanium 600497.SS Neutral 11.89 CNY 10.41 0.24 0.32 48.9 37.7 4.0 3.7 14.9 13.5 8% 10%

Chalco (A) 601600.SS Sell 4.09 CNY 3.30 (0.16) (0.12) 1.3 1.3 17.8 20.6 -5% -4%

Yunnan Copper 000878.SZ Sell 12.58 CNY 6.85 0.04 0.04 2.6 2.5 17.5 18.1 1% 1%

Median-A share metals companies 22.4 27.0 2.6 2.4 12.0 11.2 11% 10%

HK-H share

Jiangxi Copper (H) 0358.HK Buy 16.42 HKD 18.30 1.46 1.36 8.9 9.6 1.0 0.9 5.8 5.9 11% 10%

Zijin Mining (H) 2899.HK Buy 2.33 HKD 2.70 0.24 0.19 7.8 9.5 1.3 1.2 5.0 5.6 17% 13%

China Molybdenum 3993.HK Neutral 3.17 HKD 3.91 0.23 0.22 10.7 11.5 1.0 0.9 5.8 5.2 9% 8%

Zhaojin Mining (H) 1818.HK Sell 8.50 HKD 7.00 0.57 0.45 11.7 14.9 2.1 1.9 8.2 9.5 19% 13%

Chalco (H) 2600.HK Sell 3.24 HKD 2.40 (0.16) (0.12) 0.8 0.8 15.3 17.7 -5% -4%

Median-H share metals companies 9.8 10.6 1.0 0.9 5.8 5.9 11% 10%

US

Vale VALE Buy 16.96 USD 25.60 2.09 2.32 8.1 7.3 1.2 1.1 4.6 4.4 15% 15%

Freeport-McMoRan Copper & GoFCX Buy 32.55 USD 38.00 3.35 3.00 9.7 10.8 1.5 1.4 4.4 4.7 17% 13%

Alcoa AA Neutral 8.70 USD 8.00 0.42 0.65 20.8 13.4 0.7 0.6 7.1 6.3 4% 5%

Southern Copper Corp. SCCO Neutral 33.31 USD 42.00 2.61 2.22 12.7 15.0 4.6 3.9 8.0 8.6 41% 28%

Median-US metals companies 11.2 12.1 1.4 1.2 5.9 5.5 16% 14%

Australia

OceanaGold OGC.AX Buy* 2.07 AUD 2.60 0.16 0.21 13.0 9.8 0.9 0.8 3.9 3.4 7% 9%

Lynas LYC.AX Buy 0.66 AUD 0.81 (0.06) 0.04 15.0 1.9 1.8 9.5 -20% 12%

Teranga Gold TGZ.AX Sell 0.93 AUD 0.50 0.10 (0.03) 9.4 0.6 0.6 3.7 7.6 6% -2%

Alumina AWC.AX Sell 1.09 AUD 0.90 (0.01) 0.00 0.9 0.9 15.4 13.6 -1% 0%

Alacer Gold AQG.AX Sell 2.93 AUD 2.33 0.15 0.10 20.0 30.2 0.8 0.8 2.8 3.2 4% 3%

Iluka Resources ILU.AX Neutral 10.80 AUD 8.85 0.34 1.23 32.1 8.8 2.7 2.4 11.7 4.4 5% 29%

Median-Australian metals companies 20.0 15.0 0.9 0.9 7.7 7.6 4% 3%

EPS PE (X) P/B (X) EV/EBITDA (X) ROE



Slowdown in supply growth for zinc and lead, resume on 2 stocks

Supply growth from zinc and lead mines likely to slow over the medium-to-long term. The Dairi (Indonesia) and Mount Isa (Australia) zinc and lead mines under construction are

scheduled to come onstream during 2013-2015. However, key mines such as Century and

Brunswick are likely to close down or cut production due to resource depletion. We believe

this would severely limit potential capacity release at zinc and lead facilities before 2015. Our

GS commodities research team estimates that during 2013E-2015E, global zinc mine

production will see a CAGR slowdown to 2.4%, a notch below 4% CAGR over the past decade.

In terms of demand, we expect Chinese urbanization and consumption upgrades to drive

continued growth in the real estate and automobile industries over the medium term. At the

same time, the US real estate and car markets are experiencing a revival. Our GS commodity

research team believes global demand for refined zinc will increase 4.3% CAGR over 2013E-

2015E, outpacing supply growth and restoring the supply-demand balance.

Industry consolidation and stricter environmental norms should help alleviate excess

capacity in China’s zinc and lead industry. Small mines currently account for 90% or

more of China’s zinc and lead industry. The Chinese government has strengthened its push

for M&A among metal mines in recent years to further increase industry consolidation.

Restrictions on refining capacity have also intensified, including tougher environmental

norms and emissions targets that will reduce lead refining capacity (including recycled

lead) by 1.3 mn tons and zinc refining capacity by 650k tons (government’s plan) during the

12th Five-Year Plan (2011-2015). We believe excess capacity in China’s zinc and lead

industry will be alleviated somewhat, reducing headwinds on zinc and lead prices.

We expect zinc and lead prices to rise in 2014E-2015E. Even though we believe high zinc and

lead inventories will depress prices in the short term, as peak consumption season destocking

concludes, supply and demand will become balanced, and zinc and lead prices will rise further

in 2014E-2015E. Our GS commodity research team’s 2013E/2014E/2015E price forecasts per ton

for zinc are US$2,013 / US$2,175/US$2,200 and lead are US$2,163/US$2,338/ US$2,365.

In this report, we resume coverage on two A-share zinc and lead companies.

Chihong’s net profit has higher sensitivity to zinc and lead prices, and we believe

greater organic growth over the next three years will result in the company

benefitting further from rising zinc and lead prices. Zhongjin Lingnan has a stable

asset and liability structure, and more effective overseas assets.

Zhongjin Lingnan: Overseas expansion and mining operations reflect the firm’s

strong execution skills. Lingnan successfully acquired Perliya and GlobeStar overseas in

2009 and 2010 and subsequently their earnings improved significantly, reflecting Lingnan’s

strong execution skills, in our view. Over the past two years, however, it has been affected

by environmental incidents, such as the Shaoguan and Renhua accidents, from which it

has recently recovered to normal production. We resume coverage of Zhongjin Lingnan

with a Neutral rating and a 12-month Director’s Cut–based target price of Rmb8.6.

Chihong: Resource layout complete, awaiting earnings updates. Resource allocation is

complete and earnings growth is awaited. Rapid resource expansion generated a large

increase in capex over past 3 years, and we see its CROCI improving at a slow pace

(2013/2014 CROCI of 9.3%/9.1% down from 10.5% in 2012). Our 12-month Director’s Cut–

based target price is Rmb10.41, and resume coverage with a Neutral rating.

Exhibit 2: Comparison of our earnings estimates and market consensus for A share zinc and lead coverage universe

Source: Wind, Gao Hua Securities Research estimates

Companies 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E Current TPRmb Rmb

Chihong 318 413 365 414 0.24 0.32 0.28 0.32 -13% 0% 11.9 10.41 -12.5%Lingnan 530 586 536 681 0.26 0.28 0.26 0.33 -1% -14% 9.0 8.60 -4.1%

GH estimated earning GH estimated EPSConsensus Consensus Diff. from Cons. Potential Upside/ Downside

Potentialup/ downsideMn Rmb Mn Rmb Rmb Rmb %



Zinc and lead supply-demand to be balanced over the next 3 years

Supply: Resource exhaustion and industry consolidation will slow zinc and lead supply growth over the medium-to-long term

We divide sources of global zinc and lead supply into three types: mines in production or

under construction, potential zinc and lead projects, and growth from China. Based on this

analytic framework, we estimate 2013-2015 zinc and lead supply growth of 1.1%/2.6%/3.6%,

with a 2.4% CAGR, slower than the 4% rate over the past 10 years.

Zinc and lead mines under construction coming onstream unable to replace lost capacity

from closing mines. We estimate that mine closings and lost capacity from resource

exhaustion in 2013/2014/2015 will lower zinc concentrate supply by approximately

361k/494k/397k t. The major source of decline in 2013 will be Xstrata as the firm will close its

Brunswick and Perseverance mines due to declining ore quality and resource exhaustion, and

lower production at its Antamina mine, lowering global zinc production by 361k t. The

estimated loss in 2014 is from reduced production at Minmetals’ Century zinc and lead mine,

and the closing of Vedanta’s Lisheen mine, decreasing zinc mine production by 494k t. In

addition, while zinc and lead mines under construction—like Dairi and Mount Isa—will come

onstream over 2013-2015, we estimate that they will only increase zinc mine production in

those years by 510k/236k/132k t, not enough to offset the declines caused by mine closings.

Exhibit 3: Zinc mines in production which will close/decrease production in 2013-2015, and

their effects on zinc concentrate supply Units: 1,000 t

Source: Wood Mackenzie, Goldman Sachs Global ECS Research estimates

Exhibit 4: Key zinc mines under construction set to come online/expand production, 2013-

2015 Units: 1,000 t


Capacity Capacity ChangeCompany Zinc mines 2012E 2013E 2014E 2015E 2015E 2015E-2012EMinmetals Century 510 0 -221 -289 0 -510Xstrata Brunswick 203 -183 -20 0 0 -203Vedanta Lisheen 168 0 -168 0 0 -168Xstrata Perseverance 136 -106 -30 0 0 -136Agnico Eagle La Ronde 50 -35 -9 0 6 -44Kazzinc Zyryanovsk 113 12 -16 -63 46 -67Minmetals Golden Grove 68 -13 -30 3 28 -40Kagara Mt Garnet 44 4 0 -48 0 -44Teck Red Dog 540 -10 0 0 530 -10Xstrata Antamina 250 -30 0 0 220 -30

Total 2,082 -361 -494 -397 830 -1,252

Capacity changes in 2013-2015

Capacity Capacity ChangeCompany Zinc mines 2012E 2013E 2014E 2015E 2015E 2015E-2012EXstrata Mount Isa Pb/Zn 375 25 75 35 510 135Herald Diari 0 110 12 0 122 122Various China 4,179 88 35 -49 4,252 73Glencore Perkoa 35 45 10 0 90 55Zijin Kyzyl Tashtygskoe 50 30 10 0 90 40Penoles Velardena 0 40 35 10 85 85Xstrata Bracemac McLeod 0 60 22 0 82 82HudBay Lalor Lake 8 12 20 40 80 72Compania Cerro Lindo 115 35 0 0 150 35Xstrata McArthur River 200 15 4 4 223 23Minmetals Bisha 0 30 60 90 90Hindustan Rampura-Agucha 750 30 -30 10 760 10Tajikistan Altintopkan 10 20 13 22 65 55

Total 5,722 510 236 132 6,599 877

Capacity changes in 2013-2015



Potential zinc mine capacity release will be relatively slow. We believe another key

factor in determining zinc concentrate supply growth is potential capacity release of zinc

and lead mines. Potential zinc and lead mines have verified resources, but have not yet

begun construction. These projects can be divided based on the amount of progress made,

i.e., projects which are still at the feasibility study stage, projects which have been closed

but may resume production, projects in the financing stage, and projects which have

received construction approval. Our GS commodities research team estimates global

potential zinc mine production of 1.9mt by 2015E. However, based on the current progress

in potential mines, we believe they will come on line relatively slowly.

