DBS Bank...ASIAN INSIGHTS ed: DT / sa: AH, CW, CS Copper And Its Electrifying Future HSI •...

ASIAN INSIGHTS ed: DT / sa: AH, CW, CS

Copper And Its Electrifying Future

• Electrification to drive copper demand

• Market remains in deficit due to supply constraints

• Long term bullish outlook for copper prices

• Initiating coverage on three copper players; Zijin

Mining and MMG are our top picks

Electrifying the future with copper. Demand for copper is set

to grow at rates not seen in previous decades, as the world

moves towards electrification of energy. As such, we expect

the growth in demand for electricity to outstrip that for

primary energy. Already, 72% of copper consumption is

from the power and utilities sector, and in electrical

products. In particular, the electrification of transportation

and renewable energy would also be key drivers for copper

consumption growth. We forecast that copper demand will

grow at 3.1% CAGR until 2022, exceeding growth of 2.7%

for last 10 years.

Copper prices to rise led by both demand-pull and cost-push

factors. Growth in the global copper mine supply is expected

to decelerate due to structural challenges. Production costs

are rising for existing mines on systematic grade declines and

resource depletion, while tepid exploration in recent years

have led to limited discoveries. We are bullish on copper

prices over the long term fueled by bright demand outlook

and supply constraints. Accordingly, we forecast annual

average copper prices to rise to US$6,800/ton by 2022.

Initiating coverage on three copper companies; top picks are

Zijin Mining and MMG. Based on our criteria (earnings

exposure to copper, and earnings growth from copper) to

pick key beneficiaries of bullish copper prices, we

recommend Zijin Mining (2899.HK) and MMG (1208.HK)

while we have a HOLD call for Jiangxi Copper (0358.HK).

Zijin Mining is growing through diversification to copper

mines globally via M&As. MMG is an ideal proxy given its

higher earnings exposure to copper and clear long-term

focus on copper, and is also a turnaround play.

HSI : 27,091.26

Analyst

Lee Eun Young +65 6682 3708

[email protected]

Regional Research Team

LME copper price & global refined copper market balance

Source: Bloomberg Finance L.P., DBS Bank

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DBS Group Research . Equity 4 Oct 2018

Asian Insights SparX


Refer to important disclosures at the end of this report

STOCKS

12-mth

Price Mkt Cap Target

Price

Performance (%)

HK$ US$m HK$ 3 mth 12

mth

Rating

Jiangxi Copper 9.02 3,481 10.40 (6.2) (26.9) HOLD

Zijin Mining 2.97 5,513 3.70 (0.7) 10.8 BUY

MMG Ltd 3.95 4,060 4.70 (25.5) 13.5 BUY

Source: DBS Bank, Bloomberg Finance L.P.

Closing price as of 2 Oct 2018



ASIAN INSIGHTS

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a

sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite

feedback from our readers, and in particular welcome follow on questions worthy of closer examination.

SPECIAL THANKS TO YI SEUL SHIN AND RACHEL MIU FOR THEIR CONTRIBUTION TO THE REPORT

Table of Contents

Investment Summary 3

Industry highlights 7

Bullish on Long Term Copper Prices 10

Copper Demand’s New Growth Path Over the Next Decade 14

Electrifying Society: A Key Driver of Copper Demand 20

Copper Mine Supply Staying Tight 26

Copper Supply Lagging Demand 32

Appendix I: Global Copper Sector Value Chain 39

Appendix II: China Copper Sector Value Chain 41

Appendix III: Top copper mines and refiners 42

STOCKS 44

Zijin Mining – top pick 45

MMG – top pick 69

Jiangxi Copper 88

Page 2



ASIAN INSIGHTS

Investment Summary

Electrification to drive copper demand growth. Copper is set

for an electrifying future. Already the metal of choice

wherever electricity is needed, copper demand is set to

experience growth rates not seen in previous decades, as the

world moves towards the electrification of energy. In

particular, the electrification of transportation will be a mega-

trend in the future. Electric vehicles use copper more intensely

than internal combustion engine vehicles (ICEVs) – a battery-

powered electric vehicle contains four times as much copper

as an ICEV (80kg versus 20kg). Renewable energy also uses

significantly more copper per megawatt hour of power

generated than for coal or nuclear power. With the

electrification of energy, we expect growth in demand for

electricity to outstrip the growth in total primary energy

demand going forward. Already, 72% of copper consumption

is in the power and utilities sector, and in electrical products.

We forecast that demand will grow at 3.1% CAGR until 2022,

exceeding growth over previous decades.

EV and renewable energy to boost demand for copper. We

expect the global electric vehicle market to expand at 22%

CAGR to 2030, led by 25% growth from the China market.

We forecast copper demand for electric vehicles to rise from

208,000 tonnes in 2017 to 1.91m tonnes in 2030,

representing 19% CAGR. Copper consumption on electric

vehicles, estimated at 0.9% of the global total in 2017, will

rise to 8.2% of 2017’s total copper demand in 2030.

Between 2017 and 2040, the International Energy Agency

(IEA) forecasts an average global net capacity addition of

74GW for solar photovoltaic, 50GW for wind and 36GW for

all other renewables, concluding that 635,000 tonnes of

copper demand (3% of global copper consumption in 2017)

will be generated every year on average.

Copper’s second consumption peak to provide huge growth

potential in China and India. Copper demand is set to

experience an overall boost in Asia. Historically speaking,

copper consumption peaks a second time as emerging

economies mature and develop. In our analysis, we see that

the United States and Japan had one peak at 11kg/capita,

when their gross domestic product (GDP) was around

US$20,000-30,000 per capita, and a second peak

(13kg/capita) at US$40,000-50,000 GDP per capita. This

suggests huge potential for copper consumption in such

countries as China and India, which have yet to reach even the

first consumption peak. China, the world’s biggest copper

consumer at 50%, has a per capita copper consumption of

just 8.2kg while India was a mere 0.4kg in 2017.

Supply to remain tight. Growth in the global copper mine

supply is expected to decelerate due to structural challenges.

Production costs are rising for existing mines on systematic

grade declines and resource depletion, while tepid exploration

in recent years have led to limited discoveries. Net cash cost at

mines globally in 2017 is about three times the levels in 2000,

while copper ore grade at mines in Chile, the world’s largest

producer, has declined by 0.76ppts to 0.65% in 2016, from

1.41% in 1999. We forecast that global mine production will

grow at a CAGR of 2.9% during 2017-2022, slower than the

4% achieved over 2010-2016. We project that global refining

capacity will expand at 2.6% CAGR while global refined

copper supply will grow at 3% CAGR in 2017-2022, driven by

China and India’s capacity growth.

Market remains in deficit, long-term bullish outlook for copper

prices. Given strong demand growth, we expect to see a

copper shortage in the medium term. The global copper

market last registered a surplus in 2015, which turned into a

deficit of 326,000 tonnes in 2016, and was 262,000 tonnes

short in 2017. In 2018, we expect the deficit to narrow to

136,000 tonnes. We expect shortages until 2022, with the

deficits increasing. After ending 2017 30.1% higher at

US$7,157 per tonne, the LME spot copper price has retreated

in 2018. As of end-Sep, copper price is down by 13.7% to

US$6,180 per tonne, affected by the escalating trade war

across the globe and concerns over a potential economic

slowdown as a result. However, we expect LME copper prices

to rebound from current levels, backed by health demand. In

2018, copper price is forecast to average at US$6,471 per

tonne, 4.9% higher y-o-y. We forecast LME copper prices on

average to gradually rise to US$6,800 per tonne by 2022.

Initiating coverage on three copper players; top picks are Zijin

Mining and MMG. In evaluating the key beneficiaries of

bullish copper prices, we have considered two critical factors:

i) earnings exposure to copper; ii) earnings growth from

copper. In this perspective, we recommend Zijin Mining and

MMG as our top picks while we have a HOLD call for Jiangxi

Copper.

Zijin Mining (2899 HK / BUY / TP HK$3.70) is the leading

miner in China and is growing by diversification to copper

mines globally by M&As since 2012. The copper business will

lead the group’s earnings growth of 7.7% CAGR backed by

copper sales volume growth of 11.5% CAGR over 2017-2021.

The ongoing M&As for RTB Robor in Serbia and Nevsun in

Canada should be the key drivers for long term growth.

Page 3



ASIAN INSIGHTS

MMG (1208 HK / BUY / TP HK$4.70) is an ideal proxy to invest

in the copper space as its revenue exposure for copper is 86%

and the company has a clear strategy to focus on copper.

Over the years, MMG has divested non-core assets and

cleaned up its asset portfolio in line with its long-term

objective. The company also has turnaround story, and we

anticipate strong earnings growth of 60%/50% for

2018/2019 backed by robust operating results and interest

cost savings.

Jiangxi Copper (358 HK / HOLD / TP HK$10.40) has 84% of its

revenue coming from copper, however we believe the

company may not reap the full benefits of copper price hikes

given that i) its self-sufficiency of concentrates is low; and ii)

contribution from the low-margin copper trading business is

high. Copper smelting capacity expansion by Chalco and other

domestic companies may impact treatment charges/refining

charges(TC/RCs), which would lead to higher raw material

cost for the company as it is highly dependent on purchased

raw materials for copper cathodes, and competition is

intensifying in the domestic refined copper metal market.

However, we believe share price downside should also be

limited as it is trading at low end of its historical band at 0.6x

P/BV.

Business comparison Jiangxi Copper Zijin Mining MMG

Production volume (2017) Copper concentrate k tonnes 210 243 649 Copper cathode k tonnes 1,374 430 143 Copper Reserve & Resources m tonnes 14.4 31.5 21.9 Contribution by product (2017)

Revenue Copper 84%

Gold 4% Gold 50%

Copper 22%

Copper 86% Gold 5% Zinc 4%

Profit* Copper 89%

Gold 8% Copper 34%

Gold 25%

Las Bambas 79% Kinsevere 8%

(main product: copper)

Market Cap (28 Sep 2018) HK$ bn 46.9 87.6 32.6 US$ bn 5.99 11.20 4.17 RMB bn 41.1 76.9 28.6

Net Debt (2018F) RMB bn 9.94 27.5 49.7 EBITDA margins (2018F) 2.5% 12.2% 49.0% ROE (2018F) 3.8% 10.2% 18.0%

*Gross profit for Jiangxi copper and Zijin Mining and EBITDA margins for MMG. Source: Company, DBS Bank