Exhibit 5: Contribution to ‘probable’ supply, 2011-2015,

by project type/stage Tonnage is in Kt

Exhibit 6: Key potential zinc and lead mines, and

estimated progress Units: 1,000 t


Source: ILZSG, Gao Hua Securities Research.

Integration of China’s zinc and lead industry could ease production growth concerns. The integration of China’s zinc and lead industry mainly involves consolidation of small-

scale mines and limiting zinc and lead smelting. We estimate that the Chinese government

will continue to attempt to rectify the zinc and lead industry’s “small-scale and

fragmented” nature and increase industry consolidation. Furthermore, we note that

environmental requirements will limit zinc and lead smelter capacity—energy-saving and

emissions targets will lead to decrease in lead smelting capacity of 1.3 mt by the end of

2015E (including recycled lead capacity), and a decrease in zinc smelting capacity of 650k t;

recycled lead production will increase to 40% (all these targets are set by the government)

of total production. Our base case assumes refined zinc production growth of 6% in 2013E

and 7% in 2014E.

In addition, we believe global refined lead supply growth will slow. With zinc and lead

being generally found in the same mines, most zinc mine closures will equally affect lead

concentrate production, and we estimate that refined lead production growth will slow in

2013-2015. Our GS commodities research team estimates refined lead production growth

at 7% for 2013E, slightly below the average 8.3% growth in 2010-2012.

Demand: Global industrial recovery will spur zinc and lead demand growth

The Goldman Sachs ECS Research team estimates that global GDP will increase to 3.2% in

2013E, from 3.0% in 2012. They estimate 2013E GDP growth in emerging markets (e.g.,

China, India, Brazil, Russia) at 5.8%, up from 2012’s 5.4% (Exhibit 7). The momentum of the

Goldman Sachs Global Leading Indicator has turned positive since August 2012, and

remained so for the past several months, indicating that global manufacturing activity will

continue to recover.

Type/ StageNo. Probable

MinesTotal

tonnage%probable

growthFeasibility 18 1285 68%Potential Restart 12 337 18%Financing/ Refin. 6 207 11%Permitting 2 50 3%Total 39 1878 100%

Zinc mines Country CapacityEstimate year to

come onlineDugald River Australia 200 2015Selwyn Canada 100 2015/16Ozernoye Russia 350 2015/16Gamsberg South Africa 200 2015/16Oued-Amizour (Tala Hamza) Algeria 164 2017/18Mehdiabad Iran 400 2018/19

Total 1414



Exhibit 7: Our ECS Research team estimates global GDP

recovery in 2013/2014…

Exhibit 8: …and the Goldman Sachs GLI indicates

recovery in global manufacturing

Source: Goldman Sachs Global ECS Research estimates. Source: Bloomberg, Goldman Sachs Global ECS Research estimates.

Zinc: Urbanization in China and upgraded consumption are key drivers of demand

Zinc has good anti-corrosion, thermal conductivity and electrical conductivity properties. Its

main uses in primary consumption are in galvanization and zinc alloys, applications which

account for over 50% of total zinc use. Key downstream industries include property, home

appliances and automotives. On a country level, zinc consumption in China currently

accounts for over 40% of the world total (Exhibit 10), making it one of the world’s major

zinc consumers. Our China real estate team expects total GFA sold to rise 20% yoy in 2013E,

which we believe will drive recovery in industries like home appliances, spurring higher

zinc demand. Urbanization and upgraded consumption are also likely to increase

automotive consumption. Furthermore, moderate recovery in demand in regions outside of

China (the property and automotive industries in the US, other developing economies) will

support global zinc consumption in 2013 and 2014, in our view (Exhibits 11 and 12). Our GS

commodities research team estimates global zinc consumption growth of 3.9% in 2013E

and 4.4% in 2014E.

Exhibit 9: Structure of global primary zinc consumption Galvanization and zinc alloys make up over 50% of zinc

consumption, as of 2011

Exhibit 10: Global zinc consumption by country China consumes over 40% of the world’s zinc, as of 2011

Source: ILZSG, Gao Hua Securities Research

Source: ILZSG, Gao Hua Securities Research

Q1 Q2 Q3 Q4USA 2.1 2.9 2.4 2.7 3.1 3.4Japan 1.4 1.7 3.9 1.7 0.8 0.2Euro area -0.7 0.8 0.3 0.7 0.9 1.1 France -0.7 0.4 -0.2 0.3 0.6 0.8 Germany 0.4 1.8 1.4 1.8 2 2.1 Italy -1.5 0.4 -0.1 0.3 0.6 0.9UK 1.3 2 2 2.1 2 2.1China 7.8 8.4 8.3 8.4 8.4 8.5India 5.8 7.2 7.1 7.1 7.3 7.4Brazil 3.3 4.4 4.6 4.6 4.3 4Russia 3.1 4.3 3.4 4.7 4.5 4.5Advanced Economies 1.2 2.2 2.1 2.1 2.2 2.2Emerging Markets 5.8 6.5 6.5 6.6 6.5 6.6World 3.2 4.1 4 4.1 4.1 4.2

2014Real GDP, % change2014

2013

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

25

30

35

40

45

50

55

60

65

70

10/08 04/09 10/09 04/10 10/10 04/11 10/11 04/12 10/12 04/13

US PMI China PMI

Europe PMI GS GLI Momentum (Rhs)

50%

17%

17%

6%

6%4%

Zincification

Zinc alloy

Brass

Zinc products

Chemical

Others

40.6%

8.1%16.1%

4.8%

4.0%

26.5%China

USA

Western Europe

India

Japan

Others



Exhibit 11: US property consumption has improved

significantly since 2012 Units: 1,000 units; %

Exhibit 12: US automotive consumption growth

continues Units: mn cars; %

Source: Wind, Gao Hua Securities Research.


Lead: Lead-acid batteries to remain the most stable form of energy storage in 2013-15

Over 70% of lead demand comes from lead-acid batteries, which are mainly used in electric

scooters and cars. We estimate China will remain the largest consumer of lead-acid

batteries in 2013-2015, and continue to consume over 40% of the world’s lead. However,

the continued increase in American car ownership should compensate for weaker demand

for lead-acid batteries as a result of slowing production growth, thereby supporting lead

demand. Our GS commodities research team estimates global lead consumption growth of

8% in 2013E.

Exhibit 13: Over 70% of lead is used in lead-acid batteries as of 2011

Exhibit 14: China consumes over 40% of the world’s lead as of 2011



Zinc and lead supply and demand will balance out in the medium-to-long term

Over the next six months, smelters including South Korea’s Onsan and Peru’s La Oroya will

resume production, and the current high levels of world zinc and lead inventories will exert

pressure on prices. However, as destocking concludes, and zinc and lead mines halt/reduce

production, supply and demand will come into balance, in our view. We estimate zinc and

lead prices will rise further in 2013E-2015E. Our 2013E/2014E/2015E price forecasts per ton

for zinc are US$2,013 / US$2,175/US$2,200 and lead are US$2,163/US$2,338/US$2,365, in

line with our ECS Research team.

‐50.0%

‐40.0%

‐30.0%

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0

10

20

30

40

50

60

03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12 03/13

US new house sales (Lhs) yoy

‐50%

‐40%

‐30%

‐20%

‐10%

0%

10%

20%

30%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12 03/13

US auto sales (Lhs) yoy

77%

3%

6%

2%3% 8%

3%

Batteries

Cable Sheathing

Rolled & Extruded

Shot/Ammunition

Alloys

Pigments & Compounds

Miscellaneous

44.50%

1.30%3.90%

15.40%

15.70%

19.20%China

Japan

Korea Rep

USA

Europe

Others



Exhibit 15: Global zinc supply and demand model

Source: Wood Mackenzie, CRU, Goldman Sachs ECS Research estimates.

Exhibit 16: Global lead supply and demand model

Source: Wood Mackenzie, CRU, Goldman Sachs ECS Research estimates.

For more detailed analysis on global zinc and lead supply and demand, please see our

commodities research team’s January 16, 2013, report titled Global Commodities Research:

GS Mining Commodity Forecasts for 2013, and Beyond, and April 23, 2013, report Metal

Detector: Zinc finding its floor.

China zinc/lead industry: Consolidation likely to cut excess capacity

Zinc and lead supply in China: A two-pronged approach by mines and refineries

should hold back blind expansion

The General Office of the State Council released “Comments on Properly Consolidating

Metal and non-Metal Mines in Accordance with the Law” from the State Administration of

Work Safety on November 4, 2012. The document proposes the government to control

unlicensed mining and other illegal activities. Small mines that do not conform to industry

policy and unable to ensure safety will be either consolidated or closed in accordance with

the law. The restructuring of small mines will help alleviate fragmentation and

uncoordinated behavior because 90% or more of China’s zinc and lead mines are small-

scale operations, in our view.

Further, we think the recent fallback in zinc prices could limit zinc ore supply growth in

China. In our 4-year global supply growth model, which pre-dates the recent market

weakness, more than 70% of supply growth came from China. As the majority of small

Chinese zinc and lead mines have costs at the upper range of the global zinc and lead cost

curve, we think the recent downturn in zinc prices will limit Chinese supply growth.

000 tonnes 2009 2010 2011 2012 2013E 2014E 2015E

Global mine supply 11,021 11,817 12,194 13,013 13,159 13,495 13,977% change -4.0 7.2 3.2 6.7 1.1 2.6 3.6

Including disruption allow. (%) -- -- -- 0% 3% 4% 4%Global refined supply 11,174 12,288 12,920 13,020 13,300 13,750 14,300

% change -3.2 10.0 5.1 0.8 2.2 3.4 4.0

Global refined consumption 10,136 11,754 12,517 12,672 13,119 13,699 14,316 % change (9.5) 16.0 6.5 0.9 3.9 4.4 4.5

Balance 1,038 534 403 393 181 51 (16) Year end inventory (weeks) 4.8 6.2 6.7 8.3 8.7 8.5 8.1 LME Price ($/ t) 1,655 2,162 2,194 1,950 2,013 2,175 2,200 LME Price (c/lb) 75 98 100 88 91 99 100

000 tonnes 2009 2010 2011 2012 2013E

Refined supply 9,042 9,916 10,600 11,496 12,353% growth -2% 10% 7% 8% 7%Refined consumption 8,872 10,032 10,547 11,373 12,230 % growth (3.0) 13.0 5.0 8.0 8.0 Global balance 170 (116) 52 123 122 LME Price (US$/ t) 1,719 2,149 2,402 2,063 2,163



Exhibit 17: Supply from high-cost Chinese zinc mines is

under pressure Chinese zinc concentrate accounts for more than 70% of our

projected global supply growth over the next four years

Exhibit 18: Since 2012, Chinese zinc production growth

has been generally negative 10 thousands tonnes; %

Source: Wood Mackenzie, GS Global ECS Research estimates

Source: Wind, Gao Hua Securities Research

Tougher environmental standards likely to alleviate uncoordinated expansion by

Chinese zinc and lead refiners. Zinc and lead refining is a high-pollution industry. Over

the past few years, the majority of environmental accidents attributable to the non-ferrous

metals industry were caused by zinc and lead refineries emitting heavy metals in excess of

their targets. For example, in 2010 the Shaoguan refinery released excessive amounts of

thallium into a river; lead poisoning occurred in 2012 in Renhua county, Guangdong; and

further lead poisoning incidents have occurred in Hunan and Shaanxi. We note that small,

poorly managed refineries are responsible for the majority of environmental accidents. As

such, the government is drawing up “Conditions for Entry into the Zinc and Lead Industry.”