Page 4



ASIAN INSIGHTS

Earnings comparison

Jiangxi Copper (RMB m) FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F

Total Revenue 185,228 201,728 204,234 206,193 213,675 222,354

Operating Profit 925 3,392 3,700 3,159 3,215 3,573

EBITDA 2,835 4,412 5,001 5,286 5,368 5,850

EBIT 1,185 2,550 3,196 3,359 3,315 3,673

Profit Before Tax (After-EI) 1,216 2,078 2,904 2,768 2,801 2,946

Net Profit (After-EI) 690 837 1,650 1,841 1,836 1,903

Return on Average Equity (ROAE) % 1.5% 1.8% 3.5% 3.8% 3.7% 3.8%

EPS (After-EI) 0.20 0.24 0.48 0.53 0.53 0.55

EPS (After EI) Growth (%) (YoY) -76.2% 21.4% 97.0% 11.6% -0.2% 3.6%

P/E (X) 39.7 32.7 16.6 14.9 14.9 14.4

Price/ BVPS (X) 0.6 0.6 0.6 0.6 0.6 0.5

EV/ EBITDA (X) 7.8 6.4 6.4 5.4 5.7 5.5

Zijin Mining (RMB m) FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F

Total Revenue 74,304 78,851 94,549 95,877 96,186 101,156

Operating Profit 1,577 4,867 6,884 7,386 8,112 8,761

EBITDA 4,886 8,984 11,211 11,698 12,565 13,382

EBIT 1,577 4,867 6,884 7,386 8,112 8,761

Profit Before Tax (After-EI) 2,086 2,126 4,568 5,544 5,748 6,220

Net Profit (After-EI) 1,656 1,840 3,508 3,613 3,746 4,054

Return on Average Equity (ROAE) % 6.0% 6.7% 11.2% 10.2% 10.1% 10.5%

EPS (After-EI) 0.08 0.09 0.16 0.16 0.16 0.18

EPS (After EI) Growth (%) (YoY) -29.1% 11.2% 83.0% 0.1% 3.7% 8.2%

P/E (X) 33.9 30.5 16.7 16.7 16.1 14.8

Price/ BVPS (X) 2.0 2.0 1.7 1.7 1.6 1.5

EV/ EBITDA (X) 16.0 9.9 7.6 7.7 7.9 7.3

MMG (US$ m) FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F

Total Revenue 1,951 2,489 4,143 3,836 4,170 4,286

Operating Profit -229 265 1,098 1,122 1,315 1,437

EBITDA -476 949 2,210 1,974 2,201 2,289

EBIT -1,126 265 1,277 1,097 1,315 1,437

Profit Before Tax (After-EI) -1,211 -48 744 605 889 1,063

Net Profit (After-EI) -1,027 -153 147 238 355 425

Return on Average Equity (ROAE) % -87.3% -18.0% 13.1% 18.0% 22.1% 21.2%

EPS (After-EI) -0.19 -0.02 0.02 0.03 0.04 0.05

EPS (After EI) Growth (%) (YoY) N/A N/A N/A 60.3% 49.5% 19.5%

P/E (X) -2.6 -20.4 27.3 17.0 11.4 9.5

Price/ BVPS (X) 4.0 3.9 3.3 2.8 2.3 1.8

EV/ EBITDA (X) N/A 15.1 6.4 6.6 5.6 5.0

Source: Company, DBS Bank

Page 5



ASIAN INSIGHTS

Peer comparison

Market Cap PER PBR EV/EBITDA ROE

(US$m) FY18F FY19F FY20F FY18F FY19F FY20F FY18F FY19F FY20F FY18F FY19F FY20F

BARRICK GOLD CORP ABX CN 12,890 21.0 18.5 19.7 1.3 1.3 1.2 6.0 5.9 6.1 7.6 8.6 8.1

NEWCREST MINING NCM AU 10,782 17.9 14.8 17.9 1.3 1.2 1.2 6.8 6.3 7.2 8.0 8.5 6.7

GOLDCORP INC G CN 8,841 43.1 17.8 16.5 0.6 0.6 0.6 8.1 5.6 5.1 0.8 3.3 2.2

AGNICO EAGLE MINES AEM CN 7,988 130 47.2 29.1 1.6 1.6 1.5 11.6 9.4 7.5 1.6 3.7 6.4

RIO TINTO RIO AU 89,154 11.6 12.8 13.2 2.1 2.0 1.9 5.8 6.2 6.3 19.0 15.9 15.4

GLENCORE GLEN LN 61,380 8.8 8.5 9.0 1.2 1.2 1.1 5.3 5.2 5.3 14.1 13.5 12.2

VALE SA-SP ADR VALE US 78,422 11.0 10.2 10.4 1.8 1.6 1.6 5.9 6.0 6.2 16.2 17.1 15.8

SOUTHERN COPPER SCCO US 33,349 18.3 15.8 15.2 4.5 3.9 3.5 9.9 8.8 8.5 24.2 25.3 26.0

ANGLO AMERICAN PLC AAL LN 29,044 9.4 10.0 11.1 1.2 1.1 1.0 4.4 4.6 4.9 13.0 11.8 10.2

FREEPORT-MCMORAN INC FCX US 20,170 7.6 13.0 8.6 1.8 1.6 1.4 4.2 6.2 4.7 27.0 13.0 16.5

ANTOFAGASTA ANTO LN 10,993 16.5 12.6 12.1 1.5 1.4 1.3 5.8 4.8 4.6 8.3 10.4 9.6

ZIJIN MINING-H 2899 HK 11,195 12.9 11.7 10.8 1.5 1.4 1.3 8.8 8.1 7.7 12.8 12.9 13.0

JIANGXI COPPER-H 358 HK 5,990 11.0 9.2 8.2 0.6 0.5 0.5 9.7 8.8 8.0 5.0 5.9 6.6

CHINA MOLYBDENUM-H 3993 HK 13,376 11.6 10.9 11.0 1.5 1.4 1.3 8.6 8.5 8.6 13.7 13.8 12.4

MMG 1208 HK 4,167 11.2 8.3 7.4 2.2 2.0 1.9 5.9 5.4 5.2 22.1 27.6 21.9

FIRST QUANTUM MINERALS FM CN 7,837 16.0 10.2 6.9 0.8 0.8 0.7 8.3 6.1 4.6 7.1 9.2 10.6

OZ MINERALS OZL AU 2,180 15.3 17.7 12.2 1.1 1.0 1.0 5.1 5.4 4.4 6.5 6.1 5.7

As of 28 Sep 2018 Source: Bloomberg Finance L.P., DBS Bank

Page 6



ASIAN INSIGHTS

Industry highlights

Copper and its deep links to society and the business cycle.

From at least 10,000 years ago, copper, one of the first metals

harnessed by humans, has been used to produce everything

from coins to ornaments. Today, copper and its alloys are used

to produce a range of products necessary to modern life, from

cars to electronics. Accordingly, copper demand has grown in

line with global economic growth, which makes copper a

reliable metal with which to track business cycles over the

long term.

An ‘electrifying society’ and copper’s new growth path. We believe that copper consumption is entering a new growth phase driven by an “electrifying society”. With the electrification of energy, we expect demand for electricity to outstrip the growth in total primary energy demand going forward. The production, distribution and transmission of all that power will require a great deal of copper. In particular, the electrification of transportation will be a mega-trend. Copper, with its superb electrical conductivity and lack of price-competitive substitutes, will be the key metal wherever electricity is used. Already, 72% of copper consumption is in the power and utilities sector, and in electrical products. We forecast that demand will grow at an annual 3.1% until 2022, exceeding growth over previous decades.

Electric vehicles, a key driver of copper demand. Electric vehicles will be a key driver of copper demand. The transition to electric vehicles (EVs) from internal combustion engine vehicles (ICEVs) is inevitable despite controversies over the

speed of implementation. Our regional automotive analyst, Rachel Miu, expects the global electric-vehicles market to grow 22% annually to 2030, led by China’s 25% market growth, which is bolstered by government policy. With a battery-powered electric vehicle (BEVs) containing four times as much copper as an ICEV (80kg versus 20kg), the red metal is expected to emerge a big winner from the electrification of light-duty vehicles.

We expect copper demand from electric vehicles to rise from

208k tonnes in 2017 to 1.91mn tonnes in 2030, up 19%

annually. Copper consumption from electric vehicles,

estimated at 0.9% of the global total in 2017, will rise to

8.2% of 2017’s total copper demand in 2030.

Renewable energy growth to accelerate copper demand

growth. Renewable energy growth is expected to accelerate

copper demand growth. Renewable energy uses copper more

intensely than conventional power generation – copper usage

per megawatt hour of offshore wind and solar power

generation is significantly higher than that for coal or nuclear

power generation. Based on International Energy Agency (IEA)

forecasts on global average annual net capacity addition

between 2017-2040 (74GW for solar photovoltaic, 50GW for

wind and 36GW of all other renewables), 635k tonnes of

copper demand (3% of global copper consumption in 2017)

will be generated every year on average until 2040.

Copper demand in EV Copper demand from renewable energy

Source: International copper alliance; IDTechEX; BYD, DBS Bank Source: IEA, DBS Bank

0%

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(k tonnes)Copper demand from Hybrids and EVs

% of 2017 demand

195

370

158

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(k tonnes)Other renewables Wind Solar

Page 7



ASIAN INSIGHTS

Copper’s second consumption peak and its huge growth

potential in China, India. In our analysis of peak copper

consumption, we see that developed economies such as the

United States and Japan had one peak at 11kg/capita, when

their gross domestic product (GDP) was around US$20,000-

30,000 per capita, and a second peak at US$40,000-50,000

GDP per capita. This feature distinguishes copper from other

metals and brightens its demand outlook. We are especially

optimistic on copper demand growth in the emerging markets.

China, the world’s biggest copper consumer at 50%, has a per

capita copper consumption of just 8.2kg while India was at a

mere 0.4kg in 2017.

Copper consumption per capita by country Copper consumption per capita for China & India

Source: Bloomberg Finance L.P., DBS Bank Source: Bloomberg Finance L.P., DBS Bank

Copper ore supply growth constrained by structural challenges.

Growth in the global copper mine supply is expected to

decelerate as existing mines experience higher production costs

from systematic grade declines and resource depletion, while

tepid exploration activities in recent years limit new discoveries.

Net cash cost at mines globally in 2017 is about three times the levels in 2000, while the copper ore grade at mines in Chile, world’s largest producer, has declined by 0.76ppts to 0.65% in 2016, from 1.41% in 1999. Of the 20 biggest copper mines globally, only four have begun production in the 21st century. The latest newly discovered mines are mostly in Latin America and sub-Saharan Africa, where political and social stability is weak. We forecast that global mine production will grow at a CAGR of 2.9% during 2017-2022, slower than the 4% achieved over 2010-2016.

World copper mine capacity vs utilisation

Source: Cochilco, DBS Bank

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(%)(m tonnes) World Mine Capacity

Mine Capacity Utilisation (R)

Page 8



ASIAN INSIGHTS

Refined copper supply growth to lag demand growth. Copper

is refined to the 99.99% cathode form through three broad

methods: primary production from copper concentrate or

solvent extraction and electrowinning (SX-EW), and secondary

production from scrap. These accounted for a respective 67%,

15% and 18% of global total refined copper production in

2017.

There is strong refining capacity growth in China, but ore

supply will remain a key determinant of refined metal

production going forward. We expect 2.6% CAGR growth in

global refining capacity and 3% CAGR growth in global

refined copper supply in 2017-2022, driven by China and

India.

In 2018, production is expected to outstrip capacity increases

and drive the strong recovery of output, compared to 2016-

2017, when weather and labour issues disrupted mines and

flattened output. However, output will still grow at a slower

pace than demand, keeping the copper market tight.

Meanwhile, China’s ban on low-grade copper scrap imports

has introduced uncertainties for secondary refined copper

production, and the prognosis remains unclear, given the

stricter environmental regulations on smelters.

Copper price range-bound in near term. After ending 2017

30.1% higher at US$7,157 per tonne, the London Metal

Exchange (LME) spot copper price has retreated in 2018. As of

end-Sep, copper price is down by 13.7% to US$6,180 per

tonne, affected by the escalating trade war. Both

fundamentals and sentiments put pressure on copper prices

last year as global major mines faced disruptions and were

expected to continue facing them in 2018 with a significant

portion of global mine output subject to the renewal of labour

contracts. However, as the year progresses, the market is

factoring in a smaller risk to copper supply YoY and in line

with this, we expect a positive growth in copper ore and metal

supply this year. Meanwhile, trade war concerns have been

weighing on copper prices, but we expect prices to rise from

the current levels. All in all, we forecast copper price to

average at US$6,471 per tonne in 2018, 4.9% higher y-o-y.

Long-term bullish perspective on copper prices. Given strong

demand growth, we expect a copper shortage over the mid-

term. The global copper market last registered a surplus in

2015, which turned into a deficit of 326k tonnes in 2016, and

remains 262k tonnes short. In 2018, we expect the deficit to

narrow to 136k tonnes. We expect shortages until 2022, with

the deficits increasing. Accordingly, we expect LME copper

prices to generally trend up, subject to fluctuations from

market dynamics such as warehouse inventory, supply

disruptions stemming from weather and labour strikes, and

macroeconomic indicators. We forecast annual average LME

copper prices to be on an uptrend in medium term.

Copper prices, affected by factors beyond fundamentals.

Copper is one of the most traded commodities around the

world. Market participants tend to trade on sentiment and

expectation rather than fundamentals, given the time lag in

the release of data on actual demand and supply. So, copper

prices are affected by various economic indicators, and news

and money flows in relation to the financial markets.

Copper prices are strongly correlated with the global economy

and generally swing with the business cycle, as seen from the

OECD system of Composite Leading Indicators (CLI).

Commodity prices have an obvious negative correlation with

the US dollar and copper is no exception.

LME copper price & global refined copper market balance


0

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(200)

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Page 9



ASIAN INSIGHTS

Bullish on Long Term Copper Prices

Our long-term outlook is that the copper market will remain

tight with strong demand growth. Copper prices will be

supported long term by solid global demand from electric

vehicles (EVs), renewable energy and economic growth.

Demand solid fuelled by EV, renewable energy and economic

growth. China, which accounts for 50% of global copper

demand, will keep demand growth bolstered by its power and

construction sectors, which account for approximately 46%

and 9.4% of copper end-use, respectively. Meanwhile, the

growing market for electric vehicles (EVs) and the shift to

renewable energy systems will generate fresh demand for

copper.

Also, demand from fast-growing developing countries,

especially India and within ASEAN, remains strong and should

continue to grow as their infrastructure investments, including

on power supply, rise. In particular, electric vehicles are

projected to consume 8.2% of 2017’s total copper demand in

2030, from a mere 0.9% in 2017. All in all, we forecast that

global copper demand will register a CAGR of 3.1% in 2022

from 2017.

Supply lagging in face of falling ore grades and structural

resource depletion. We do not expect the supply of refined

copper to keep pace with demand. Over the coming decade,

primary output from currently operating mines is set to fall,

due to the decline in ore grades endemic to the porphyry-type

resource base that dominates global supply. With weak metal

prices in the wake of the global financial crisis, investment in

mines also became inactive.

In addition, China’s latest restrictions on copper scrap imports

should significantly reduce the supply of secondary refined

copper for the world’s largest copper consumer, with impact

estimated to be equivalent to a 2% reduction in global copper

production in 2018. We expect refined copper supply to

register just 3% growth annually for the next five years.

Copper prices to be boosted by supply shortage in mid-term. We expect copper prices to be boosted by a supply shortage

in mid-term. Global refined copper supply last registered a

surplus in 2015 before a deficit of 326k tonnes in 2016, which

narrowed to 262k tonnes in 2017. In 2018, we expect the

shortage to further shrink to 136k tonnes. However, we

expect the copper market to stay in shortage until 2022, with

bigger deficits.

Accordingly, we expect London Metal Exchange (LME) copper

prices to generally trend upwards, with fluctuations influenced

by market dynamics, such as warehouse inventory levels,

supply disruptions stemming from weather or labour strikes,

and macroeconomic indicators.

Global copper supply/demand & price forecasts

(k tonnes) 15 16 17 18F 19F 20F 21F 22F

Copper mine production 19,450 20,429 20,278 20,927 21,534 22,150 22,728 23,408

Yoy % 4.6% 5.0% -0.7% 3.2% 2.9% 2.9% 2.6% 3.0%

Refined copper production 23,032 23,092 23,225 24,113 24,790 25,480 26,153 26,862

Yoy % 2.5% 0.3% 0.6% 3.8% 2.8% 2.8% 2.6% 2.7%

Copper consumption 22,893 23,418 23,487 24,249 25,060 25,813 26,572 27,345

Yoy % 0.6% 2.3% 0.3% 3.2% 3.3% 3.0% 2.9% 2.9%

Market balance 139 (326) (262) (136) (271) (334) (419) (482)

LME copper price (US$/tonne) 5,495 4,863 6,166 6,471 6,425 6,562 6,653 6,790

Yoy % -19.9% -11.5% 26.8% 4.9% -0.7% 2.1% 1.4% 2.1%


Page 10



ASIAN INSIGHTS

Copper prices affected by factors beyond fundamentals

Copper is one of the world’s most traded commodities.

Copper is one of the world’s most traded commodities. Copper

traders tend to trade on sentiment and expectation rather than

fundamentals, given the time lag in the release of data on

actual demand and supply. Considering the active trading

activities of copper through platforms such as LME, this leads

to price movements that can be divergent from market

fundamentals. For instance, annual average copper prices fell

after 2011 despite the refined copper deficit widening every

year from 2012 to 2014. During this period, we note that

sentiment on metals weakened along with signs of China’s

economic growth turning sluggish.

Copper prices vs macro variables. Copper prices are affected by

various economic indicators, news and money flows in the

financial markets. Generally, copper prices are strongly

correlated to global economic performance and hence, the

global purchasing managers’ index (PMI), as manufacturing

activity directly affects metal demand. However, during 2012-

2014, this correlation was outweighed by negative sentiment

due to copper oversupply and the demand slowdown in China,

resulting in copper prices moving sideways despite a recovery

in the OECD system of Composite Leading Indicators (CLI),

usually a precursor of a turning point in the business cycle.

Prices for copper, as well as for other LME metals, also

generally move with interest rates when higher rates imply an

improving business cycle. An appreciating US dollar is likely to

have a negative impact on copper prices, given the obvious

negative correlation between the greenback and commodity

prices.

Copper trading band is US$4,500-8,500, much less volatile

compared to other metals. Since 2005, copper has plunged to

as low as US$2,770 per tonne on 24 December 2008, pushed

down by the global financial crisis. It has also jumped to as

high as US$10,148 per tonne on 14 February 2014, driven by a

weak US dollar, and Cyclone Yasi hitting mine output at major

producers BHP Billiton, Xtrata and Rio Tinto after two years of

shortages. Excluding outliers, the copper price band was

US$4,500-8,500 per tonne, with price volatility the second

lowest among LME-traded metals.

Base metal prices at a glance (2005 – 2017)

LME Spot Price (US$/tonne) Aluminium Copper Zinc Lead Nickel Tin

Maximum 3,292 10,148 4,620 3,980 54,200 33,255

Date registered 11/07/2008 14/02/2011 25/05/2006 15/10/2007 16/05/2007 11/04/2011

Minimum 1,254 2,770 1,042 824 7,710 5,990

Date registered 24/02/2009 24/12/2008 12/12/2008 15/07/2005 11/02/2016 21/11/2005

Average* 2,073 6,522 2,254 1,981 18,053 17,759

Standard Deviation (SD)* 399 1,563 671 533 8,111 5,572

SD/Average* 19.3% 24.0% 29.8% 26.9% 44.9% 31.4%

Volatility (daily)* 1.2% 1.4% 1.6% 1.8% 1.9% 1.5%

Price at Financial Crisis 1,254 2,770 1,042 880 9,450 9,775

2017 average 1,969 6,166 2,896 2,317 10,411 20,105

2016 average 1,605 4,863 2,095 1,872 9,609 18,006

2015 average 1,661 5,495 1,928 1,784 11,807 16,070

Change in price (%)

2017 (end) y-o-y 30.8% 30.1% 29.1% 25.7% 22.5% -5.8%

2017 (average) y-o-y 22.7% 26.8% 38.2% 23.8% 8.4% 11.7%

2016 (end) y-o-y 13.7% 17.0% 60.2% 10.2% 15.5% 44.5%

2016 (average) y-o-y -3.4% -11.5% 8.6% 4.9% -18.6% 12.0%

LME Stock (k tonnes)

At 2017 end 1,102 202 182 142 368 2.2

At 2016 end 2,205 322 428 195 371 3.7

At 2015 end 2,895 236 464 192 441 6.1

At 2014 end 4,210 177 692 222 413 12.0

*As of 26 Sep 2018 Source: Bloomberg Finance L.P., DBS Bank

Page 11



ASIAN INSIGHTS

Copper prices & global manufacturing PMI Copper prices & OECD CLI


Copper prices vs the dollar index Copper prices vs US 10-year Treasury yield


49

50

51

52

53

54

55

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

Jan-15 Jan-16 Jan-17 Jan-18

Copper price (L)

Global Manufacturing PMI(US$/tonne) (pt)

95

96

97

98

99

100

101

102

103

0

2,000

4,000

6,000

8,000

10,000

12,000

Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17

Copper price (L)

OECD Leading Indicator(US$/tonne) (pt)

70

75

80

85

90

95

100

105

110

0

2,000

4,000

6,000

8,000

10,000

12,000


(pt)(US$/tonne) Copper Price(L) DOLLAR INDEX SPOT

0

1

2

3

4

5

6

0

2,000

4,000

6,000

8,000

10,000

12,000


Copper price (L)

US govt 10years yield(US$/tonne) (pt)

Page 12



ASIAN INSIGHTS

Near-term outlook: Copper price muted in 2018; to resume gains towards 2019

Prices up by 27% in 2017, fuelled by supply disruption.

Copper prices were up by 27% in 2017, fuelled by supply

disruption. Copper prices recorded a seven-year low of

US$4,311 per tonne in Jan 2016 and moved sideways until

the US presidential election on November 8 which caused the

metal to gain 11.4% in just two days, backed by growing

optimism about metal demand on massive infrastructure

spending.

After that, the copper price rose by another 30.1% in 2017,

averaging 26.8% higher YoY (2016 average: US$4,863 per

tonne; 2017: US$6,166 per tonne). Copper’s outstanding

performance in 2017 can be attributed to 1.) an overall

strengthening of base metal prices throughout the year on the

global economic recovery, 2.) mine supply disruptions such as

the 44-day labour strike (February-March 2017) at BHP’s

Escondida mine in Chile, the world’s biggest copper mine

accounting for 5% of global mine production in 2016, and 3.)

China’s solid economic performance despite earlier worries of

its slowdown affecting metal demand. The July 2017 news of

China banning low-grade copper scrap imports from 2018

also helped to push the price higher in 2H17.

Supply to ease in 2018 with more primary refined

products available. We expect supply to ease in 2018 with

more primary refined products available. In 2017, a series of

planned and unplanned shutdowns at major smelters and

lower output at solvent extraction and electrowinning (SX-EW)

plants significantly reduced primary refined production in

major producers such as Chile, Japan and the US, leading to

world growth of only 0.7%.

Copper to trade sideways in 1H18 before gaining

momentum in 2H. In 2018, the expected recovery of smelter

production, the restarting of SX-EW capacities, and adequate

availability of concentrates will support a 6.2% growth in

primary refined output. This will more than offset an

anticipated 7.2% decline in secondary refined production

(from scrap) due to China’s scrap import restrictions. All in all,

total refined copper supply is estimated to grow by 3.8%.

The copper price rally seen over 2H17 is losing steam in 2018

with signs of faltering Chinese demand growth. As of end-

Sep, copper price is down by 13.7% to US$6,180 per tonne,

affected by the escalating trade war across the globe and

concerns over a potential economic slowdown as a result.

However, we expect LME copper prices will rebound backed

by health demand and is estimated to register copper price to

average at US$6,471 per tonne, 4.9% higher y-o-y in 2018.

We expect LME copper prices on average to trend up over

long term.

LME copper price & stocks

LME copper price & global refined copper market

balance


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

00 02 04 06 08 10 12 14 16 18F 20F 22F(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

800

1,000



0

100

200

300

400

500

600

700

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


(k tonnes)(US$/tonne) LME warehouse stock(R)

LME Copper Price(L)

Page 13



ASIAN INSIGHTS

Copper Demand’s New Growth Path Over the Next Decade The criticality of copper to economic development. From at

least 10,000 years ago, copper, one of the first metals used by

humans, has been used to produce everything from coins to

ornaments. Today, copper and its alloys are used in the

production of a range of goods necessary to modern life, from

cars to electronics.

Copper is often viewed as a good proxy for the global

economic conditions. Accordingly, copper demand has been

growing in line with global economic growth, which makes

copper a good metal to represent economic cycle. Backing this,

the growth trend in global refined copper demand and global

GDP growth in the past 55 years display a decent positive

correlation. Since 1960, the copper consumption has grown

2.8% annually slightly lower than annual world GDP growth

rate of 3.5%.

Global refined copper demand growth vs Global GDP

growth Global refined copper demand vs Global GDP


The twin peaks of copper consumption Two peaks of copper consumption over the economic

development. Copper consumption in a country tends to

increase along with economic growth at the initial phase. In

the US and Japan, copper consumption reached its first peak at

11kg/capita, when gross domestic product (GDP) per capita

was around US$20,000-30,000. We see this as rising demand

for copper-intensive activities or products, such as investment

in infrastructure and electronics, as the country gets richer. This

consumption then wanes until the replacement demand

pushes it up again. In US and Japan, copper consumption

reached the second peak at US$40,000-50,000 GDP per

capita. With key developing countries such as China and India

yet to reach even the first peak, we expect future growth in

copper demand to be well supported.

Copper consumption per capita for the US & Japan Copper consumption in US & Japan


0

2

4

6

8

10

12

14

0 10,000 20,000 30,000 40,000 50,000 60,000

(kg/capita)

GDP per capita (US$, constant)

USA Japan

-15%

-10%

-5%

0%

5%

10%

15%

20%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Global refined copper demand growth y-o-y

Global GDP growth y-o-y

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

0

5,000

10,000

15,000

20,000

25,000

196019651970197519801985199019952000200520102015

(US$ bn)(k tonnes)

Tho

usa

nds

Global refined copper demand

Global GDP (R)

Global copper demand CAGR 2.8%

Global GDP CAGR 3.5%

0

500

1,000

1,500

2,000

2,500

3,000

95 97 99 01 03 05 07 09 11 13 15 17 19F 21F

(k tonnes)US Japan

Page 14



ASIAN INSIGHTS

Copper consumption peaked at US$30,000 per capita GDP in

major developed countries. Copper consumption peaked at

US$30,000 per capita GDP in major developed countries. The

peak consumption analysis in major countries is in line with

our prior thesis (see table below). These countries hit peak

copper consumption in 1991-2010, averaging 11.5kg of

copper consumption per capital. Their urbanisation rates were

over 67%, averaged 77.6%, with average GDP per capita at

c.US$29,000. Also per capita power consumption was up to

8,266KW and contribution of the added value of the tertiary

industry to GDP registered over 58%, and averaged at 68.8%.

At the peak of copper consumption, the economic

environment suggests the widespread usage of copper across

industries in daily life.

Peak copper consumption in major countries

Peak year

Urbanisation rate

Tertiary industry to

GDP

Power consumption

per capita GDP per capita

Peak consumption

Total population

Cu consumption

per capita

% % KWH US$ k tonnes millions kg

US 2000 79 75 13,671 36,488 3,025 282 10.7

Germany 2006 73 69 7,174 35,400 1,398 82 17.1

Japan 1991 79 67 7,975 37,154 1,613 127 12.7

S.Korea 2004 81 59 7,830 15,922 940 48 19.6

Italy 2006 68 70 5,834 31,800 801 59 13.6

France 2000 77 75 7,238 21,800 574 61 9.4

Spain 2010 71 67 6,026 34,674 344 46 7.5

UK 1997 81 71 5,909 25,266 408 58 7.0

Canada 2006 80 66 17,235 31,825 301 32 9.4

Australia 2002 88 70 10,813 20,071 188 20 9.6

Average 78 69 8,971 29,040 11.6

China (2017) 58.5 51.6 4,036* 8,123* 11,790 1,404* 8.4

*2016 figures Source: Antaike, World Bank, Bloomberg Finance L.P., DBS Bank

Page 15



ASIAN INSIGHTS

Huge consumption growth potential in developing countries Promising outlook for copper demand in developing countries.

In the conventional aspect of demand, the outlook is also

promising. China, the world’s biggest copper consumer (50%),

is transforming into a consumption-driven economy, which

should boost copper demand across a range of end-use

sectors, including for automotives, smart technology products,

and household appliances like air-conditioners. In addition, the

growth of urban consumers and infrastructure investment in

India and the ASEAN economies will be a major driver of

copper demand growth over the next few decades.

Copper consumption by country (2000) Copper consumption by country (2017)


Copper consumption by country (2022)


US 20%

China 12%

Japan 9%

Germany 9%

South Korea 6%

Italy 4%

Taiwan 4%

France 4%

Mexico 3%

Belgium 2%

Others27%

China 50%

US 8%

Germany 5%

Japan 4%

South Korea 3%

Italy 3%

Brazil 2%

Taiwan 2%

India 2%

Turkey 2%

Others19%

China 50%

US 7%

Germany 5%

Japan 4%

South Korea

3%

Italy 2%

Brazil 3%

Taiwan 2%

India 2%

Others22%

Page 16



ASIAN INSIGHTS

China: intense consumer. Since 2000, China’s copper

consumption has been grown rapidly in line with

industrialisation. In 2017, this reached 8.4kg per capita, an

11% annual growth since 2000. This level of consumption is

similar to what developed economies recorded when they

grew to about c.US$20,000 per capita GDP, a level at which

China is not. This could be interpreted as China’s higher

intensity for copper consumption, as its economy has grown by

focusing on manufacturing industries and fixed-asset

investment.