The document requires zinc and lead refineries to have minimum annual capacity of 100k

tons (50k tons for recycled lead).

Energy saving and emissions reductions targets established for the 12th Five-Year Plan will

further eliminate 2 mn tons of zinc and lead refining capacity, in our view. In February of

2013, the Ministry of Industry and Information Technology released “Guidelines for Energy

Savings and Emissions Reductions in the Non-Ferrous Metals Industry,” persisting with the

closure of high energy, high pollution or outdated capacity. During the 12th Five-Year Plan,

the closures will include 1.3 mn tons of lead (including recycled lead) refining capacity and

650k tons of zinc (including secondary zinc) refining capacity.

At the same time, we think the construction of new zinc and lead refining capacity in

China will slow. Statistics from Asian Metals indicate that in 2012 numerous zinc and lead

projects were delayed once zinc and lead prices dropped sharply. They estimate zinc

refining capacity will just increase by 340k tons and crude lead capacity will increase 600k

tons in 2013.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2009 2010 2011 2012E 2013E 2014E 2015E 2016

Probables (after adj.) China (after disr.) Ex-China (after disr.) Total

‐40

‐30

‐20

‐10

0

10

20

30

40

50

60

0.0

10.0

20.0

30.0

40.0

50.0

60.0

08/09

11/09

02/10

05/10

08/10

11/10

02/11

05/11

08/11

11/11

02/12

05/12

08/12

11/12

02/13

Refined zinc production (Lhs)

yoy (%)



Exhibit 19: Zinc projects to come online in 2013E

Exhibit 20: Lead projects to come online in 2013E

Source: Asian Metals, Gao Hua Securities Research estimates

Source: Asian Metals, Gao Hua Securities Research estimates

China zinc/lead demand: Urbanization/consumption upgrades likely to be key drivers

Zinc: The completed de-stocking of galvanized sheets may directly drive zinc demand. Since 2009, Chinese production of coated sheets (primarily galvanized sheets) enjoyed

sustained growth, increasing from 19.43 mn tons in 2009 to 37.63 mn tons in 2012 (growth

of 94%). In terms of inventories, galvanized sheet stocks fell to the average level since 2009,

in 2H12. We believe that as the de-stocking process winds down, continued urbanization in

China will increase demand from galvanized sheets.

Exhibit 21: Chinese production of coated sheets has risen

since 2009 Coated sheets are the key demand driver for zinc

Exhibit 22: Galvanized sheet inventories have fallen to

the average level since 2009 The end of de-stocking should drive increased zinc demand



Real estate sales and car production growth continue to support consumption. Data

from the National Bureau of Statistics indicates that yoy sales growth for commercial

housing in China turned negative for almost a year starting October 2011 but then

rebounded strongly to positive growth in October 2012. The rebound was especially

pronounced in 1Q13, when yoy growth reached 37%. At the same time, housing sales have

driven a clear increase in demand for appliances. In addition, we believe that the auto

industry will further support demand. Our China auto analyst expects 2013E/2014E/2015E

car sales to grow 8.5%/8.5%8%, maintaining a strong growth rate. In 2H12, dealerships’

inventories declined; restocking has been driving a rebound in car production.

CompanyCapacity

expansionCurrentcapacity

Year tocome online

Huize of Chihong 100 380 2013Hulunbeier Chihong 140 380 2013Western Mining 100 160 2013Total in 2013 340Jinding zinc Co. 100 220 2014Yunxi zinc Co. 100 120 2014Xinganmen Boyuan 100 100 2014Huili zinc & lead 100 100 2014Total in 2014 400

Company ProvinceCapacity

expansionYear to

come online

Zhuzhou Smelter Group Hunan 100 Jan-13

Zhantai non-ferrous metals Hunan 100 Mar-13

Hongling zinc & lead mine Inner Mongolia 100 2013

Hulunbeier Chihong Inner Mongolia 60 2013

Huize of Chihong Yunnan 60 2013

Luanchuan Shibao mining Henan 80 2013

Hengbang Smelting Co. Shandong 100 2013

Total in 2013 600

(40)

(20)

0

20

40

60

80

100

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

02/09 08/09 02/10 08/10 02/11 08/11 02/12 08/12 02/13

Coated sheets production yoyKt %

0

5

10

15

20

25

30

35

40

45

50

02/09 08/09 02/10 08/10 02/11 08/11 02/12 08/12 02/13

Galvanized sheets Average from 2009

Kt

Average from 2009



Exhibit 23: China property sales maintain strong growth

10 thousands sqm; %

Exhibit 24: As per our China auto analyst, China car sales

likely to maintain strong growth

Source: Wind, Gao Hua Securities Research

Source: Wind, Gao Hua Securities Research estimates

Lead: Benefiting from consumption upgrades. Broken down by lead’s end users (2011),

in China, 28% of lead is used in the manufacture of electric scooters, 22% in the automotive

industry, 22% in lead-acid batteries for export and the rest in UPS, motorcycles and other

fields.

Compared with other metals, lead’s downstream uses skew towards consumption. As such,

we expect that consumption upgrades, increased car sales and the replacement of bicycles

with electric scooters in rural areas will drive lead demand growth. We believe production

of cars and electric scooters should enjoy sustained growth during 2013-2015.

Exhibit 25: Chinese lead-acid battery production has

continued to enjoy strong growth over the past 5 years

Exhibit 26: Electric scooter production has increased

rapidly in China



Car starting batteries are the main application for lead-acid batteries, accounting for about

48% of the market as of 2011, and are a type of consumable that require regular

replacement. As car ownership increases in China, so will the consumption of batteries.

Accordingly, we see China’s increasing car ownership rate as a support for Chinese lead

demand.

‐100%

‐50%

0%

50%

100%

150%

200%

0

100

200

300

400

500

600

700

800

03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12 03/13

Real estate sales area by daily

yoy (Rhs)

0.8 0.8 1.4 2.3 2.6 3.3

4.3 5.3 5.7

8.6

11.7 12.7

13.9 15.0 16.3

17.6 16.5%

1.7%

80.3%65.7%

13.8%

24.1%32.5%

22.4%

7.4%

51.1%35.4%

8.7% 9.2%8.5% 8.5%

8.0%

-150%

-100%

-50%

0%

50%

100%

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

2015

E

Passenger Car Sales Volume Passenger Car growth rate (YoY) (RHS)

115,735 116,391

142,297 140,695

175,955

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2008 2009 2010 2011 2012

Production of Lead‐acid batteriesKvAh

1,530

30,960

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

China E‐bike productionThousands



Exhibit 27: Car ownership in China continues to increase rapidly Units: 1 mn cars, %


Our supply/demand models for zinc and lead in China

Exhibit 28: China’s zinc supply/demand should trend towards balance in 2013/2014

Source: China Nonferrous Metals Industry Association, Wind, Gao Hua Securities Research estimates.

Exhibit 29: China’s refined lead supply/demand model

Source: China Nonferrous Metals Industry Association, Wind, Gao Hua Securities Research estimates.

7.71

73.27

0%

5%

10%

15%

20%

25%

30%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Private car ownership in China

yoy (Rhs)

000t 2009 2010 2011 2012 2013E 2014E

China refined zinc capacity 4,425 5,115 5,720 5,800 6,140 6,540Capacity utilization (%) 97% 102% 93% 84% 84% 84%

China refined zinc production 4,286 5,209 5,308 4,847 5,131 5,466yoy (%) 6% 22% 2% -9% 6% 7%

Net import of refined zinc 641 280 301 509 540 512Import 670 323 348 515 550 520Export 29 43 46 6 10 8

China refined zinc supply 4,927 5,489 5,610 5,356 5,671 5,978

China refined zinc demand 4,350 4,850 5081 5285 5,621 5,987Demand growth (%) 5% 11% 5% 4% 6% 7%

Balance 577 639 528 71 50 (9)

000t 2009 2010 2011 2012 2013E 2014E

China refined lead capacity 4,450 4,980 5,382 5,632 5,932 6,232Capacity utilization (%) 85% 83% 79% 82% 82% 82%

China refined lead production 3,773 4,158 4,262 4,646 4,893 5,141 Mined lead production 2,626 2,794 2,836 3,284 3,328 3,290 Recyced lead 1,147 1,364 1,426 1,362 1,566 1,851

Refined lead production yoy (%) 10% 3% 9% 5% 5%Net import of refined lead 134 -2 0 5 0 3

Import 157 22 7 7 5 7Export 23 23 6 2 5 4

China refined lead supply 3,907 4,156 4,262 4,651 4,893 5,144

China refined lead demand 3,650 3,950 4005 4510 4,815 5,179Demand growth (%) 6% 8% 1% 13% 7% 8%

Balance 257 206 257 141 78 (35)



Operations comparison for A-share zinc and lead firms

We compared China’s two main zinc and lead firms—Zhongjin Lingnan and Chihong—

across multiple dimensions. We looked at the firms’ 2013-2015 zinc and lead concentrate

production growth rate, net profits and sensitivity to zinc and lead prices, production costs

and other operational indicators. We further checked firms’ ratio of interest-bearing bonds

to total invested capital, among other factors, to examine financial pressure. We evaluated

gross margins on zinc and lead operations, ROE and CROCI as indicators of profitability.

Our comparisons lead us to conclude: Chihong’s net profits are more sensitive to zinc

and lead prices and the firm’s production growth also outpaces Zhongjin Lingnan.

Lingnan’s overseas mines have higher operational effectiveness and are more stable.

1. Zinc and lead concentrate production growth: We estimate Chihong‘s zinc and lead

concentrate production growth will reach 10.4% CAGR in 2013E-2015E. If Chihong were to

successfully complete the rights issue and purchase Rongda Mining, the CAGR would

climb to 12% (our base case does not include Rongda). Lingnan is expanding Panlong mine

and entering Potosi and Silver Peak mines into service, pushing its 2013-2015 production

growth to 6.8% CAGR. That , however, remains below Chihong’s rate.

2. Net profit sensitivity to zinc and lead prices. We measured the sensitivity of firms’ net

profits to zinc and lead prices. If zinc and lead prices were to rise by 1%, net profit at

Chihong should rise 4%, whereas the figure for Lingnan is about 2.1%. We think Chihong is

likely to benefit more, as we expect zinc and lead prices to rise in 2014 and 2015.

Exhibit 30: Chihong has greater organic growth

Exhibit 31: Chihong will benefit more from higher prices

Sensitivity of net profit to 1% rise in zinc and lead prices

Source: Company data, Gao Hua Securities Research estimates.


3. Production costs for zinc and lead concentrate: Lingnan’s primary mine, Fankou, has

lead grade 5% and zinc grade 9%. We estimate the firm’s 2013 costs to be Rmb4,966 per

ton. In comparison, Huize, Chihong’s primary mine, is of higher quality with lead grade

8.5% and zinc grade 20%. Costs per ton are Rmb4,600, a step below Lingnan’s costs.

4. Gross margins for mining and refining: Lingnan had mining and refining gross margin

of 28.5% in 2012 due to slightly higher production costs. That figure is clearly below

Chihong’s gross margin, which was 39.2% in 2012.

10.4%

6.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Chihong Lingnan

Zinc & Lead concentrate production

growth in 2013-20154%

2%

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

Chihong Lingnan

Zinc & Lead prices sensitivity to 2013 net profit



Exhibit 32: We estimate Chihong has lower production

cost as of 2013E…

Exhibit 33: …and better gross mining and refining

margins in 2012


Source: Company data, Gao Hua Securities Research.

5. Interest-bearing bonds to total invested capital: We use the ratio of interest-bearing

bonds to total invested capital to measure financial cost pressure (total invested capital is

the sum of interest-bearing bonds and shareholder equity attributable to their parent firm).

As of late 2012, the ratio for Lingnan was 38.6%, where as Chihong’s ratio was76.5%,

indicating a significant amount of financial pressure. Chihong’s high gearing ratio is

primarily due to recent rapid resource expansion. However, the firm’s plan to raise capital

through a rights offering has been approved by CSRC on March 15. If the rights issue were

to be successfully completed, it could help lower Chihong’s interest-bearing bond to total

invested capital ratio to about 45%, alleviating financial pressure once bank loans are

returned.

6. Assets acquired overseas and operations: Lingnan and Chihong, aside from developing

domestic resources, have in recent years continued to look for growth abroad. Lingnan in 2009

acquired Perliya during the financial crisis and that year moved from losses to profit; in 2010 it

again leveraged the Perliya platform to acquire GlobeStar mine and began to develop a variety

of metals. Profitability also became more stable. Chihong in 2010 became involved with one of

the world’s biggest zinc and lead mines—Canada’s Selwyn zinc and lead mine, which is

scheduled to enter service in 2015/2016. Further, Chihong announced in 2012 that it had

acquired a zinc and lead mine in Bolivia. Overall, Lingnan’s overseas operations already

account for 25% (2012) of the company’s net earnings and operational effectiveness is higher

while Chihong’s overseas assets are still under construction.

Exhibit 34: Lingnan is under less financial pressure Lingnan has a more stable asset and debt structure as of

2012

Exhibit 35: Comparison of overseas acquisitions and

operational status Lingnan’s overseas operational efficiency is higher



4,600

4,966

3,000

3,500

4,000

4,500

5,000

5,500

Huize mine of Chihong Fankou mine of Lingnan

Zinc & Lead concentrate production cost

39.2%

28.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Chihong Lingnan

Gross margin of mining/smelting

business in 2012

76.5%

38.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Chihong Lingnan

Interest-bearing debt/total invested capitalCompany Overseas resources Operation

Selywn in CanadaScheduled to come online in2015/2016

Zinc & Lead projects in BoliviaAnnounced in Dec 2012 while notcomplete yet

Perilya in Australia

Globestar

Chihong

Lingnan

Made profit in the purchasingyear of Perilya; Profit alsoimproved for Globestar; both ofthem contribute Rmb90 mn(25%) of net profit in 2012



7. ROE: We expect Lingnan’s ROE to rise to 9.1% in 2013E as zinc and lead prices increase

and the negative influence of environmental accidents fades. That figure outpaces

Chihong’s ROE, which we estimate to be 8.2% in 2013E.

8. CROCI: We estimate Lingnang’s 2013E CROCI will edge up to 11.6% and remain in the

sector’s second quartile for the next three years. For Chihong, which continues to invest

significant sums into new mines, we expect CROCI to slip to 9.3%, placing it in the sector’s

third quartile.

Exhibit 36: Lingnan’s ROE should outpace Chihong in

2013E

Exhibit 37: Lingnan’s CROCI is also outpacing Chihong in

2013E



Using Director’s Cut to value zinc and lead firms

We use Director’s Cut methodology for valuing A-share zinc and lead firms, in line

with our other covered commodity stocks. Based on current valuations, the non-

ferrous metals’ industry average EV/GCI vs. CROCI/WACC is 1.0X.

Cash returns on cash invested (CROCI) is a key measure of a firm’s ability to create value.

By comparing firm’s past-three-years and 2013E-2014E CROCI, we divide non-ferrous

metals A-shares into quartiles, with the highest-CROCI firms in the first quartile, and the

lowest-CROCI firms in the fourth quartile.

Exhibit 38: A-share metal firms’ CROCI

Gold firms have higher CROCI while aluminum firms have lower CROCI


8.2%

9.1%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

Chihong Lingnan

2013E ROE

9.3%

11.6%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

Chihong Lingnan

2013E CROCI

Ticker Company 2010 2011 2012 2013E 2014E 2015E

600362.SS Jiangxi Copper 2 2 2 2 2 2000630.SZ Tongling 3 3 4 3 3 3000878.SZ Yunnan Copper 2 4 2 4 4 4000060.SZ Zhongjin Lingnan 4 2 3 2 2 2600497.SS Chihong 3 3 3 3 3 3601600.SS Chalco 4 4 4 4 4 4600489.SS Zhongjin Gold 1 1 1 1 1 1600547.SS Shandong Gold 1 1 1 1 1 1601899.SS Zijin Mining 1 1 1 1 1 1



We use the Director’s Cut valuation method to assign target prices

We multiply average 2013-2014 CROCI/WACC with the industry average ValRatio (trend line

slope) to obtain target EV/GCI for listed firms. We then assign a premium or discount to

each firm based on the firms’ free cash flows and valuation premium relative to the

industry over the past four years, and use that premium to derive a 12-month target price

for each company.

Chihong (600497.SS): We assign a 9% valuation premium to Chihong. Over the past four

years (2009-2012), Chihong has enjoyed an average premium of 9% relative to the industry,

and currently has a 3% premium for 2013E. We estimate the firm’s CROCI will remain in the

third quartile for 2013E-2014E (see Exhibit 38). However, we believe the valuation premium

will increase to historic levels as Chihong has basically completed its planned resource

layout for the 12th Five-Year Plan, and release of capacity currently under construction will

drive a zinc and lead production CAGR for 2013E-2015E of up to 10.4% (not including

Rongda Mining), and a net profit CAGR of 13%, in our view. Furthermore, CSRC has

approved the firm’s rights issue for the purchase of Rongda Mining. Based on this 9%

premium, we arrive at a 12-month Director’s Cut-based target price of Rmb10.41.

Zhongjin Lingnan (000060.SZ): We do not assign a premium/discount to Zhongjin

Lingnan, which is an improvement over its average 4% discount over the past four years

(2009-2012). This is largely because we believe the firm’s production has returned to

normal, following corrections at the Shaoguan and Danxia refineries, which suffered

environmental incidents in 2010 and 2012. In addition, the firm’s overseas expansion

resources and management capabilities lead the industry. We estimate the firm’s CROCI

will increase in 2013E, but will remain in the second quartile (see Exhibit 38). Therefore, we

believe the firm’s discount will close out, and hence we assign a 12-month Director’s Cut-

based target price of Rmb8.6.

Exhibit 39: Director’s Cut valuation of A-share nonferrous metal firms (2013E) Usually stocks above the sector average line appear overvalued on a sector-relative basis, and

stocks below the line appear undervalued. When the sector average is below the 1:1 line, the

sector appears undervalued on Director’s Cut; when above, the sector appears overvalued.


JXC (A)Tongling

Yunnan Copper LingnanChihong

Chalco

Zhongjin Gold

Shandong Gold

Zijin (A)

y = 1.0 xR² = 0.6

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

0.0x 0.5x 1.0x 1.5x 2.0x 2.5x

EV/GCI

CROCI/WACCNeutralBUY Sell



Exhibit 40: Director’s Cut derivation of 12-month target prices; we rate both Chihong and

Zhongjin Lingnan Neutral

Source: Company data, Datastream, Gao Hua Securities Research estimates.

Zhongjin Lingnan Chihong Ave CROCI (2013E-2014E) 11.5% 9.2%Sector Valratio (EV/GCI vs. CROCI/WACC) 1.0x 1.0xValuation prem./disc.Adjustment 0% 9%Historical premium/discount -4% 9%Adjusted Valratio 1.0x 1.1xCROCI/WACC (2013E-2014E) 1.4x 1.2xTarget EV/GCI 1.5x 1.3xGCI (mn) 14,613 22,102Minority interests 1,611 2,529Net debt 2,099 12,231MV (pricing currency mn) 17,743 13,635Share outstanding (mn) 2,063 1,31012M Target price 8.60 10.41 Rating Neutral NeutralPotential upside (%) -4.1% -12.5%Current price (2013/5/10) 9.0 11.9



Chihong (600497.SS, Neutral): Resources acquired, awaiting profits

Investment view

We resume coverage on Chihong with a Neutral rating and a 12-m

Director’s Cut-based target price of Rmb10.41, implying 12.5% downside

potential. We believe the firm’s core growth driver will be the release of

capacity from acquired mines beginning production. In addition, we

believe the potential acquisition and consolidation of Rongda Mining

through a rights issue, if successfully completed, could be accretive to

earnings, and help lower the firm’s financial cost. However, with the

firm’s 2013E/2014E CROCI in the third quartile, and a 2013E P/E ratio of

48.9X—above the industry median—we assign a Neutral rating.

Key growth drivers

The firm may meet its 12th Five-Year Plan resource target early.At the end of 2009, Chihong set strategic targets for the 12th Five-Year

Plan: zinc and lead resources reaching 10mt by 2015, and refining

capacity of 1mt. Over the past three years, the firm has expanded its

resources through domestic consolidation and overseas purchases. In

terms of smelting production, the Huize 160k t smelting project is

scheduled to begin production in 2H13, and the 200k t Hulunbuir facility

is slated to start operations in late 2013.

Potential acquisition and consolidation of Rongda Mining could be earnings accretive. Chihong’s application for a rights issue has

been approved by the CSRC on March 15, and it plans to use Rmb2.1 bn

for acquiring a 51% stake in Rongda Mining held by the parent company

Yunnan Metallurgical Group (our base case does not include assets from

Rongda Mining). Rongda had net profits attributable to the parent

company of Rmb363 mn in 2012, 51% of which would imply Rmb185

mn. If Chihong’s rights issue and Rongda acquisition were to be

successfully completed, we estimate Rongda could potentially

contribute Rmb0.11 to Chihong’s 2013E EPS. Furthermore, the company

announced that the rights issue will raise not more than Rmb5 bn, of

which Rmb2.1 bn will be used to acquire the 51% stake in Rongda, and

the rest will be deposited in the bank, potentially lowering the firm’s

asset-liability ratio to around 53%.

Valuation

From 2009-2012, Chihong saw a 9% valuation premium on average. It is

currently at 3%; but we think if the rights issue were to be successfully

completed, earnings updates post the potential purchase of Rongda may

help raise the premium closer to the historical average. We apply a 9%

valuation premium and arrive at our 12-month Director’s Cut-based

target price of Rmb10.41.