Thanks to strong demand growth, China now consumes 50%

of the world’s copper, as of 2017, up from 12% in 2000.

Power made up 50% of China’s total copper demand in 2016,

followed by air-conditioning and refrigeration (15%),

transportation (10%), construction (9%), and electronics (7%).

Chinese copper consumption to peak after 2027. According to

Antaike, the research arm of the China Nonferrous Industry

Association, China’s copper consumption peak will come after

2027 and hit more than 10kg per capita.

To support the projection, Antaike believes that China can 1.)

reach US$16,000 per capita GDP by around 2027, closing gap

with industrialised countries, 2.) exceed 10kg per capita copper

consumption by around 2030, 3.) its tertiary industries can

contribute to 59% of its GDP, and that 4.) by about 2031,

China can grow its per capita power consumption to 7,534kW

per hour, about the middle level in developed countries.

With the growing use of electric vehicles in China set to take a

key role in copper demand growth for next decade, we

forecast that Chinese copper demand will grow by a CAGR of

3.1% by 2022.

India: early-stage consumer. In 2017, the copper consumption

per capita in India was a mere 0.4kg, implying huge growth

potential. India’s GDP per capita was US$1,983 which is ¼ of

China’s, while its population, at 1.32bn, was slightly lower

than China’s 1.4bn. In light of India’s economy entering a rapid

growth phase, we forecast that copper consumption in India

will post one of the world’s strongest growth rates, at 6.2%

during 2017-2022.

China copper consumption by usage (2016) Copper consumption in Asia

Source: Antaike, DBS Bank Source: Bloomberg Finance L.P., DBS Bank

Copper consumption per capita by country Copper consumption per capita for China & India


Power50%

Air conditioning refrigeration

15%

Transportation10%

Construction9%

Electronic7%

Others9%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

00 02 04 06 08 10 12 14 16 18F 20F 22F

(k tonnes) Other India

Taiwan South Korea

Japan China

0

2

4

6

8

10

12

14

0 10,000 20,000 30,000 40,000 50,000 60,000

(kg/capita)


USA Japan China India

0

1

2

3

4

5

6

7

8

9

0 2,000 4,000 6,000 8,000

(kg/capita)


China India

Page 17



ASIAN INSIGHTS

What is copper used for? Electricity, mainly

Copper’s outstanding electrical conductivity... Copper is the

most conductive base metal in the world, with ideal properties

such as strength, ductility, corrosion-resistance and energy

efficiency. It is widely used in electric wires, power cables, and

other electronic equipment. Power utilities and electrical

products together account for more than 70% of copper

consumption globally. Substitution risk is very limited, as it is

not cost effective to use silver or gold, the world’s first and

third most conductive elements, instead of copper, which is

the second most.

…makes it key beneficiary of electrification trend. Demand for

copper will brighten with the electrification of energy

demand, which we expect to outstrip the growth in total

primary energy demand going forward. The production,

distribution and transmission of all that power will require a

great deal of copper. As will the growth of the electric vehicle

market.

Copper to remain an important building material. Copper is

also used in construction, to make plumbing, taps, valves and

fittings. It is a preferred building material and should remain

so, thanks to its advantageous properties –as it does not burn,

melt or release toxic fumes in case of fire. Also, copper is

antimicrobial, naturally resisting pathogens and preventing

diseases from spreading; for example, copper tubes help

protect water systems from potential bacterial infection.

Accordingly, copper demand will grow following With Asia’s

urbanisation and the need for more buildings, copper demand

will grow as high rising commercial and residential building

requires more consumption of copper.

…while coinage demand could fall. Another use of copper is

in coins and ammunition, which was responsible for 10% of

copper demand in 2016. Copper’s malleability and anti-

bacterial properties – coins pass many hands – make it an

ideal coinage metal. According to the International Copper

Study Group (ICSG), one cent and five cent US coins contain

2.5% and 7.5% of copper respectively, while other coins

contain a pure copper core with 75% copper face; the 10,20

and 50 euro cents coins consist of 89% copper. However, we

expect technological advancements in electronic payment to

threaten demand for coins, and so demand for copper for

coinage to fall according.

Global copper consumption breakdown by sector (2016) Global copper consumption breakdown by usage (2016)

Source: IWCC, ICA, DBS Bank Source: IWCC, ICA, DBS Bank

Building Construction

29%

Home appliance &

PC

21%Infrastructure

16%

Transport13%

Industrial 11%

Ammunation, coins10%

Electrical products

37%

Power Utilities35%

Plumbing & Valves, fittings

11%

Ammunation, coins10%

Others7%

Page 18



ASIAN INSIGHTS

New growth path for copper demand Copper’s demand growth to scale greater heights… Global

copper demand has grown at 2.5% annually since 1970, with

2000s and the period of 2010-2017 registering the strongest

demand growth of 2.8% each. Particularly in the 2000s,

growth was dampened as demand from US and Europe

flagged during the global financial crisis, offsetting a

whopping 14.7% annual growth from China. In 2010 to

2017, demand recovery was led by the developed world as

China’s growth decelerated to 6.9% on average. The worst

period for copper demand was in the 1990s, which was driven

by negative CAGR of 12.5% and 3.2% in demand from China

and US, respectively.

…along with society’s electrification. We believe copper

consumption is entering a new growth phase driven by an

“electrifying society”. Electrification of transportation should

be a mega-trend and the strong government push for electric

vehicles will keep copper demand strong in China. The

growing need for renewable energy is another critical factor.

We forecast that global copper demand will register its

highest growth of an annual 3.1% for the next five years. This

will also be bolstered by emerging economies, including India

and ASEAN, entering the high copper-consuming phase.

Global demand growth rate by century Global demand forecast by region

Source: Bloomberg Finance L.P., WBMS, DBS Bank Source: Bloomberg Finance L.P., WBMS, DBS Bank

Global copper demand forecasts

Source: WBMS; ICSG, DBS Bank

CAGR

(k tons) 2016 2017 2018F 2019F 2020F 2021F 2022F 2017 2018F 2019F 17-22F

Asia 16,398 16,564 17,135 17,748 18,314 18,900 19,495 1.0 3.4 3.6 3.3

China 11,642 11,790 12,144 12,545 12,921 13,309 13,708 1.3 3.0 3.3 3.1

Japan 973 998 1,003 1,018 1,039 1,059 1,070 2.6 0.5 1.5 1.4

South Korea 759 656 669 682 692 699 706 (13.6) 2.0 2.0 1.5

Taiwan 507 498 508 523 534 542 550 (1.8) 2.0 3.0 2.0

India 499 486 524 556 584 619 656 (2.7) 8.0 6.0 6.2

Other 2,018 2,137 2,286 2,423 2,544 2,672 2,805 5.9 7.0 6.0 5.6

Europe 3,781 3,712 3,786 3,881 3,960 4,020 4,081 (1.8) 2.0 2.5 1.9

Germany 1,243 1,176 1,200 1,224 1,236 1,248 1,261 (5.4) 2.0 2.0 1.4

Italy 596 633 646 659 665 672 679 6.2 2.0 2.0 1.4

Other 1,942 1,903 1,941 1,999 2,059 2,100 2,142 (2.0) 2.0 3.0 2.4

North America 2,405 2,324 2,404 2,479 2,553 2,627 2,707 (3.3) 3.4 3.1 3.1

US 1,811 1,775 1,811 1,838 1,867 1,893 1,922 (2.0) 2.0 1.5 1.6

Other 594 549 593 641 686 734 785 (7.4) 8.0 8.0 7.4

South & Cent ral America 672 718 751 772 796 826 856 6.9 4.6 2.8 3.6

Brazil 511 583 612 630 649 675 702 14.0 5.0 3.0 3.8

Other 161 135 139 142 147 151 154 (15.8) 3.0 2.0 2.6

Africa 140 119 122 126 134 141 145 (14.6) 2.0 4.0 4.0

Oceania 23 49 51 54 57 58 60 113.0 5.0 5.0 4.2

Total 23,418 23,487 24,249 25,060 25,813 26,572 27,345 0.3 3.2 3.3 3.1

y-o-y (%)

0

5,000

10,000

15,000

20,000

25,000

30,000

00 02 04 06 08 10 12 14 16 18F 20F 22F

(k tonnes) Oceania Africa

South & Central America North America

Europe Asia

2.5% 2.6%

1.4%

-3.3%

2.5% 2.8% 2.8% 3.1%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1970-2017 1970's 1980's 1990's 2000's 2010's 2010-2017 2017-2022F

Page 19



ASIAN INSIGHTS

Electrifying Society: A Key Driver of Copper Demand

We believe copper consumption is entering a new growth

phase driven by an “electrifying society”.

With the electrification of energy demand, we expect demand

for electricity to outstrip the growth in total primary energy

demand going forward. The production, distribution and

transmission of all that power will require a great deal of

copper. A mega trend will be the transition to electric vehicles

from internal combustion engine vehicles. Also driving

demand is renewable energy, which has higher intensity of

copper consumption – copper usage per megawatt hour of

offshore wind and solar power generation is significantly

higher than that for conventional power generation.

EV market to see strongest growth in next decade Electric vehicle market to register strong growth to 2030.

The electric vehicle, or EV, market will register strong growth

to 2030. This is attributed to 1.) purchasing incentives as part

of national policy, 2.) high consumer acceptance of electric

vehicles, 3.) cheaper batteries due to substantial capacity

expansion, and 4.) fast-expanding charging infrastructure in

cities. As of 2017, there are 1.02mn EVs* produced, up from

48,000 in 2011, a CAGR of 87%, according to our auto

analyst, Rachel Miu. This is set to achieve an CAGR of 28%

over the next decade to 12.3mn units in 2030.

Sales of electric and hybrid electric vehicles** rising

Sales of EVs and HEVs** are rising. In 2017, sales of these

vehicles reached 3.2mn units, up 65.7% annually, from 254k

units in 2012. We expect sales to increase to 28.7mn units in

2030 from 3.2mn in 2017, up 18% annually. Hybrid electric

vehicles, or HEVs, are expected to make a key contribution to

the overall electric vehicle market with a 16% CAGR in light

of less cost competitiveness of batteries in EVs and low oil

prices bolstered by US shale oil’s output.

China opting for high-performance EVs. China has been

actively promoting the adoption of electric vehicles in the

country. In September 2014, it introduced an exemption for

EVs and HEVs from the 10% purchase tax. The tax exemption

was set to expire in 2017, but has been extended to 2020

China’s policies are also increasingly selecting for better

quality, higher performing EVs. This year, it lifted the subsidy

requirement on a single-charge range from 100km to 150km.

Also, the subsidies given to the higher-range models have

been raised. By 2020 however, China plans to phase out the

subsidies. Meanwhile, it is introducing a new energy vehicle

(NEV) credit scheme for automotive makers and importers,

making it mandatory for these companies to obtain a

minimum level of NEV credits: 10% in 2019, and 12% in

2020. The credit value per electric car will vary depending on

specifics such as charging range, with preference given to

more advanced technology. Originally set to start in 2018, the

scheme has been deferred to 2019 to allow for a smoother

transition.

* EV: BEV (Battery Electric Vehicle) and PHEV (Plug Hybrid Electric Vehicle)

** EV & HEV: EV and HEV (Hybrid Electric Vehicle), Hybrid Bus and E-bus.

EV & HEV forecasts EV forecast for China

Source: International copper alliance; IDTechEX; BYD, DBS Bank Source: DBS Bank

0%

10%

20%

30%

40%

50%

60%

70%

0

5,000

10,000

15,000

20,000

25,000

30,000

16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F

(k units)

Ebus hybrid

Ebus BEV

Car HEV

Car BEV

Car PHEV

Growth rate(R)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F

(k units)

China EV sales

Page 20



ASIAN INSIGHTS

Strongest growth across Asia for next three years. We expect

Asia’s EV market, led by China, to grow at a CAGR of 24%

till 2030, higher than the expected 21% growth globally. As

the result, Asia is likely to increase its share of the global EV

market to 69% in 2030 from 51% in 2017. North America,

led by the US should remain the second largest EV market for

the next decade, growing 16% annually. In particular, we

expect the EV market to enjoy its strongest growth over the

next three years in Asia, expanding 35% annually to reach

8.8mn units in 2020.

EV forecast breakdown by region

Source: IEA; IDTechEX; BYD, DBS Bank

EV forecast

Source: IEA; IDTechEX; BYD, DBS Bank

Asia, 69%North America,

11%

Europe, 18%

Others, 2%

2030

Asia, 51%

North America,

21%

Europe, 23%

Others, 4%

2017

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F

(k units) Others Europe North America

Asia Growth rate(R)

Page 21



ASIAN INSIGHTS

Policy support key to growth of EV market. We believe that at

this stage of the electric-car market development, policy

support is indispensable to lower barriers to adoption. A

supportive policy environment enables market growth by

making vehicles more appealing for consumers, reducing risks

for investors and encouraging large-scale electric-vehicle

business streams.

We believe that the most important policies should be support

the research and development of innovative technologies, and

financial incentives to lower the total cost of ownership.

Recent advancements in battery cost and performance show

that research and development, and mass production both

lead to rapid cost declines and performance improvements.