Risks

Downside: An “environmental tax” levied on the firm’s products;

Upside: Faster-than-expected progress on projects under construction.

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Yunnan Chihong Zinc & Germanium (600497.SS)

Asia Pacific Metals & Mining Peer Group Average

Key data Current

Price (Rmb) 11.89

12 month price target (Rmb) 10.41

Market cap (Rmb mn / US$ mn) 15,577.0 / 2,536.3

Foreign ownership (%) --

12/12 12/13E 12/14E 12/15E

EPS (Rmb) 0.27 0.24 0.32 0.39

EPS growth (%) 1.6 (8.5) 29.8 22.5

EPS (diluted) (Rmb) 0.27 0.24 0.32 0.39

EPS (basic pre-ex) (Rmb) 0.27 0.24 0.32 0.39

P/E (X) 52.6 48.9 37.7 30.8

P/B (X) 4.8 4.0 3.7 3.5

EV/EBITDA (X) 24.2 14.9 13.5 13.0

Dividend yield (%) 1.4 1.0 1.3 1.6

ROE (%) 9.3 8.2 10.3 11.7

CROCI (%) 10.5 9.3 9.1 8.9

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2,700

10

11

12

13

14

15

16

17

May-12 Aug-12 Nov-12 Feb-13

Price performance chart

Yunnan Chihong Zinc & Germanium (L) Shanghai SE A Share Index (R)

Share price performance (%) 3 month 6 month 12 month

Absolute (24.1) (1.9) (24.5)

Rel. to Shanghai SE A Share Index (17.8) (9.6) (19.0)

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 5/10/2013 close.

INVESTMENT LIST MEMBERSHIP

Neutral

Coverage View: Neutral



Yunnan Chihong Zinc & Germanium: Summary financials

Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E

Total revenue 12,130.4 16,558.8 19,759.2 21,342.4 Cash & equivalents 1,171.0 1,205.1 1,466.4 1,221.5

Cost of goods sold (10,287.1) (14,526.3) (17,492.7) (18,903.6) Accounts receivable 1,296.7 1,879.0 1,910.4 2,182.6

SG&A (848.5) (853.6) (951.9) (1,024.3) Inventory 1,277.0 1,906.8 1,927.2 2,216.0

R&D -- -- -- -- Other current assets 0.0 0.0 0.0 0.0

Other operating profit/(expense) (57.4) (47.9) (53.5) (57.5) Total current assets 3,744.7 4,990.9 5,304.0 5,620.2

EBITDA 1,324.9 2,039.8 2,184.6 2,298.4 Net PP&E 12,234.1 13,195.5 13,474.3 13,814.4

Depreciation & amortization (387.5) (908.9) (923.5) (941.4) Net intangibles 5,215.8 5,001.4 4,787.1 4,572.7

EBIT 937.4 1,130.9 1,261.1 1,357.0 Total investments 819.3 819.3 819.3 819.3

Interest income 8.2 14.5 14.9 18.1 Other long-term assets 204.4 279.0 332.9 359.6

Interest expense (600.8) (755.6) (770.2) (755.6) Total assets 22,218.3 24,286.1 24,717.6 25,186.2

Income/(loss) from uncons. subs. 39.4 0.0 0.0 0.0

Others 32.1 0.0 0.0 0.0 Accounts payable 2,794.3 3,573.4 4,094.7 4,191.8

Pretax profits 416.4 389.8 505.8 619.5 Short-term debt 7,587.8 8,087.8 7,587.8 7,587.8

Income tax (74.6) (77.1) (100.0) (122.5) Other current liabilities 0.0 0.0 0.0 0.0

Minorities 6.1 5.5 7.2 8.8 Total current liabilities 10,382.1 11,661.1 11,682.4 11,779.6

Long-term debt 4,848.5 5,348.5 5,348.5 5,348.5

Net income pre-preferred dividends 347.9 318.2 413.0 505.8 Other long-term liabilities 619.8 846.1 1,009.6 1,090.5

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 5,468.3 6,194.5 6,358.0 6,438.9

Net income (pre-exceptionals) 347.9 318.2 413.0 505.8 Total liabilities 15,850.3 17,855.6 18,040.5 18,218.5

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 347.9 318.2 413.0 505.8 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 3,833.2 3,901.3 4,155.2 4,454.5

EPS (basic, pre-except) (Rmb) 0.27 0.24 0.32 0.39 Minority interest 2,534.7 2,529.2 2,522.0 2,513.2

EPS (basic, post-except) (Rmb) 0.27 0.24 0.32 0.39

EPS (diluted, post-except) (Rmb) 0.27 0.24 0.32 0.39 Total liabilities & equity 22,218.3 24,286.1 24,717.6 25,186.2

DPS (Rmb) 0.19 0.12 0.16 0.19

Dividend payout ratio (%) 71.9 50.0 50.0 50.0 BVPS (Rmb) 2.93 2.98 3.17 3.40

Free cash flow yield (%) (5.6) (4.0) 5.1 (0.2)

Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E

Sales growth 92.1 36.5 19.3 8.0 CROCI (%) 10.5 9.3 9.1 8.9

EBITDA growth 22.6 54.0 7.1 5.2 ROE (%) 9.3 8.2 10.3 11.7

EBIT growth 34.6 20.6 11.5 7.6 ROA (%) 1.9 1.4 1.7 2.0

Net income growth (3.1) (8.5) 29.8 22.5 ROACE (%) 5.6 5.0 5.5 5.9

EPS growth 1.6 (8.5) 29.8 22.5 Inventory days 54.0 40.0 40.0 40.0

Gross margin 15.2 12.3 11.5 11.4 Receivables days 47.1 35.0 35.0 35.0

EBITDA margin 10.9 12.3 11.1 10.8 Payable days 97.7 80.0 80.0 80.0

EBIT margin 7.7 6.8 6.4 6.4 Net debt/equity (%) 176.9 190.2 171.8 168.1

Interest cover - EBIT (X) 1.6 1.5 1.7 1.8

Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E

Net income pre-preferred dividends 347.9 318.2 413.0 505.8

D&A add-back 387.5 908.9 923.5 941.4 P/E (analyst) (X) 52.6 48.9 37.7 30.8

Minorities interests add-back (6.1) (5.5) (7.2) (8.8) P/B (X) 4.8 4.0 3.7 3.5

Net (inc)/dec working capital 84.1 (433.1) 469.5 (463.9) EV/EBITDA (X) 24.2 14.9 13.5 13.0

Other operating cash flow 546.0 151.7 109.6 54.2 EV/GCI (X) 1.6 1.4 1.3 1.2

Cash flow from operations 1,359.4 940.1 1,908.4 1,028.8 Dividend yield (%) 1.4 1.0 1.3 1.6

Capital expenditures (2,534.5) (1,655.9) (988.0) (1,067.1)

Acquisitions (1,433.7) 0.0 0.0 0.0

Divestitures 0.0 0.0 0.0 0.0

Others (138.4) 0.0 0.0 0.0

Cash flow from investments (4,106.6) (1,655.9) (988.0) (1,067.1)

Dividends paid (common & pref) (196.5) (250.1) (159.1) (206.5)

Inc/(dec) in debt 3,815.6 1,000.0 (500.0) 0.0

Common stock issuance (repurchase) 421.8 0.0 0.0 0.0

Other financing cash flows (789.2) 0.0 0.0 0.0

Cash flow from financing 3,251.6 749.9 (659.1) (206.5)

Total cash flow 504.4 34.1 261.3 (244.8) Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Resource strategy promotes sustained growth

Chihong has the potential to meet its resource goals early. At the end of 2009, Chihong

set strategic targets for the 12th Five-Year Plan: zinc and lead resources reach 10mt by 2015,

and refining capacity of 1mt. Over the past three years, the firm has expanded its

resources: In April 2011, it purchased Yongchang mine, Lancang Lead mine and

Daxing’anling Mining, increasing its zinc and lead holdings by 1.32mt; in 2011, it also

purchased Jinxin Mining, increasing its zinc and lead holdings by 155k t; in December 2012,

it announced the purchase of Bolivian Yangfan mine, D Copper mine, and Amazon Mining;

in March 2013, the firm signed an agreement with Selwyn to purchase the remaining 50%

equity stake in the Selwyn-Chihong joint venture; further, Chihong’s application for a rights

issue has been approved by the CSRC on March 15, and it plans to use the money raised to

acquire 51% stake in Rongda Mining. We believe that, if the above projects all progress

smoothly, the firm has the potential to increase its resource holdings from 3mt in 2009 to

10mt in 2013, meeting its 12th Five-Year Plan resource targets early.

Exhibit 41: Zinc and lead reserves controlled by the firm, as of 2012

Source: Company data, Gao Hua Securities Research

Exhibit 42: Zinc and lead projects with announced purchases in progress, as of March 2013


Smelting capacity is likely to be released gradually over the next two years. The firm’s

160k t Huize refinery project (60k t/a crude lead, 100k t/a refined zinc and comprehensive

slag utilization process) is scheduled to begin trial production, and is likely to begin normal

production in 2H13. The 200k t Hulunbuir refinery (140k t/a zinc, 60k t/a lead refining) is

likely to begin production at the end of 2013, according to the company.

OreKt Zinc (%) Lead (%) Silver (g/ t) Zinc (kt) Lead (kt) Silver (t)

Huize mine 100% 3,756 20.2% 8.5% 757 321 0Zhaotong Yiliang mine 100% 1,610 14.0% 3.0% 46.0 225 48 74Yongchang mine 93% 5,318 7.3% 3.0% 159.5 397 173 33Lancang mine 100% 5,619 3.3% 4.6% 156.7 280 272 1,206Daxing'anling Mining 100% 7,240 2.1% 0.7% 149 52Jinxin mining 100% 4,081 3.5% 0.3% 142 13 442Hulunbuir Chihong 50%Selwyn in Canada 50% 16,063 10.3% 4.2% 1,646 679Total 3,598 1,558 1,755

Zinc & Lead mines EquityGrade Resources

OreKt Zinc (kt) Lead (kt) Silver (t) Copper (kt)

Mines announced to acquire

Rongda mine 51% 526 426 2,057 49

D copper mine in Bolivia 835

Yangfan mine in Bolivia 817

Amazon mining in Bolivia 1,007

Zinc & Lead mines EquityResources



Potential consolidation of Rongda accretive to earnings

The firm’s application for a rights issue was approved by the CSRC on March 15, and

Chihong has announced that it will use the money raised to acquire Yunnan Metallurgical

Group’s 51% stake in Rongda Mining (our base case does not include assets from Rongda).

Rongda and its wholly owned subsidiary Yishengyuan Mining have approval for four

mines with total zinc and lead reserves of 952k t, 2057 t of silver, and 49k t of copper. In

2012, Rongda realized net profits attributable to the parent company of Rmb363 mn, with a

51% stake implying Rmb185 mn. Assuming Chihong’s rights issue and Rongda purchase

were to be successfully completed, on Chihong’s 2012 earnings it would about 15%

accretive.

We believe the potential rights issue could also improve the firm’s asset-liability

structure, lowering financial costs. As of end-2012, Chihong had an asset-liability ratio of

71%, with interest-bearing debt of over Rmb12 bn. Financial costs for the firm in 2012

reached Rmb600 mn, significantly higher than the firm’s 2012 net profit attributable to the

parent company of Rmb350 mn. Based on the company’s announcements, the rights issue

will raise not more than Rmb5 bn, of which Rmb2.1 bn will be used to acquire the 51%

stake in Rongda, and the rest will be deposited in the bank. We calculate that this could

lower the firm’s asset-liability ratio to 53%, saving approximately Rmb180 mn in financial

costs in 2013.

Exhibit 43: Scenario analysis: EPS after potential

consolidation of Rongda (based on share capital after

rights issue)

Exhibit 44: Asset-liability ratio before and after potential

rights issue, as of 2012



Further profit contributions will have to wait until capacity release from the

purchased overseas resources. Although the firm has increased its resources relatively

rapidly over the past few years, earnings from the Yongchang and Lancang zinc and lead

mines have been relatively weak due to geologic conditions; Jinxin Mining has just

received resource registration; Selwyn-Chihong Mining is scheduled to begin production

at the end of 2015, contributing in 2016. Therefore, we estimate relatively slow 2013E/2014E

zinc and lead concentrate production growth (8.1%/8.0% from7.8% in 2012), while the start

of zinc and lead concentrate production at Selwyn-Chihong would potentially lead to a

15.2% growth in 2015E.

0.27

0.31

0.22

0.24

0.26

0.28

0.3

0.32

No consolidation Consolidated Rongda mine

2012 EPS 71%

53%

0%

10%

20%

30%

40%

50%

60%

70%

80%

No consolidation Consolidated Rongda mine

Asset-liability ratio



Scattered metals are an important source of profits

The company’s key scattered metals include germanium and cadmium. Presently, Chihong

has 30 tons of annual germanium capacity and is constructing 800 tons of annual cadmium

capacity.

Chihong’s main germanium products are pure germanium and germanium dioxide, and

most of which are used in optical instruments or military applications, with stable orders.

In 2011, Chihong produced 5.56 tons of pure germanium and 11.64 tons of germanium

dioxide, accounting for 6.2% of gross earnings. In 2012, we estimate Chihong sold only 10

tons of germanium products and the contribution to gross earnings declined to 2% as

prices and sales volumes declined. But germanium prices have been among the strongest

performers in metals in 2013, rising 7% since the start of the year. As a result, we expect

the contribution of germanium products to earnings to increase.

Exhibit 45: Price trends for germanium products

Exhibit 46: Price trends for cadmium ingot

Source: Asian Metals, Gao Hua Securities Research.

Source: Asian Metals, Gao Hua Securities Research.

Potential environmental tax on lead may be a headwind for Chihong

The Economic Information newspaper reported on March 12, 2013, that the Ministry of

Finance will accelerate reforms to the environmental protection tax. The move will place an

environmental protection tax on products that contain lead or other highly polluting

materials. In 2012, lead products accounted for 8% of Chihong’s total income (not including

lead product trade income). We perform a scenario analysis on the environmental

protection tax rate as below.

Exhibit 47: Scenario analysis of the impact of an environmental tax on Chihong in 2013 Our base case is no environmental tax


0

2000

4000

6000

8000

10000

12000

14000

05/09 11/09 05/10 11/10 05/11 11/11 05/12 11/12 05/13

Germanium oxide 99.99% min

Germanium metal 99.99% min

Rmb/t

0

5000

10000

15000

20000

25000

30000

35000

40000

05/09 11/09 05/10 11/10 05/11 11/11 05/12 11/12 05/13

Cadmium ingot Rmb/t

1% 3% 5%Net profit changes (%) 0 -2.0% -6.2% -10.3%

Environmental tax rateBase case - Noenvironmental tax



Director’s Cut target price of Rmb10.41; Neutral rating

CROCI to remain in the third quartile. We think Chihong’s strong organic growth will

help its net profit growth rate outpace Lingnan, its peer. Despite this, we believe Chihong’s

2013E/2014E/2015E CROCI will edge down to 9.3%/9.1%/8.9%, from 10.5% in 2012, primarily

because the firm will continue to make significant capital expenditures over this period and

the release of capacity from mines under construction will likely be slow.

Chihong’s EV/GCI vs. CROCI/WACC premium relative to the industry is likely to rise to its historical average. Over the past four years (2009-2012), Chihong averaged a

9% premium to the industry, but at present that premium has slipped to 3%. But we think

its premium is likely to climb to its historical average, because the company has completed

its resource layout for the 12th Five-Year plan and capacity from mines under construction

should drive zinc and lead ore concentrate production growth of 10.4% CAGR from 2013E-

2015E (not including Rongda). Further, the CSRC has already approved Chihong’s rights

offering to acquire Rongda, the successful completion of which would also support

Chihong’s premium, in our view.

We derive our 12-m Director’s Cut target price of Rmb10.41 and resume coverage with a Neutral rating. Our 12-month target price of Rmb10.41 is based on a

target premium of 9%. Our target price implies 12.5% potential downside.

Exhibit 48: Chihong’s historical P/E band

Exhibit 49: Chihong’s historical P/B band

Source: Bloomberg, Gao Hua Securities Research estimates.

Source: Bloomberg, Gao Hua Securities Research estimates.

0

50

100

150

200

250

May‐07 May‐08 May‐09 May‐10 May‐11 May‐12 May‐13

PE Ave.PE +1Stdev ‐1Stdev

0

10

20

30

40

50

60

70

80

90

Ma

y/0

5

No

v/0

5

Ma

y/0

6

No

v/0

6

Ma

y/0

7

No

v/0

7

Ma

y/0

8

No

v/0

8

Ma

y/0

9

No

v/0

9

Ma

y/1

0

No

v/1

0

Ma

y/1

1

No

v/1

1

Ma

y/1

2

No

v/1

2

Ma

y/1

3

Share price 0.50X 1.50X 2.50X

3.50X 4.50X 6.50X



Zhongjin Lingnan (000060.SZ, Neutral): Back to normal operations

Investment view

We resume coverage on Lingnan with a Neutral rating and our 12-month

Director’s Cut-based target price of Rmb8.6, implying 4% potential

downside. Lingnan successfully acquired Perliya and GlobeStar

overseas in 2009 and 2010, and their earnings improved significantly

under Lingnan. However, environmental accidents negatively impacted

development over the past two years, and production has recently

recovered. We expect Lingnan’s CROCI to remain in the second quartile

over the next two years on the back of resumption of normal operations.

Currently, 2013E P/E is 34.9X, slightly above the 5-year average of 28.7X.

Key growth drivers

Overseas expansion and operational results demonstrate strong execution skills. During 2008-2009, Lingnan acquired 50.1% of Perliya for

Rmb200 mn. Perliya then moved into profitability. In 2010, Lingnan used

Perliya as a platform to successfully acquire GlobeStar, which significantly

improved earnings in 2011. In 2012, overseas mines raised their share of

Lingnan’s net profits to 25% from 15% in 2011.

Diverse metal resources support strategy of stable development. In 2013, we estimate Panlong mine’s zinc and lead concentrate production

to be 26.7k tons and the opening of the Perilya Potosi/Silver Peak projects

also to contribute 17k tons of zinc and lead concentrate. In addition,

Lingnan acquired GlobeStar and added 123k tons of copper resources from

Cerro de Maimon, 93k tons of nickel resources from Cumpie Hill, and 201k

tons of lithium from Moblan. Diversified resources should make earnings

more defensive when zinc and lead prices are low and support Lingnan’s

stable development, in our view.

Returning to normalcy after environmental accidents. In 2010,

Lingnan’s Shaoguan refinery water discharges into a river resulted in

thallium levels exceeding targets. The government required that the

refinery be closed entirely for corrections and the crude smelting system

was unable to resume transitional operations until September 2012. In

March 2012, Danxia refinery was closed for 3 months and Fankou mine

closed for 1 month due to lead poisoning. Lingnan has recently returned

to normal operations. Furthermore, its second largest shareholder—

Guangsheng Investment and Development—increased its stake by

purchasing 6.94mn shares (0.34%) during Dec 21, 2012 to Feb 7, 2013 to

6.85%, which we think reflects its confidence in Lingnan’s robust

outlook.

Valuation

From 2009-2012, Lingnan’s EV/GCI vs. CROCI/WACC was at 4% discount

relative to the industry, which widened to 5% in 2013. We think the

discount is likely to disappear as the firm returns to normal operations

after accidents in 2010 and 2012, and its CROCI remaining steady in the

second quartile during 2013-2014.

Risks

Downside: Environmental problems continuing to influence production;

Upside: New progress in overseas expansion.

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Shenzhen Zhongjin Lingnan Nonfemet (000060.SZ)

Asia Pacific Metals & Mining Peer Group Average

Key data Current

Price (Rmb) 8.97

12 month price target (Rmb) 8.60

Market cap (Rmb mn / US$ mn) 18,504.6 / 3,012.9

Foreign ownership (%) --

12/12 12/13E 12/14E 12/15E

EPS (Rmb) 0.21 0.26 0.28 0.29

EPS growth (%) (54.5) 22.5 10.6 0.6

EPS (diluted) (Rmb) 0.21 0.26 0.28 0.29

EPS (basic pre-ex) (Rmb) 0.21 0.26 0.28 0.29

P/E (X) 41.7 34.9 31.6 31.4

P/B (X) 3.2 3.1 2.8 2.6

EV/EBITDA (X) 13.1 11.7 10.9 10.8

Dividend yield (%) 0.5 0.6 0.7 0.7

ROE (%) 7.9 9.1 9.3 8.7

CROCI (%) 10.1 11.6 11.4 10.9

750

800

850

900

950

1,000

1,050

1,100

1,150

1,200

1,250

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

May-12 Aug-12 Nov-12 Feb-13

Price performance chart

Shenzhen Zhongjin Lingnan Nonfemet (L) Shenzhen A Index (R)

Share price performance (%) 3 month 6 month 12 month

Absolute (20.5) 18.2 (7.6)

Rel. to Shenzhen A Index (20.6) 1.0 (7.8)

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 5/10/2013 close.