However, despite rapidly decreasing battery costs since 2009,

electric-car battery packs are still a major cost component and

drive up retail prices. Financial incentives remain important in

reducing the gap between electric and conventional cars in

terms of purchase cost and total cost of ownership.

EV support policies

China

• In 2016, implementation of the fourth stage of the fuel consumption standard framework

• Acquisition tax and excise tax exemption (depending on engine displacement and price, in the range of RMB35,000-60,000 or US$5,100-8,700)

• Circulation and ownership tax exemption

• Possibility of local subsidies within the limit of 50% of the amount granted via central subsidies

• From 2017, 20% reduction from 2016 subsidies, with the plan to adjust policies according to market response until 2020

• In seven major urban centres, exemptions from licence plate access restrictions

• Locally, access to bus lanes, exemption from access restrictions at peak times, free charging, free parking

Germany

• EU tailpipe emission standard (Euro 6 in 2016), EU fuel economy regulation

• Purchase rebates of EUR4,000 (US$4,400) for BEVs and EUR3,000 (US$3,300) for PHEVs, at the limit of 400,000 cars until 2020 or EUR600m (US$674m)

• Automakers should provide half of the incentive amount, the government covering the other half

• Ten-year circulation tax exemption, reduced to five years from 2021

• Tax deduction for company cars

• Differentiated plates for EVs, allowing for differentiated measures

• Locally, free parking, dedicated parking and access to bus lanes

India

• Tailpipe emission standard (Bharat 3, equivalent Euro 6)

• FAME Scheme (includes several components, such as demand incentives and pilot projects)

• In some states, registration tax and VAT rebates or exemptions

Japan

• Tailpipe emissions standard (PNLT 2009, equivalent to Euro 6)

• Battery capacity and electric range-based purchase subsidy of JPY850,000 (US$7,700) maximum, e.g. 30 kWh-battery Nissan Leaf: JPY330,000 (US$3,000)

• Locally, waivers on fees, access to restricted traffic

US

• Corporate Average Fuel Economy (CAFE) standard with multipliers for EVs and alternative powertrains

• Tax credit of US$2,500-7,500 to be phased out after 200,000 units per manufacturer are sold for use within the country

• ZEV production mandates in place in nine states

• In some states, purchase rebates and registration tax exemptions

Source: IEA, DBS Bank

Page 22



ASIAN INSIGHTS

Copper to benefit from EV market growth

Copper, batteries and the growing EV market. Copper, the

irreplaceable metal for electric conductivity, will be in greater

demand than ever in the production of EVs. This is because

the EV, which uses an electric motor powered by batteries or

fuel cells, requires more copper to manufacture than the

conventional internal combustion engine vehicle (ICEV), which

is powered by gasoline or diesel. The greater the reliance in

electricity, the more copper is needed to make the vehicle. So,

a battery-operated vehicle (BEV), which operates exclusively on

battery power, requires more copper than a plugged-in hybrid

electric vehicle (PHEV), which has a battery that can be

recharged from plugging into an external electric power

source and also operates on gasoline or diesel. Among BEVs,

buses would use up more copper than cars because they need

bigger batteries to run. Hybrid electric vehicles (HEVs), which

can’t be plugged in, we do not include in our definition of

“EVs”.

BEVs consume four times more copper. According to research

commissioned by the International Copper Association (ICA),

EVs require a substantial amount of copper in the batteries,

windings and copper rotors used in their electric motors, and

in wiring, busbars and the charging infrastructure. It takes

83kg of copper to make one BEV, and 40kg to make one

HEV, which is four and two times respectively what is required

for an ICEV. The BEV battery pack alone contains 40kg of

copper (half of its total copper content) and is the single

biggest area of copper consumption.

Copper usage per unit of car

Source: Copper Alliance, IDTechEX; BYD, DBS Bank

Copper usage per unit of car by component

(kg) ICEV HEV PHEV BEV Ebus Hybrid Ebus BEV

Battery 1.0 22.0 40.0 12.0 292.0

Inverter 0.3 0.3 0.3 1.0 1.0

Electric Motor 5.0 5.0 9.9 20.0 20.0

HV Wire 5.0 5.0 5.0 11.0 11.0

Others 5.0 5.0 5.0 5.0 5.0 5.0

LV Wire 18.0 23.0 23.0 23.0 40.0 40.0

Total 23.0 39.3 60.3 83.2 89.0 369.0

Source: Copper Alliance, IDTechEX; BYD, DBS Bank

23 40 60 83 89

369

0

50

100

150

200

250

300

350

400

ICEV HEV PHEV BEV Ebus HEV Ebus BEV

(kg/unit)Copper usage

Page 23



ASIAN INSIGHTS

Contribution of copper demand from EVs to rise to 6.6% in

2030 from 0.9% in 2017. Based on our EV forecasts, we

project that copper demand from EVs will rise from 208k

tonnes in 2017 to 1.91mn tonnes in 2030, up 19% annually.

Copper demand from EVs is estimated to equate 8.2% of

total copper consumed in 2017 by 2030, up from an

estimated 0.9% in 2017. For next five years, copper demand

from EVs will register the strongest growth of 29% in CAGR,

in line with our EV forecasts. In 2022, copper usage in EVs

should contribute to 2.3% of total copper demand.

In our pessimistic case scenario, we have factored in the

possibility of oil prices staying low and leading to slower

adoption of EVs globally. We assume that HEVs’ contribution

in terms of unit sales to the total HEV and EV market will

gradually lower to 49% in 2030 from 64% in 2017. Where

EVs’ contribution exceeds the premise, we expect a positive

impact on copper demand.

EV infrastructure an additional spur to copper demand

growth. Outside of the copper demand projections based on

usage in electric vehicles, we also expect copper uses

associated with infrastructure. First, each 3.3kW charger will

add 0.7kg of copper demand with fast chargers, say a 200kW

one, adding up to 8kg of copper each. On top of that, copper

will be needed in power generation and grid infrastructure,

and grid storage and charging infrastructure. Copper

consumption in these areas, negligible in the early stages, is

set to grow strongly as electric vehicles become more popular.

According to industry experts, copper demand from electric-

vehicle infrastructure is likely to register 29% growth during

2020-2030, with share of consumption expanding to 37% in

2030 from 29% in 2020.

Forecast of copper demand in EV Forecast of copper demand in EV by scenario

Source: Copper Alliance; IDTechEX; BYD, DBS Bank Source: IEA; IDTechEX; BYD, DBS Bank

Forecast of copper demand in EV & EV infrastructure

Source: IEA; IDTechEX; Glencore, DBS Bank

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0

500

1,000

1,500

2,000

2,500

15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F

(k tons) Ebus hybrid

Ebus BEV

Car HEV

Car BEV

Car PHEV

% to 2017 total copper demand(R)

0

500

1,000

1,500

2,000

2,500

12 13 14 15 16 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F

(k tons) Base case

Pessimistic

Optimistic

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2020F 2025F 2030F

(k tonnes) Hybrid/Electric vehicle

Charging infrastructure

Grid storage

Generation and grid infrastructure

Page 24



ASIAN INSIGHTS

Renewable energy a copper guzzler

Copper is also the key metal in the renewable energy theme.

Copper is also the key metal in the renewable energy theme.

Renewable energy consumes copper more intensely than

conventional power generation – copper usage per megawatt

hour of offshore wind and solar power generation is

significantly higher than that for coal or nuclear power

generation. As such, the expansion of renewable energy

globally should be another driver of copper demand going

forward.

Based on International Energy Agency’s (IEA) forecasts on

global average annual net capacity addition between 2017-

2040 (74GW for solar photovoltaic systems, 50GW for wind

and 36GW of all other renewables), 635k tonnes of copper

demand (3% of global copper consumption in 2017) would be

generated every year on average until 2040. This is up 37%

from copper consumption between 2010-2016. The IEA also

expects renewables to contribute 40% of total power

generation by 2040, led by the strong adoption of solar

photovoltaics in China and India.

Global electricity generation mix forecast by IEA

Copper intensity by power generation type (renewable

energy)

Source: IEA, DBS Bank Source: IEA, DBS Bank

Global average annual renewable energy capacity

additions & forecast Copper demand from renewable energy capacity additions

Source: IEA, DBS Bank Source: IEA, DBS Bank

Coal, 37%Coal, 26%

Oil, 4%

Oil, 1%

Gas, 24%

Gas, 23%

Nuclear, 11%

Nuclear, 10%

Renewables, 24% Renewables,

40%

2016 2040

0

2

4

6

8

10

12

Wind -Offshore

Solar Wind -Onshore

NaturalGas

Nuclear Hydro Coal

(kg/KW)

195

370

158

175

110

90

0

100

200

300

400

500

600

700

2010-2016 2017F-2040F

(k tonnes)Other renewables Wind Solar

39

74

45

5044

36

0

20

40

60

80

100

120

140

160

180

2010-2016 2017F-2040F

(GW)Other renewables Wind Solar

Page 25



ASIAN INSIGHTS

Copper Mine Supply Staying Tight

Real ore availability to be limited despite capacity growth over the decade

Mine capacity has grown, but utilisation has declined. We

expect real ore availability to be limited despite capacity growth

over the decade. Mine capacity has grown, but utilisation has

declined over the same period. Global copper production

increased at a CAGR of 2.5% from 2000 to 2017, lower than

the global mine capacity growth of 3.1%. This is because of

the drop in the utilisation ratio over the same time period –

declining from over 90% to mid- to low-80%. We believe the

major reasons behind the lower utilisation ratio are declining

ore grades and rising cash costs as mines age; the lack of new

major mine discoveries; as well as growing social instability,

including labour strikes at major mines.

Ore supply growth to slow to 2022. There will continue to be

obstacles in the ramp-up of ore production going forward. In

2017, the net cash cost of a mine was triple that in 2000, with

surging labour costs as the biggest contributor to the cost

increase. In addition, capex intensity for mines is another

concern for mining costs going forward, having doubled over

the last 10 years. In light of currently developing mine projects

and mine shutdowns, we expect global mine capacity to

increase at around a 2% CAGR over a five-year period (2017-

2022). Global copper ore production is expected to grow at a

CAGR of 2.9% over the same period, a slowdown from the

4% CAGR from 2010 to 2016.

World copper mine capacity & utilisation rate

Source: ICSG, DBS Bank

We expect copper mine output to recover this year, after

posting negative growth in 2017. We forecast that global

copper ore production will return to growth this year, rising

3.2% in 2018 and 2.9% in 2019. Despite the lack of new

large-scale projects in the pipeline, there will still be some

additional supply coming through from restarts, expansion at

existing mines and commencement of smaller size projects.

Also, we are assuming fewer mine disruptions arising from

weather and labour issues this year, as compared to 2017.

In 2017, copper ore production was down 0.7% YoY to

20.3mn tonnes. This can be attributed to 1.) a lack of new

supply additions, 2.) falling ore grades, 3.) unfavourable

weather conditions at the beginning of the year, and 4.) labour

disputes leading to production halts at major mines. By region,

North America saw the biggest fall due to the substantial drop

in production from both the US and Canada. Major copper ore

producing countries, including Chile and Indonesia, also

recorded negative growth in their mine output.

One-fifth of the global production volume remains subject to

potential disruption from labour negotiations. In 2018, one-

fifth of global production volume remains subject to potential

disruption from labour negotiations. The 44-day strike at the

world’s largest copper mine, Escondida in Chile, contributed to

the mine output decline last year; and concerns over potential

mine supply disruptions continue to linger this year. Around 32

labour contracts at copper mines are due for negotiation in

2018 – the highest number since 2010. To date, about half of

these negotiations have been completed, with some even

reaching early agreement. However, the pending agreements

remain a risk to mine output this year, as these mines together

account for 21% of global output (based on 2016 production

figures); and early talks at Chile’s Escondida mine have ended

with no conclusion.

80

82

84

86

88

90

92

94

96

0

5

10

15

20

25

30

2000 2003 2006 2009 2012 2015 2018F 2021F

(%)(m tonnes)

Thou

sand

s

World Mine Capacity

Mine Capacity Utilisation (R)

Page 26



ASIAN INSIGHTS

Global copper mine production forecast

Source: WBMS, Bloomberg Finance L.P., DBS Bank

South America to remain key supplier

South America

We expect South America to remain a key supplier with strong

growth expected in Democratic Republic of the Congo (DRC).

South and Central American countries accounted for 41% of

global copper ore production in 2017. We forecast the region

to post 1.8% and 5.1% growth in mine output in 2018 and

2019, respectively. Chile is the largest copper ore producer in

the world, contributing 27% to the global output in 2017.

However, this was a substantial decline from its 35%

contribution in 2000, and the proportion is set to decline

further to 26% by the end of our forecast period in 2022, as

Chile faces the rising threat of falling ore grades with no

significant new supply coming up.

Meanwhile, we expect Peru to gain increasing presence as a

key copper ore producer. Since the opening of the Las Bambas

mine in 2016 – which is the eighth largest copper mine

globally, with a production capacity of 450k tonnes – Peru’s

copper mine output surged steeply (up 653k tonnes or 38.4%

YoY in 2016). As of 2017, Peru was the world’s second biggest

copper ore producing country, accounting for 12% of the

world’s output.

Asia

Copper mine output from Asia fell 3.1% YoY in 2017, as

production declined in two key countries – China and

Indonesia. We attribute the sluggish output from China to

declining ore grades as well as the country’s tightening

environmental protection restrictions on pollution-causing

mining activities. In Indonesia, there was a temporary ban

imposed on concentrate exports from January to April 2017,

leading to slower production. We expect continued volatility in

the output of these countries in the coming years, on the back

of unexpected regulatory changes that may affect mining

activities. We forecast 5.6% growth in copper mine output

from Asia in 2018, and a 3.4% decline in 2019. The decline in

2019 will largely be due to the production volumes affected by

the transformation of Indonesia’s Grasberg mine into

underground operations.

Africa & Oceania

DRC experienced a fall in output in 2016 as Glencore

suspended production at the Katanga mine. Backed by the

resumption of operations at Katanga mine, we expect the mine

output from DRC to grow strongly, with double-digit growth

rates in 2018 and 2019. After 2019, the growth could come

from the new major mines – Kamoa and Kipushi, which are

currently undergoing feasibility studies. While the Kamoa-

Kakula project would be a significant mine for future supply,

CAGR

(k tons) 2016 2017 2018F 2019F 2020F 2021F 2022F 2017 2018F 2019F 17-22F

Asia 4,509 4,370 4,616 4,460 4,783 4,754 4,839 (3.1) 5.6 (3.4) 2.1

China 1,851 1,656 1,803 1,868 1,904 1,913 1,919 (10.5) 8.9 3.6 3.0

Indonesia 696 666 721 494 759 696 711 (4.2) 8.3 (31.5) 1.3

Kazakhstan 596 745 754 754 774 774 774 25.1 1.1 0.0 0.8

Others 1,367 1,302 1,337 1,343 1,345 1,370 1,434 (4.8) 2.7 0.4 2.0

Europe 1,677 1,711 1,745 1,831 1,808 1,828 1,828 2.1 2.0 4.9 1.3

Russia 740 740 770 880 951 1,022 1,093 0.0 4.1 14.3 8.1

Others 937 971 975 951 857 806 735 3.7 0.4 (2.5) (5.4)

North America 2,914 2,623 2,594 2,591 2,589 2,685 2,774 (10.0) (1.1) (0.1) 1.1

US 1,431 1,256 1,221 1,211 1,221 1,250 1,319 (12.2) (2.8) (0.8) 1.0

Mexico 766 756 756 763 776 788 788 (1.3) 0.0 0.9 0.8

Others 717 611 618 618 593 648 668 (14.7) 1.1 0.0 1.8

South & Cent ral America 8,337 8,376 8,531 8,965 9,242 9,711 10,113 0.5 1.8 5.1 3.8

Chile 5,553 5,504 5,578 5,588 5,658 5,876 6,024 (0.9) 1.4 0.2 1.8

Peru 2,354 2,445 2,521 2,691 2,783 3,008 3,246 3.9 3.1 6.7 5.8

Others 431 428 431 686 801 826 843 (0.5) 0.7 59.1 14.5

Africa 1,964 2,214 2,426 2,643 2,663 2,671 2,678 12.7 9.6 8.9 3.9

DRC 1,024 1,095 1,267 1,434 1,434 1,441 1,446 6.9 15.7 13.2 5.7

Zambia 738 942 982 1,032 1,052 1,052 1,052 27.6 4.2 5.1 2.2

Others 202 178 178 178 178 178 180 (12.0) 0.0 0.0 0.2

Oceania 1,028 983 1,014 1,043 1,063 1,079 1,176 (4.4) 3.2 2.8 3.6

Australia 948 879 910 939 959 974 1,009 (7.3) 3.6 3.2 2.8

Others 80 105 105 105 105 105 167 30.6 0.0 0.0 9.8

Total 20,429 20,278 20,927 21,534 22,150 22,728 23,408 (0.7) 3.2 2.9 2.9

y-o-y (%)

Page 27



ASIAN INSIGHTS

and would rank within the top three biggest copper mines

globally with projected annual production of over 500k tonnes

of copper, we have not factored this potential production

volume into our forecast due to the uncertainties over when

production will begin. As such, DRC’s production volume is

subject to a large upside adjustment.

Mine restarts and new openings are scheduled in Africa and

Oceania. Zambia’s production will grow on a ramp-up and new

projects. Some projects are in the pipeline for Papua New

Guinea, but production will likely start in 2019 and beyond.

Until 2019, Australia will be the sole driver of output growth in

Oceania, where we expect 2.6% and 2.2% growth in 2018

and 2019, respectively.

Copper ore production breakdown by country (2000) Copper ore production breakdown by country (2017)


Copper ore production breakdown by country (2022)


Chile 35%

US 11%

Indonesia 8%Australia

6%

Canada 5%

Russia 4%

Peru 4%

China 4%

Poland 4%

Kazakhstan 3%

Others16%

Chile 27%

Peru 12%

China 8%US

6%

DRC5%Zambia

5%

Australia 4%

Mexico 4%

Kazakhstan 4%

Russia 4%

Indonesia 3%

Others18%

Chile 26%

Peru 14%

China 8%

DRC6%

US 6%Zambia

5%

Russia 5%

Australia 4%

Mexico 3%

Kazakhstan 3%

Indonesia 3%

Others17%

Page 28



ASIAN INSIGHTS

Challenges in mines beyond 2018 Falling ore grades and rising mining costs. Falling ore grades

and rising mining costs are limiting factors to mine output. As

many of the world’s larger copper mines age amid the lack of

new discoveries, a major issue the copper industry faces is

decreasing copper content in the ores. We note that the

copper ore grade at mines in Chile has been trending down

consistently over the years, and the average ore grade has

fallen 0.76ppt – from 1.41% in 1999 to 0.65% in 2016.

Without discoveries of better quality resources, existing mines

will face an increasing cost burden.

The declining grade of mines implies the cost of mining is

rising. In fact, the net cash cost of mines globally in 2017 was

about three times the levels seen in 2000. Meanwhile, the

slight reduction in cash cost from 2014 is thanks to

management efforts and other market factors (such as

exchange rates and prices of by-products). The world copper

cost curve also suggests that the mining cost has increased

substantially – especially the cash mining cost in Chile, which

grew to US$212/lb in 2017 from US$68.4/lb in 2000,

according to Cochilco. The major reasons for this rising cost

were the surging costs of labour, other consumable goods

and depreciation.

Average copper ore grades at Chilean mines


Net cash cost vs. LME copper price


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(%) Grades average (%)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F

(US$/tonne) Chile cash cost

Rest of the world

LME Copper price

Page 29



ASIAN INSIGHTS

Change in C3 cash cost from 2000 to 2016, by element (US$/tonne)


Average copper ore grades at Chilean mines


C1 Cash Cost 2000, 981

Labour, 774

Other Consumables,

536

Services & Contractors,

445

TC/RC & Marketing,

238

Power, 218

Acid, 110

Diesel, 88

Conc Freight, 60

Deferred costs, -154 BP Credit, -

335C3 Net Cash Cost 2000, 1,508

C1 Cash Cost, 1,982

Depreciation, 814

Other, 117

Corporate Overheads,

117

Interest, 73

C3 Cash Cost 2016 = 2,961

(US$/ton)

Page 30



ASIAN INSIGHTS

Subdued mining investments hinder upside to future supply.

New discoveries of mineral deposits have peaked across all

regions, albeit at different times. The same case applies to

copper, as 16 out of world’s 20 biggest copper mines were

discovered and began production before the 21st century. The

four relatively new mines only account for 14% of the

combined capacity of the top 20 mines. With ore grades

falling at the existing mines, the lack of new projects hints at a

steeper cost curve going forward and poses risks to the future

growth of production. In addition, the mines discovered in

recent periods are located in Latin America and sub-Saharan

Africa, where political and social stability is weaker than in

other regions. Also, the lack of social infrastructure in those

areas would raise the production costs higher and lower

supply consistency and visibility.

Higher capital intensity for mines to lift up cost curve. The

higher depreciation cost stems from the increase of the capex

intensity of mines. Over the last 10 years, capex intensity has

almost doubled from US$8,116 per tonne in 2006 to

US$16,400 per tonne in 2017. Las Bambas in Peru, which

started production in 2016 with a capacity of 460k tonnes per

annum and is the biggest recent mine project, is estimated to

register a capex intensity of US$18,043 per tonne. The growth

of capital intensity should be a key reason to push up copper

prices over the long-term.

Mine discovery by century

Regions Highest metal deposit discoveries

made in:

Europe and central Asia 1960s

High income OECD 1980s

East Asia and Pacific 1980s

Latin America 1990s

Sub-Saharan Africa 2000s

Source: BHP Billiton, DBS Bank

Capex Intensity trend


8,116 9,046

10,242

13,016

10,954

16,584

20,524 19,027

16,561 17,726

11,624

16,400

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F

(US$/tonne)Capex Intensity

Page 31



ASIAN INSIGHTS

Copper Metal Supply Lagging Demand Major sources of refined copper supply: Copper ore and scrap

Copper can be produced from ores (i.e. primary production) or

scrap (i.e. secondary production). There are three broad

methods to produce refined copper – i) primary production

from copper concentrates, ii) primary production through SX-

EW, and iii) secondary production from copper scrap. Most

commonly, copper ore is mined, processed into concentrate

(which would contain around 30% of copper), and then

refined to form copper cathode. Intermediate steps post-

concentrating constitute of smelting to form matte with

around 50-70% copper content, converting to blister with

98.5-99.5% copper content and, finally, electrolytic refining

into cathode with 99.99% copper content. Increasingly, the

hydrometallurgy method is being adopted, where the copper

oxide ore goes through electrowinning (SX-EW process) to

form cathode.

Secondary production accounts for 18% of refined copper

metal supply. In 2017, refined copper production through the

SX-EW method accounted for around 15% of the total supply

of refined copper, while the electrolytic method (from copper

concentrates) accounted for 67%. Thanks to copper’s ability to

be recycled without any loss of properties, refined copper of

the same quality can also be produced from copper scrap. In

2017, secondary refined production amounted to the

remaining 18% of total refined copper production.

Copper production process


Copper ore Copper scrap (Secondary Material)

Leaching

Solvent Extraction

Electrowinning (SX-EW process)

Smelting

Converting

Fire Refining

Electrolytic refining

ProcessingOxide ore Sulphide ore

Concentrate (c.30% Cu)

Matte (50-70% Cu)

Blister (98.5-99.5% Cu)

Anode

Cathode (99.99% Cu)

Hyd

rom

etal

lurg

y

Pyr

om

etal

lurg

y

Melting, Alloying

Semi-fabrication (rolling, drawing, extrusion)

Strip/sheet Tube Wire rod Profile

Fab

rica

tion

Page 32



ASIAN INSIGHTS

Refined copper breakdown by production method (2017)

Source: Bloomberg Finance L.P., WBMS, DBS Bank

Global refining capacity to continue expanding steadily

Refining capacity to expand steadily. Total global refinery

capacity has grown by 60% over the past 17 years, to reach

27.4mn tonnes in 2017 from 17.1mn tonnes in 2000 (CAGR of

2.8%) This was largely driven by the smelting expansion in

China, where, by 2016, both smelting and refining capacity

had expanded by six times to 6.5mn tonnes (from 1.1m tonnes

in 2000) and 10.9mn tonnes (from 1.7m tonnes in 2000),

respectively. By 2017, nine out of the world’s 20 largest copper

refineries were located in China.

Global refining capacity is expected to grow 14% (annual

growth of 2.6%) to 31.1mn tonnes by 2022 with the major

contributions of China and India. China is expected to carry on

with capacity addition and contribute the most to global

refining capacity growth in in the next couple of years, albeit at

a decelerated pace. There are at least around 1.7mn tonnes of

smelting projects currently in the pipeline for China from 2018

to 2020, which should also lead to a similar increase in its

refining capacity by over 20%. In India, one of world’s largest

smelters, owned by Vedanta, has plans to double its smelting

capacity. There will also be some increases from DRC and

Poland, while South America will be the only region

experiencing a negative change in refining capacity.

Global refining capacity & utilisation rate

Annual change in refining capacity by region (2018F-

2021F)



76

78

80

82

84

86

88

90

0

5

10

15

20

25

30

35

2000 2003 2006 2009 2012 2015 2018F 2021F

(%)(m tons)

Thousa

nds

World Refinery Capacity

Refineries Capacity Utilisation (R)

-5%

0%

5%

10%

15%

20%

25%

Asia Africa Europe NorthAmerica

SouthAmerica

Oceania

Annual Refining Capacity Change by Region

Primary: electrolytic

67%

Primary: SX-EW

15%

Secondary18%

Page 33



ASIAN INSIGHTS

More capacity additions across regions until 2022. In line with

the huge growth in refining capacity, China’s refined

production has gained substantial presence in the global

refined copper market. From a mere 9% in 2000, China’s

contribution to global refined production rose to a whopping

38% in 2017, making it the largest copper producer in the

world. While we observe declining contribution from

developed countries such as the US, whose share dropped

form 12% in 2000 to 5% in 2017, we should see more

developing countries stepping up. In particular, we expect to

see a higher contribution from India going forward; it has

become the sixth biggest refined copper producer, with a 4%

share in 2017 (from less than 2% in 2000), and has plans for

further capacity expansion.