INVESTMENT LIST MEMBERSHIP

Neutral

Coverage View: Neutral



Shenzhen Zhongjin Lingnan Nonfemet: Summary financials

Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E

Total revenue 18,440.1 19,608.0 20,817.0 21,656.8 Cash & equivalents 1,190.5 1,336.7 1,130.7 1,368.3

Cost of goods sold (16,247.9) (17,196.5) (18,289.3) (19,208.9) Accounts receivable 964.9 1,288.1 1,103.8 1,384.6

SG&A (991.2) (1,090.4) (1,142.9) (1,106.8) Inventory 2,040.1 2,655.7 2,338.5 2,906.8

R&D -- -- -- -- Other current assets 282.2 300.1 318.6 331.5

Other operating profit/(expense) (185.2) (199.1) (208.7) (202.1) Total current assets 4,477.7 5,580.6 4,891.6 5,991.1

EBITDA 1,668.2 1,895.9 1,977.5 1,993.7 Net PP&E 4,465.1 4,829.5 5,209.2 5,569.2

Depreciation & amortization (652.5) (773.8) (801.4) (854.7) Net intangibles 3,733.5 3,379.6 3,031.2 2,682.7

EBIT 1,015.7 1,122.0 1,176.1 1,139.0 Total investments 222.6 222.6 222.6 222.6

Interest income 10.9 10.9 12.2 10.3 Other long-term assets 1,174.2 1,248.6 1,325.6 1,379.1

Interest expense (279.0) (265.9) (227.2) (188.5) Total assets 14,073.2 15,260.9 14,680.1 15,844.7

Income/(loss) from uncons. subs. 31.1 0.0 0.0 0.0

Others (90.2) 0.0 0.0 0.0 Accounts payable 1,541.0 2,067.0 1,770.3 2,260.0

Pretax profits 688.5 867.0 961.1 960.8 Short-term debt 2,884.6 2,884.6 2,384.6 2,384.6

Income tax (154.5) (203.8) (225.9) (225.8) Other current liabilities 562.4 562.4 562.4 562.4

Minorities (101.2) (133.0) (148.8) (145.3) Total current liabilities 4,988.0 5,514.0 4,717.3 5,207.0

Long-term debt 551.4 551.4 51.4 51.4

Net income pre-preferred dividends 432.8 530.3 586.5 589.7 Other long-term liabilities 1,440.8 1,532.0 1,626.5 1,692.1

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,992.1 2,083.4 1,677.9 1,743.5

Net income (pre-exceptionals) 432.8 530.3 586.5 589.7 Total liabilities 6,980.1 7,597.4 6,395.1 6,950.4

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 432.8 530.3 586.5 589.7 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 5,615.1 6,052.6 6,525.3 6,989.3

EPS (basic, pre-except) (Rmb) 0.21 0.26 0.28 0.29 Minority interest 1,477.9 1,610.9 1,759.7 1,904.9

EPS (basic, post-except) (Rmb) 0.21 0.26 0.28 0.29

EPS (diluted, post-except) (Rmb) 0.21 0.26 0.28 0.29 Total liabilities & equity 14,073.2 15,260.9 14,680.1 15,844.7

DPS (Rmb) 0.05 0.06 0.06 0.06

Dividend payout ratio (%) 21.4 21.4 21.4 21.4 BVPS (Rmb) 2.72 2.93 3.16 3.39

Free cash flow yield (%) 1.1 1.2 4.5 1.8

Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E

Sales growth (1.2) 6.3 6.2 4.0 CROCI (%) 10.1 11.6 11.4 10.9

EBITDA growth (31.6) 13.6 4.3 0.8 ROE (%) 7.9 9.1 9.3 8.7

EBIT growth (44.8) 10.5 4.8 (3.2) ROA (%) 3.1 3.6 3.9 3.9

Net income growth (54.5) 22.5 10.6 0.6 ROACE (%) 8.0 9.0 9.3 9.0

EPS growth (54.5) 22.5 10.6 0.6 Inventory days 49.8 49.8 49.8 49.8

Gross margin 11.9 12.3 12.1 11.3 Receivables days 21.0 21.0 21.0 21.0

EBITDA margin 9.0 9.7 9.5 9.2 Payable days 38.3 38.3 38.3 38.3

EBIT margin 5.5 5.7 5.6 5.3 Net debt/equity (%) 31.7 27.4 15.8 12.0

Interest cover - EBIT (X) 3.8 4.4 5.5 6.4

Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E

Net income pre-preferred dividends 432.8 530.3 586.5 589.7

D&A add-back 652.5 773.8 801.4 854.7 P/E (analyst) (X) 41.7 34.9 31.6 31.4

Minorities interests add-back 101.2 133.0 148.8 145.3 P/B (X) 3.2 3.1 2.8 2.6

Net (inc)/dec working capital 363.9 (412.8) 204.7 (359.4) EV/EBITDA (X) 13.1 11.7 10.9 10.8

Other operating cash flow (63.4) (1.0) (1.0) (0.7) EV/GCI (X) 1.6 1.5 1.4 1.3

Cash flow from operations 1,487.0 1,023.4 1,740.4 1,229.7 Dividend yield (%) 0.5 0.6 0.7 0.7

Capital expenditures (1,271.4) (784.3) (832.7) (866.3)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 64.4 0.0 0.0 0.0

Others 0.0 0.0 0.0 0.0

Cash flow from investments (1,207.0) (784.3) (832.7) (866.3)

Dividends paid (common & pref) (148.5) (92.8) (113.7) (125.8)

Inc/(dec) in debt 159.6 0.0 (1,000.0) 0.0

Common stock issuance (repurchase) 0.0 0.0 0.0 0.0

Other financing cash flows (298.4) 0.0 0.0 0.0

Cash flow from financing (287.4) (92.8) (1,113.7) (125.8)

Total cash flow (7.4) 146.2 (206.1) 237.6 Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Overseas expansion, mining results display strong execution skills

The acquisition of Perilya was Lingnan’s first overseas venture. In 2009, Lingnan

invested A$45.46 mn (Rmb200 mn) to acquire 50.1% of the listed Australian mining firm

Perilya. At the time of acquisition, Perilya had 3.5 mn tons of zinc and lead reserves and

617 tons of silver. The company raised A$55.2 mn in a rights offering to expand its

development of non-ferrous metals and in 2009 helped Perilya to shift from loss-making

into profitability. Since the acquisition on February 9, 2009, to the end of 2009, Lingnan had

realized profits of A$31.08 mn. Lingnan further expanded Perilya’s reserves through

additional exploration to 4.47 mn tons of zinc and 1,979 tons of silver as of June 2012.

Further, in 2009 Lingnan successfully signed a cooperative exploration agreement with the

Canadian firm Teck for the Ballinalack site in Ireland—Lingnan took 40% stake in Teck for

US$6 mn. Exploration at the Ballinalack site already has found 560k tons of zinc and lead

resources.

Exhibit 50: The acquisition of Perilya clearly increased resource reserves, as of 2012


The acquisition of GlobeStar created a platform for an international, diversified metal

company. In December 2010, Lingnan acquired 97.77% of the Canadian firm GlobeStar

using C$1.65 per share cash offer through Perilya. GlobeStar fully controls the resources at

Cerro de Maimon (123k tons of copper, 208 tons of silver and 6.8 tons of gold); Cumpie Hill

(93k tons of nickel); and Moblan (201k tons of lithium). The move not only boosted

Lingnan’s zinc and lead reserves, but also gave it exposure to copper, gold, nickel, and

lithium among other metal resources that we think would help stabilize the company’s

earnings when zinc and lead prices are weak.

Exhibit 51: The acquisition of GlobeStar created a diversified metals platform (as of 2012)


OreKt Zinc (%) Lead (%) Silver (g/ t) Copper (%) Zinc (kt) Lead (kt) Silver (t) Copper (kt)

Broken hill southern 53% 12,700 8.9% 6.8% 67 1,130 864 851

Broken hill Potosi 53% 1,610 14.0% 3.0% 46 225 48 74

Broken hill Silver Peak 53% 400 5.0% 9.0% 77 20 36 31

Broken hill North Mine 53% 1,000 7.0% 9.0% 140 70 90 140

Broken hill North Deeps 53% 3,300 11.5% 13.8% 224 380 455 739

Flinders-Beltana 53% 972 29.8% 290

Flinders-Adelaide 53% 316 32.0% 101

North Moolooloo 53% 2,140 34.4% 1.4% 735 29

Mount Oxide 53% 15,977 9 1.4% 144 228

Perilya total 38,415 2,951 1,522 1,979 228

Perilya total excluding minorities 20,502 1,575 812 1,056 122

Equity (%)Grade Resources

Zinc & Lead mines

OreKt Copper (kt) Silver (t) Gold (t) Nickel (kt) Lithium (kt)

Cerro de Maimon Oxide Ore 53% 1,157 39.9 2.2

Cerro de Maimon Sulphide Ore 53% 4,825 122.5 168.4 4.6

Cumpie Hill 53% 6,200 93.0

Moblan 32% 14,250 200.9

GlobeStar total 26,432 122.5 208.3 6.8 93.0 200.9

GlobeStar total excluding minorities 11,065 65.4 111.2 3.6 49.6 64.3

Equity (%)Resources

Mines



Results of overseas mining operations display Lingnan’s strong execution skills. After

making Perilya profitable, Lingnan also got good results in their first year of operations at

GlobeStar. In 2011, Cerro de Maimon mine saw copper production increase 20%, gold

production grow 5%, and silver production jump 72.7%. Cash costs for copper concentrate

also fell from US$0.80/pound to US$0.40/pound. Further, GlobeStar also significantly

increased its resource reserves through exploration. We estimate that in 2013E-2014E,

Perilya and GlobeStar will account for about 30% of Lingnan’s earnings, becoming a stable

income source. Compared with the constant delays facing other domestic mining firms’

overseas projects, Lingnan’s overseas operational results display its strong execution skills.

Stable development in 2013/2014

The return to normal production of Fankou mine and the expansion of Panlong mine should help Lingnan grow zinc and lead production by 16% in 2013E.

The return of Fankou mine to normal production in 2013 should increase zinc and lead ore

concentrate production by 15k tons, in our view. Lingnan’s key domestic mines include

Fankou and Panlong, both zinc and lead mines. Fankou mine has 4.1 mn tons of zinc and

lead reserves and produces about 180k tons of those metals annually (as of 2011). Thanks

to high quality ores (zinc grade 8.9%, lead grade 5.1%), 2012 costs per ton were only

Rmb4,861.5, a clear cost advantage over most domestic zinc and lead mines and allowing

Fankou mine’s 2012 gross margins to reach 61%. In 2012, after the lead poisoning incident,

Fankou mine stopped production for 1 month. We believe a return to normal operations in

2013 should increase zinc and lead ore concentrate production by 15k tons.

In 2013, Panlong mine will expand production to 26k tons. Lingnan’s other

domestic mine—Panlong—has current zinc and lead reserves of 1.28 mn tons. Beginning in

late 2011, Lingnan has increased its equity stake in Panlong mine from 55% to 75%,

initiating a round of expansion and upgrades. Lingnan expects to finish the upgrades in

2013 and we expect daily ore capacity to increase to 3,000 tons from 1,500 tons at present

and annual zinc and lead production to increase to 26k tons from 12k tons at present .

Exhibit 52: Lingnan’s key domestic resources, as of 2012

Source: Company data, Gao Hua Securities Research

Launch of Broken Hill’s Potosi and Silver Peak projects provide overseas growth in 2013

Lingnan began construction on Potosi and Silver Peak of Broken Hill in February 2011. The

projects entered service in late March 2013 with an annual capacity of 1.6mt. Average zinc

grade is 8.3%, lead grade is 3.1% and silver content is 38 grams per ton. We estimate the

projects will contribute 17k tons of zinc and lead ore concentrate in 2013E and 35k tons in

2014E, becoming Lingnan’s key overseas growth drivers.

The company also has nickel reserves at Cumpie Hill and lithium at Moblan. Once

developed, these resources will help Lingnan diversify, hedging against the risk of zinc and

lead prices weakening, in our view.