Refined copper production breakdown by country (2000) Refined copper production breakdown by country (2017)



Refined copper production breakdown by country (2022)


Chile18%

US12%

Japan10%

China9%

Russia6%

Germany5%

Canada4%

Poland3%

Australia3%

South Korea3%

Others27%

China 38%

Chile 10%Japan

6%

US 5%

Russia 4%

India 4%

Germany 3%

DRC3%

South Korea 2%

Poland 2%

Brazil 2%

Others21%

China 35%

Chile 11%

Japan 6%

India 5%

US 4%

Russia 4%

DRC3%

Germany 3%

South Korea 2%

Poland 2%

Others25%

Page 34



ASIAN INSIGHTS

Refined copper supply is heavily dependent on mine supply and copper prices Utilisation of refineries fluctuates along with copper prices. The

global copper refinery capacity was 27.4mn tonnes in 2017,

with an 85% utilisation ratio. Historically, refinery capacity has

been good enough to meet global consumption and, hence,

had not been a key determinant for the global supply of

refined copper. Refineries’ utilisation has been fluctuating

along with copper ore and refined metal prices, posting its

lowest at 77.3% in 2009, after the price of copper crashed

during the financial crisis. Along with the recovery in copper

prices, the utilisation ratio has recovered and we expect it will

be sustained at around 85% going forward.

Copper refinery utilisation copper prices Refinery utilisation vs. benchmark treatment charges (TC)

Source: ICSG, Bloomberg Finance L.P., DBS Bank

Source: Teck Resources, DBS Bank

No profit from TC/RC for refined copper; margins from free

metal and by-products. Smelters and refineries purchase ores

from mines according to the pricing mechanisms known as

treatment charges (TC) and refining charges (RC). TC and RC

conceptually imply miners are paying smelters/refiners to

process the ores. It could also be understood as the processing

companies paying for the ores at the price equivalent to the

difference between the LME copper price and TC/RC. Because

of the tightness in copper ore supply, TC/RCs for copper have

been far below the levels for other metals. In other words,

copper smelters and refineries have not been profiting from

processing copper ores to produce refined metal. Instead,

smelters and refineries earn from by-products (gold, silver and

sulphuric acid), free metal and premium. Free metal refers to

the metal content in excess of the payable limit (approximately

95.6% for copper), which allows smelters to benefit if they

achieve a higher recovery ratio. Although TC/RCs do not

contribute to the profits of smelters and refineries, it is still a

critical factor for their businesses as it covers marginal

operating costs.

Benchmark TC/RCs are negotiated periodically between major

miners and smelters and fixed, while TCs in the spot market

fluctuate. Spot TCs are a barometer for the condition of the

copper metal and concentrates market. In the big picture, TC

moves in line with copper prices. However, it is determined

more by the condition of the concentrates market. We reckon

that the utilisation ratio in refineries used to increase along

with benchmark TC/RC.

Spot copper TC & LME copper price


4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

0

20

40

60

80

100

120

140

160

10.1 11.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1

(US$/tonne)(US$/tonne) China Copper Concentrate TC 30% CIF

LME Copper price (R)

76

78

80

82

84

86

88

90

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2000 2002 2004 2006 2008 2010 2012 2014 2016

(%)(US$/tonne) LME copper price (average)


76

78

80

82

84

86

88

0

20

40

60

80

100

120

2006 2008 2010 2012 2014 2016 2018F

(%)(US$/tonne) Benchmark TC


Page 35



ASIAN INSIGHTS

Spot TC heading down since 2018. Since 2015, TCs have been

trending down, reflecting the tight ore market. The tightness is

expected to aggravate as there are no significant mine projects

until 2024, while smelting capacity additions continue in

China. Also, the restriction on secondary copper production

driven by the Chinese import ban on low-grade scrap will bring

about higher primary production growth, implying higher

demand for copper ore.

Copper supply growth to lag demand

Refined copper output forecast to grow at 3% annually until

2022. Refined copper output is forecast to grow at a five-year

CAGR of 3% between 2017 and 2022, lower than the 3.7%

CAGR during 2010 to 2015, but improving from the tepid

growth in 2016 to 2017 (0.3% y-o-y in 2016; 0.6% y-o-y in

2017). This is lower than expected refined copper demand

growth of 3.1% over the same period. Despite the capacity

expansion of smelting and refinery facilities globally, copper

ore availability will be a hindrance to strong supply growth.

Wild cards: Secondary refined copper and environmental

regulation in China. Besides copper ores, secondary refined

copper – which accounted for approximately 18% of total

refined copper supply – is another variable to watch. In 2017,

despite the YoY decline in copper mine supply, refined copper

output posted positive growth, thanks to the higher

contribution from secondary production, which had increased

by 30.1% YoY. In the coming years, however, we expect

secondary refined copper to decline 7.2% due to China’s

restrictions on scrap imports and the plans to completely ban

Category 7 scrap by the end of 2018. The scrap ban is

estimated to remove round 500k tonnes of copper supply from

the global market, which is equivalent to 2.2% of the global

production volume in 2017. China’s environmental protection

policies, such as upgrading standards for smelting plants,

should be a critical factor for the supply of refined copper as

China’s accounts for 38% of global copper supply, and is the

largest supplier of refined copper.

Global refined copper production forecast

Source: WBMS, Bloomberg Finance L.P., DBS Bank

CAGR

(k tons) 2016 2017 2018F 2019F 2020F 2021F 2022F 2017 2018F 2019F 17-22F

Asia 12,406 12,958 12,889 13,143 13,604 14,038 14,519 4.5 (0.5) 2.0 2.3

China 8,436 8,889 8,707 8,788 9,039 9,261 9,490 5.4 (2.0) 0.9 1.3

Japan 1,553 1,488 1,482 1,484 1,482 1,479 1,476 (4.2) (0.4) 0.1 (0.2)

South Korea 607 552 559 571 585 606 629 (9.0) 1.3 2.2 2.6

India 768 845 896 954 1,021 1,112 1,235 10.0 6.0 6.5 7.9

Other 1,041 1,183 1,245 1,346 1,477 1,579 1,688 13.7 5.2 8.1 7.4

Europe 3,888 3,961 4,513 4,565 4,602 4,632 4,651 1.9 13.9 1.1 3.3

Russia 867 867 876 885 894 903 912 0.0 1.0 1.0 1.0

Germany 672 695 701 707 714 720 725 3.5 0.9 0.9 0.9

Poland 536 522 527 534 557 571 577 (2.6) 1.0 1.4 2.0

Other 2,349 2,399 2,409 2,438 2,438 2,438 2,438 2.1 0.4 1.2 0.3

North America 2,009 1,835 1,859 1,874 1,890 1,911 1,925 (8.7) 1.3 0.8 1.0

US 1,221 1,079 1,090 1,104 1,121 1,141 1,156 (11.7) 1.0 1.3 1.4

Other 788 756 770 770 770 770 770 (4.1) 1.8 0.0 0.4

South & Cent ral America 3,183 2,429 3,132 3,280 3,423 3,577 3,736 (23.7) 28.9 4.7 9.0

Chile 2,613 2,430 2,624 2,703 2,811 2,923 3,040 (7.0) 8.0 3.0 4.6

Other 571 492 508 577 612 654 696 (13.7) 3.1 13.6 7.2

Africa 1,176 1,182 1,334 1,525 1,556 1,592 1,628 0.5 12.8 14.3 6.6

DRC 707 673 773 897 897 900 902 (4.9) 15.0 16.0 6.0

Others 469 509 560 628 659 692 726 8.7 10.0 12.0 7.4

Oceania 475 386 386 404 404 404 402 (18.7) 0.0 4.7 0.8

Total 23,092 23,225 24,113 24,790 25,480 26,153 26,862 0.6 3.8 2.8 3.0

y-o-y (%)

Page 36



ASIAN INSIGHTS

Global refined copper production: Primary vs secondary Global secondary production growth



In 2018, recovery in mine supply to underpin refined copper supply growth

Global refined copper output to rebound in 2018 on higher

ore availability. After the tepid growth observed in 2017, we

forecast that global refined copper output will grow by 3.4%

in 2018, and 3.2% in 2019. This growth would be supported

by the rise in ore availability YoY, and less so by secondary

production. This trend would imply strong production growth

in South and Central America, where the refined copper

output depends on primary production. Production from South

and Central America is forecast to grow by a huge 28.9% YoY

in 2018, after falling 23.7% YoY in 2017.

The global output of refined copper registered a slight growth

of 0.6% YoY to 23.2mn tonnes in 2017. Amid the contraction

in mine output during the same period, higher copper scrap

availability supported the output of refined copper. Notably,

secondary refined copper production grew by a whopping

30% YoY to 4.2mn tonnes in 2017, from 3.2mn tonnes in

2016. This was made possible thanks to the release of copper

scrap that was hoarded during the period of sluggish prices.

The copper price bottomed out in 2016, and maintained a

strong uptrend throughout 2017.

China’s refined output to decline in 2018 but recover from

2019. Reflecting the impact of strict regulations on scrap

imports, we forecast that China’s refined copper output will

decline by 2% YoY in 2018. However, we expect the lower

secondary production to be increasingly offset by rising primary

production in China on the back of continued smelting

capacity additions and higher copper ore availability. As such,

China’s refined output could start inching up again YoY from

2019.

Strong output from Europe and North America in 2018. We

forecast increases in refined output from Europe, growing by

11.7% YoY in 2018 and 2.2% in 2019. This will be supported

by the planned smelter expansion in Poland. Meanwhile, the

US saw a significant decline in its refined output in 2017, along

with a contraction in its ore output. We expect the ore output

decline to moderate this year, and the impact on refined

output should be muted, accordingly. Refined output from

North America is forecast to increase slightly by 1.3% YoY in

2018, before slowing to 0.8% YoY in 2019.

Impact China’s scrap import ban

Scrap import restriction to cause production decline from

China China has imposed a series of regulations on copper

scrap imports since last year. It has tightened the import licence

issuance, especially on lower-grade scrap under Category 7.

Due to the large amounts of impurities contained in low-grade

scrap, the processing activities are harmful to the environment.

It was recently announced that the import of Category 7

copper scrap would be completely banned from the end of

2018.

We expect a significant impact on the refined production of

not only China, but also globally. In 2017, China produced

2.3m tonnes of secondary copper, which accounted for 56%

of the world’s total secondary copper production and a quarter

of China’s total refined copper production. China’s scrap

import restrictions are estimated to affect 500k tonnes of

copper output, according to Jiangxi Copper, China’s biggest

copper producer. It has also estimated that China’s scrap

imports would decline by 45% YoY. Indeed, China’s copper

scrap import volume plunged 37% YoY in January to July

2018.

Output increase from other Asian countries to be limited. The

copper scrap rejected by China due to the new regulations is

reportedly being flown into Southeast Asian countries. This

12%

13%

14%

15%

16%

17%

18%

19%

20%

0

5,000

10,000

15,000

20,000

25,000

2008 2010 2012 2014 2016

(k tonnes) Secondary production

Primary production

Secondary production as % of total (R)

-20%

-10%

0%

10%

20%

30%

40%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2008 2010 2012 2014 2016

(k tonnes)Secondary production Y-o-y % (R)

Page 37



ASIAN INSIGHTS

implies higher secondary copper production from Asia ex-

China for as long as China continues to restrict scrap imports.

However, the growth in refined output from the Southeast

Asian countries would not be sufficient to make up for the lost

output from China, due to the lack of facilities. While some

Chinese copper refiners are considering setting up processing

plants in these countries, speculation over the possible removal

of the regulation by China in the next couple of years is acting

as a hindrance. There is also the possibility of these countries

imposing similar restrictions on scrap imports, in consideration

of the negative effects on the environment.

China refined copper production: Primary vs. secondary China copper scrap imports



15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(k tonnes) China's secondary production

China's primary production

Secondary production as % of total (R)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

50

100

150

200

250

300

350

400

450

500

10.2 11.2 12.2 13.2 14.2 15.2 16.2 17.2 18.2

(k tonnes)

China's copper scrap imports y-o-y

Page 38



ASIAN INSIGHTS

Appendix I: Global Copper Sector Value Chain Copper ores

(k tonnes)

Mine capacity* 23,906

Mine production 20,278

Reserves 790,000

Total resources 5,600,000

*Capacity, reserves and resources are according to ICSG; production data is based on WBMS

Top 5 mine producing countries

2017 (k tonnes) % of global output

Chile 5,504 27.1%

Peru 2,445 12.1%

China 1,656 8.2%

US 1,256 6.2%

DRC 1,091 5.4%

Top 10 miners

2016 (k tonnes) % of global production

FREEPORT-MCMORAN INC 2,108 10.3%

CODELCO 1,657 8.1%

GLENCORE PLC 1,425 7.0%

BHP BILLITON LIMITED 1,326 6.5%

GRUPO MEXICO SAB DE CV-SER B 957 4.7%

VEDANTA RESOURCES PLC 676 3.3%

ANGLO AMERICAN PLC 577 2.8%

FIRST QUANTUM MINERALS LTD 539 2.6%

RIO TINTO PLC 523 2.6%

MMG LTD 503 2.5%

Sources of all data: ICSG, WBMS, IWCC, ICA, Bloomberg Finance L.P., DBS Bank

Page 39



ASIAN INSIGHTS

Refined copper

2017 (k tonnes)

Refinery capacity* 27,402

Refined production 23,225

Refined demand 23,487

*Capacity according to ICSG; production and demand data is based on WBMS

Refined copper: Primary vs. Secondary

2017 (k tonnes) (%)