Ore

Kt Zinc (%) Lead (%) Silver (g/t) Zinc (kt) Lead (kt) Silver (t)

Fankou mine 100% 29,338 8.9% 5.1% 89.4 2,608 1,496 2,623

Panlong mine 75% 35,273 2.7% 0.9% 959 321

Domestic total 64,611 3,568 1,817 2,623

Domestic total excluding minorities 55,792 3,328 1,737 2,623

Equity (%)Grade Resources

Zinc & Lead mines



Environmental accidents a drag on expansion

Environmental accidents impacted operations. In October 2010, excessive amounts

of thallium were discovered in an upstream segment of Bei River in Shaoguan city. The

Ministry of Environmental Protection found the Shaoguan refinery’s waste water to be the

source of the pollution and, starting October 21, 2010, the refinery ceased all operations.

On July 20, 2011, Lingnan received approval from SASAC (State-owned Assets Supervision

and Administration Commission of Guangdong province) for transitional operation of the

refining system, but the #2 crude smelting system did not receive approval for transitional

operation until September 2012. The #1 crude smelting system has been required to be

completely closed and reorganizing the Shaoguan refinery has involved relocation and

upgrades at other sites. Refining of zinc and lead metals at Shaoguan refinery fell from

256.2k tons in 2010 to 32k tons in 2011.

In March 2012, the company’s Danxia refinery and Fankou zinc and lead mine were also

closed for inspections following lead poisoning incidents. Fankou mine was closed for 1

month while Danxia refinery stopped work for about 3 months. We believe the stoppages

reduced 2012 refined zinc and lead metal output by about 50k tons.

Exhibit 53: Lingnan’s smelting production declined significantly after environmental

accidents ‘000 tonnes

Source: Company data, Gao Hua Securities Research estimates

Environmental accidents also delayed progress on expansion. Before the accidents,

Lingnan had successfully acquired Perilya and GlobeStar. The overseas acquisitions drove

rapid development. But the two accidents forced Lingnan to focus more on environmental

safety in mining regions and refineries, especially at the relocation and upgrades to new

sites for the Shaoguan refinery, which is an area of focus for the company in 2013-2014.

We think as a result of this, the pace of expansion will slow somewhat.

The accidents have also caused Lingnan’s stock price to slide from outperforming to underperforming the sector. In October 2010, in the six months

preceding the Shaoguan refinery accident, Lingnan’s stock price rose 48% while the zinc

and lead industry as a whole rose 45% and Chihong’s stock price rose 25.6%. But from the

Shaoguan accident until the lead poisoning on March 5, 2012, Lingnan’s stock price fell

39.3% while the sector declined 34% and Chihong’s stock price fell 17.3%. In the six months

363.8

132.4 143.9

250.0

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2010 2011 2012 2013E

Smelting production

for Lingnan



following the lead poisoning incident, Lingnan’s stock fell an additional 28.4% while the

sector fell 27.6% and Chihong declined 24%.

Exhibit 54: Accidents have caused Lingnan’s stock price to slide from outperforming to

underperforming the sector

Source: Bloomberg、Gao Hua Securities Research.

Valuation: 12-m TP of Rmb8.6; Neutral

CROCI should be stable in 2013-2014. Lingnan’s CROCI in 2012 was 10.1% and we

expect it to rise to 11.6% in 2013E and 11.4% in 2014E on return to normal operations

following the accidents and gradual earnings growth. Lingnan outperforms Chihong in

terms of CROCI and should remain in the industry’s second quartile.

Exhibit 55: Lingnan’s CROCI is a notch above that of Chihong

Source: DataStream, Gao Hua Securities Research estimates.

EV/GCI vs. CROCI/WACC discount relative to the industry is likely to disappear, we assign a Neutral rating. From 2009-2012, Lingnan’s EV/GCI vs. CROCI/WACC was at

4% discount relative to the industry, which widened to 5% in 2013. We believe the

accidents in 2010 and 2012 interrupted normal production, causing the discount to expand.

However, now that normal operations have been resumed since late 2012, we think the

discount is likely to disappear. Our 12-month Director’s Cut target price of Rmb8.6 implies

4% potential downside.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

0

5

10

15

20

25

30

35

12/09 06/10 12/10 06/11 12/11 06/12 12/12

Lingnan Chihong Sector index

Lingnan outperformed before the environmental

accidents of Shaoguan refinery.

Lingnan's stock was down 39.3%

between two environmental accidents, while the sector index was down 34%, and Chihong down 17%

Lingnan underperformed

after lead poisoning

incidents

Ticker Company 2010 2011 2012E 2013E 2014E 2010-2012 2013-2014

000060.SZ Lingnan 10.4% 21.0% 10.1% 11.6% 11.4% 13.8% 11.5%

600497.SS Chihong 13.9% 12.6% 10.5% 9.3% 9.1% 12.3% 9.2%



Exhibit 56: Lingnan historical P/E band

Exhibit 57: Lingnan historical P/B band

Source: Bloomberg, Gao Hua Securities Research.

Source: Bloomberg, Gao Hua Securities Research.

0

20

40

60

80

100

120


PE Ave.PE +1Stdev ‐1Stdev

0

2

4

6

8

10

12

14

16


PB Ave.PB +1Stdev ‐1Stdev



Disclosure Appendix

Reg AC

We, Jefferson Zhang and Yong Han, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the

subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,

related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and

market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for

in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list

includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and

superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate

performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Jefferson Zhang: Asia Commodities Companies, Asia Energy. Yong Han, CFA: Asia Commodities Companies, Asia Energy.

Asia Commodities Companies: ACC, Aluminum Corporation of China (A), Aluminum Corporation of China (H), Ambuja Cements, Angang Steel (A),

Angang Steel (H), Anhui Conch Cement (A), Anhui Conch Cement (H), Asia Cement, Asia Cement China Holdings, BBMG Corporation (A), BBMG

Corporation (H), Banpu Public Company, Baoshan Iron & Steel, Borneo Lumbung Energi and Metal Tbk PT, Bumi Resources, China Coal Energy (A),

China Coal Energy (H), China Molybdenum Co., China National Building Material, China Resources Cement Holdings, China Shanshui Cement Group,

China Shenhua Energy (A), China Shenhua Energy (H), China Steel (GDR), China Steel Corporation, Coal India Ltd., Grasim Industries, Harum Energy

Tbk PT, Hidili Industry International Development, India Cements, Jiangxi Copper (A), Jiangxi Copper (H), Korea Zinc, Maanshan Iron & Steel (A),

Maanshan Iron & Steel (H), Mongolian Mining Corp., PT Adaro Energy Tbk, PT Indo Tambangraya Megah, PT Tambang Batubara Bukit Asam,

Shandong Gold Mining Co, Shenzhen Zhongjin Lingnan Nonfemet, Shougang Fushan Resources Group, Shree Cement Ltd, TCC International

Holdings, Taiwan Cement, Tongling Nonferrous Metals Group Co., Ultratech Cement, Yanzhou Coal Mining (A), Yanzhou Coal Mining (H), Yunnan

Chihong Zinc & Germanium, Yunnan Copper Co., Zhaojin Mining Industry, Zhongjin Gold, Zijin Mining (A), Zijin Mining (H).

Asia Energy: Beijing Haohua Energy Resource, Datong Coal Industry, Guizhou Panjiang Refined Coal, Henan Shen Huo Coal Industry & Electricity

Power Co., Huolinhe Opencut Coal, Inner Mongolia Yitai Coal Co Ltd, Jizhong Energy Resources, Kailuan Energy Chemical, Pingdingshan Tianan Coal

Mining, Pingzhuang Energy Resources, SDIC Xinji Energy Co., Shanxi Coal International Energy Group Co., Shanxi Lanhua Sci-Tech Venture, Shanxi

Lu'an Environmental Energy Development, Shanxi Xishan Coal and Electricity Power, Yangquan Coal Industry Group, Yitai Coal, Yuanxing Energy.



Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies

covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Yunnan Chihong Zinc &

Germanium (Rmb11.71)

There are no company-specific disclosures for: Shenzhen Zhongjin Lingnan Nonfemet (Rmb8.94)

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 31% 54% 15% 49% 42% 36%

As of April 1, 2013, Goldman Sachs Global Investment Research had investment ratings on 3,492 equity securities. Goldman Sachs assigns stocks as

Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for

the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)

Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager

or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-

managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a

market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,

professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of

coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking

revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their

households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE

Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in

prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs

website at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States

The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws

and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in

the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any

access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman

Sachs. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html.

Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction

483, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman, Sachs & Co. has

approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers.

Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such

visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from

Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from

Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred to

in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its

Shenzhen Zhongjin Lingnan Nonfemet (000060.SZ)

11.212.2

8.85

5.00

7.00

9.00

11.00

13.00

15.00

17.00

19.00

600

800

1,000

1,200

1,400

1,600

Goldman Sachs rating and stock price target history

Stock Price Currency : Chinese Renminbi

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2013.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.

Rating

Price target

Price target at removal

Covered by current analyst

Not covered by current analyst

Shenzhen A Index

Inde

x P

rice

Sto

ck P

rice Mar 2 Mar 15 Sep 24

N NA BM

CSJ J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M

2010 2011 2012 2013

Yunnan Chihong Zinc & Germanium (600497.SS)

13.8316.79

7.5614.02

5

10

15

20

25

30

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

Goldman Sachs rating and stock price target history

Stock Price Currency : Chinese Renminbi

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2013.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.

Rating

Price target

Price target at removal

Covered by current analyst

Not covered by current analyst

Shanghai SE A Share Index

Inde

x P

rice

Sto

ck P

rice Mar 2 Mar 15 Sep 24

S NA NM

CSJ J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M

2010 2011 2012 2013



affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research,

and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman

Sachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information

and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on

appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs

(Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission.

Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services

Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer

to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial

terms used in this report, are available from Goldman Sachs International on request.

European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available

at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with

Investment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho

69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms

Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific

disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese

Securities Finance Company.

Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy

or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as

a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a

global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage

group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment

recommendations focused on either the size of the potential return or the likelihood of the realization of the return.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associated

with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each

report adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at

http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook

on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12

months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the

following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over

the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an

advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman

Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for

determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and

price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended

coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The

information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global

basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on

macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd

(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by Goldman, Sachs & Co.

regarding Canadian equities and by Goldman, Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman

Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul

Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore)

Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this

research in connection with its distribution in the United Kingdom and European Union.

European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in

connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International

Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures

This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we

consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as

appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large

majority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have

investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research

Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our

proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our

proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views

expressed in this research.



The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may

discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity

securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any

such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's

return potential relative to its coverage group as described herein.

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,

act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be

illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of

individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if

appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them

may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at

http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase

and sales of options such as spreads. Supporting documentation will be supplied upon request.

In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other

meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in

whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the

site visit or meeting.

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all

research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our

research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to

http://360.gs.com.

Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY

10282.

© 2013 Goldman Sachs.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

China: Metals & Mining: Base Metals -...

Documents

Transcript of China: Metals & Mining: Base Metals -...