Primary refined production 19,056 82

Secondary refined production 4,168 18

Top 5 refined copper producing countries

2017 (k tonnes) % of global output

China 8,889 37.8%

Chile 2,430 10.3%

Japan 1,488 6.3%

US 1,079 4.6%

Russia 867 3.7%

Top 5 refined copper consuming countries

2017 (k tonnes) % of global consumption

China 11,790 50.1%

US 1,775 7.5%

Germany 1,178 5.0%

Japan 998 4.2%

South Korea 656 2.8%

Consumption breakdown by usage

2016

Power Utilities 35%

Electrical products 37%

Plumbing & Valves, fittings 11%

Ammunition, coins 10%

Others 7%

Total 100% Sources of all data: ICSG, WBMS, IWCC, ICA, Bloomberg Finance L.P., DBS Bank

Page 40



ASIAN INSIGHTS

Appendix II: China Copper Sector Value Chain Copper ore

2017 (k tonnes)

Mine production 1,656

Copper ore imports 4,333

Copper ore exports (tonnes) 48

Refined copper

2017 (k tonnes)

Refining capacity* 10,870

Refined production 8,889

Refined consumption 11,790

Refined imports 3,243

Refined exports 338

*Capacity according to ICSG; production and demand data is based on WBMS

Refined copper: Primary vs. Secondary

2017 (k tonnes) (%)

Primary refined production 6,568 74

Secondary refined production 2,321 26

China demand breakdown

2016 % of total

Power 50%

Air conditioning refrigeration 15%

Transportation 10%

Construction 9%

Electronic 7%

Others 9%

Total 100%

Sources of all data: ICSG, WBMS, Antaike, Bloomberg Finance L.P., DBS Bank

Page 41



ASIAN INSIGHTS

Appendix III: Top copper mines and refiners Global top 20 copper mines (Based on Jul 2017)


Mine Company Country Capacity (k tonnes)

1 Escondida BHP Billiton (57.5%), Rio Tinto Corp. (30%), Japan Escondida (12.5%) Chile 1,270

2 Grasberg P.T. Freeport Indonesia Co. (PT-FI), Rio Tinto Indonesia 750

3 Morenci Freeport-McMoRan Inc (72%), affiliates of Sumitomo Corporation (28%) US 520

4 Buenavista del Cobre (former Cananea)

Grupo Mexico Mexico 510

5 Cerro Verde II (Sulphide) Freeport-McMoRan Copper & Gold Inc. (54%), Compañia de Minas Buenaventura (19.6%), Sumitomo (21%)

Peru 500

6 Collahuasi Anglo American (44%), Glencore plc (44%), Mitsui (8.4%), JX Holdings (3.6%) Chile 454

7 Antamina BHP Billiton (33.75%), Teck (22.5%), Glencore (33.75%), Mitsubishi Corp.(10%)

Peru 450

8 Las Bambas MMG (62.5%), Guoxin International Investment Corporation Limited (22.5%), CITIC Metal Co., Ltd. (15%)

Peru 450

9 Polar Division (Norilsk/ Talnakh Mills)

Norilsk Nickel Russia 450

10 El Teniente Codelco Chile 432

11 Los Bronces Anglo Amercian (50.1%), Mitsubishi Corp. (20.4%), Codelco (20%), Mitsui (9.5%)

Chile 410

12 Los Pelambres Antofagasta Plc (60%), Nippon Mining (25%), Mitsubishi Materials (15%) Chile 400

13 Chuquicamata Codelco Chile 350

14 Radomiro Tomic Codelco Chile 330

15 Sentinel First Quantum Minerals Ltd Zambia 300

16 Bingham Canyon Kennecott US 280

17 Kansanshi First Quantum Minerals Ltd (80%), ZCCM (20%) Zambia 270

18 Toromocho Chinalco Peru 250

19 Olympic Dam BHP Billiton Australia 225

20 Mutanda Glencore Plc Congo 220

Page 42



ASIAN INSIGHTS

Global Top 20 copper refineries (Based on Jul 2017)


Refinery Company Country Capacity (k tonnes)

1 Guixi Jiangxi Copper China 900

2 Jinchuan Jinchuan Non Ferrous Co. China 650

3 Daye/ Hubei (refinery) Daye Non-Ferrous Metals Co. China 600

4 Birla Birla Group (Hidalco) India 500

5 Yunnan Copper Yunnan Copper Industry Group (64.8%) China 500

6 Pyshma Refinery UMMC (Urals Mining & Metallurgical Co.) Russia 460

7 Amarillo Grupo Mexico United States

450

8 Chuquicamata Refinery Codelco Chile 450

9 Toyo/Niihama (Besshi) Sumitomo Metal Mining Co. Ltd Japan 450

10 Onsan Refinery I LS-Nikko Co. (LS, Nippon Mining) Korea Republic

440

11 Hamburg (refinery) Aurubis Germany 416

12 El Paso (refinery) Freeport-McMoRan Copper & Gold Inc. United States

415

13 Las Ventanas Codelco Chile 410

14 Jinchuan (Fangchenggang)

Jinchuan Non Ferrous Co. China 400

15 Jinguan (refinery) Tongling Non-Ferrous Metals Group China 400

16 Jinlong (Tongdu) (refinery) Tongling NonFerrous Metal Corp. (52%), Sharpline International (13%), Sumitomo Corp. (7.5%), Itochu Corp. (7.5%)

China 400

17 Shandong Fangyuan Dongying, Shandong China 400

18 Sterlite Refinery Vedanta India 400

19 Xiangguang Copper Yanggu Xiangguang Copper Co China 400

20 CCR Refinery (Montreal) Glencore plc Canada 370

Page 43



ASIAN INSIGHTS

Company Focus

Page 44

SA: CK, CW, CS

H: BUY (Initiating Coverage)

Last Traded Price ( 2 Oct 2018): HK$2.97 (HSI : 27,126)

Price Target 12-mth: HK$3.70 (25% upside)

A: HOLD Last Traded Price (A) ( 28 Sep 2018): RMB3.57 (CSI300 Index : 3,439)

Price Target 12-mth (A): RMB3.25 (9% downside)

Potential Catalyst: Copper and gold prices’ hikes Analyst Lee Eun Young +65 6682 3708 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RMBm) 2017A 2018F 2019F 2020F

Revenue 94,549 95,877 96,186 101,156

EBITDA 11,211 11,698 12,565 13,382 Pre-tax Profit 4,568 5,544 5,748 6,220 Net Profit 3,508 3,613 3,746 4,054 Net Pft (Pre Ex.) 3,508 3,613 3,746 4,054 EPS (HK cts) 17.8 17.8 18.5 20.0 EPS Pre Ex. (HK cts) 17.8 17.8 18.5 20.0 EPS Gth (%) 83 0 4 8 EPS Gth Pre Ex (%) 83 0 4 8 Diluted EPS (HK cts) 17.8 17.8 18.5 20.0 Net DPS (HK cts) 10.3 10.3 10.3 10.3 BV Per Share (HK cts) 173 179 187 197 PE (X) 16.7 16.6 16.1 14.8 PE Pre Ex. (X) 16.7 16.6 16.1 14.8 P/Cash Flow (X) 6.0 10.0 6.9 6.6 EV/EBITDA (X) 7.6 7.7 7.9 7.3 Net Div Yield (%) 3.5 3.5 3.5 3.5 P/Book Value (X) 1.7 1.7 1.6 1.5 Net Debt/Equity (X) 0.6 0.7 0.8 0.7 ROAE (%) 11.2 10.2 10.1 10.5 Consensus EPS : 0.20 0.22 0.24 Other Broker Recs: B: 12 S: 0 H:0 ICB Industry : Basic Materials ICB Sector: Mining Principal Business: Zijin Mining Group Co Ltd. operates metal mineral resources exploration and mining businesses. It produces gold, copper, zinc, iron, and other base metals. The Group also conducts metal trade and investment businesses.

Source of all data on this page: Company, DBSVHK, Bloomberg Finance L.P.

At A Glance

Issued Capital (m shrs) 5,737

- Non H shrs (m shrs) 17,294

Mkt Cap (HK$m/US$m) 87,136/11,171

Major Shareholders (%)

Minxi Xinghang State-owned Assets Investment

25.9

Free Float (%) 74.1

3m Avg. Daily Val. (US$m) 9.2

ICB Industry: Basic Materials / Mining

88

108

128

148

168

188

208

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Oct-14 Oct-15 Oct-16 Oct-17 Oct-18

Relative IndexHK$

Zijin Mining (LHS) Relative HSI (RHS)

78

98

118

138

158

178

198

218

2.2

3.2

4.2

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7.2


Relative IndexRMB

Zijin Ming (A) (LHS) Relative CSI300 Index (RHS)

DBS Group Research . Equity

4 Oct 2018

China / Hong Kong Company Focus

Zijin Mining Version 1 | Bloomberg: 2899 HK Equity | 601899 CH Equity | Reuters: 2899.HK | 601899.SS


Well-diversified miner • A leading miner from China with a growing global footprint

• Growing by product diversification to copper

• Cost competitiveness and stable operations over many cycles

• Initiate coverage with BUY call and TP of HK$3.7

From China’s gold miner to a global diversified miner. We initiate

coverage with BUY and HK$3.7 TP. Zijin Mining’s Reserves &

Resources (R&R) comprises 31.5m tonnes of copper (#1 in China),

1.32k tonnes of gold (#3 in China) and 7.8m tonnes of zinc (#2 in

China). Having successfully augmented its resources globally through

M&As since 2012, it produced 54.4% of gold and 14% of mined

copper and 34.6% of zinc in overseas mines in 2017. Overseas

projects make up 52.1% and 64.8% of its total gold and copper R&R

in 2017, respectively.

Growing by diversifying into copper. The copper business will lead the

group’s earnings growth going forward, in view of the metal’s annual

sales volume growth of 11.5% over 2017-2021. The segment’s

revenue and gross profit could register CAGRs of 12.2% and 11.1%,

respectively, in the same period, supported by our long-term positive

outlook on copper prices. However, its earnings in 2018 and 2019 will

only inch up y-o-y (despite the strong growth in copper revenue) due

to weak gold and silver prices. Nevertheless, its profit will grow faster

from 2020 onwards as its major investment to increase capacity in key

mines will be completed by 2019. This will help drive group earnings

CAGR of 7.7% by 2021.

Cost competitiveness and stable operations over many cycles. Zijin has

delivered robust profitability and stable earnings over many cycles

with EBITDA margins of 6.6%-12.2% since 2013, thanks to its

product diversification in the space of industrial and precious metals.

A key reason for its lucrative profit is its cost competitiveness in

mining operations, delivering gross margins of 47% in 2017.

Valuation: Our TP is derived from DCF model using 9% WACC and 1.5%

terminal growth rate. Our TP implies 20x PE and 2.0x P/BV based on

2019 earnings forecast, which are below the historical averages.

Key Risks to Our View: Key risks include volatility in metal prices; mine exploration and

project execution risks, geopolitical risks including changes in mining

code in the Democratic Republic of Congo (DRC) and financial

burden arising from M&As.

Company Focus

Zijin Mining

Table of Contents

Investment Thesis SWOT Analysis Company Overview Highlights

Transforming into diversified global player from China’s gold miner Growing via product diversification – from gold to copper and other metals Cost competitiveness and stable operations capability over many cycles

Forging ahead with ongoing M&As

Valuation Key Risks Financials

Company Focus

Zijin Mining

Investment Thesis

Profile Rationale

• Leading mining company with #1 copper reserves in

China. Established in 2000, Zijin Mining is a local state-

owned enterprise in Shanghang County and a dominant

base metal producer in China. It ranks #1 for copper and

#3 for zinc in terms of mineral R&R in China. The company

was listed on The Stock Exchange of Hong Kong Limited in

Dec 2003, and on the Shanghai Stock Exchange in Apr

2008.

• Engaging in mining and smelting businesses with

diversified metal portfolio. The company is mainly engaged

in the exploration and mining of gold, copper, zinc and

other metal mineral resources, supplemented by refining,

processing and sales of related products. The mining

business is a key contributor with 24% and 80%

contribution to group revenue and gross profit,

respectively, while the smelting business (zinc and copper)

accounts for 24% and 10% of group revenue and gross

profit, respectively. It has four gold mines, six copper

mines, three zinc mines and two smelting plants (one for

copper and one for zinc) in China. The company is more

known as a gold miner, but it has been diversifying its

products to copper and zinc. In 2017, the copper business

contributed 22% of total revenue and 34% of total gross

profit.

• Shareholding structure. The company currently has a

total registered capital of RMB2.3bn, consisting of 5.7m H

Shares (c.25% of the total issued shares) and 17.3m A

Shares (c.75% of the total issued shares). Minxi Xinghang

State-owned Asset Investment Company Limited (a local

state-owned enterprise in Shanghang County) is the

largest shareholder with a 25.9% stake in Zijin.

• Initiate coverage with BUY and HK$3.7 TP. We believe

the recent share price pullback offers a good opportunity to

accumulate in view of: i) its proven capability in exploring

and managing mines, ii) potentially strong earnings growth

backed by ample reserves of copper in the recently acquired

mines, and iii) strong profitability in the mining business and

integrated operations (mining to trading).

• A leading miner from China with a growing global

footprint. Zijjn Mining has one of the largest metal mineral

resources in China with 31.5m tonnes of copper (1# in

China), 1.32k tonnes of gold (#3) and 7.8m tonnes of zinc

(#2). However, Zijin is also a global player in this arena. In

2017, 54.4% of its gold, 14% of mined copper and 34.6%

of zinc were produced in overseas mines. Note that the R&R

of its overseas projects in 2017 for gold and copper stood at

687.7 tonnes and 20.4m tonnes, representing 52.09% and

64.81% of its total R&R, respectively. The current global

footprint of Zijin is the result of a series of M&As overseas

since 2012, especially during downcycles of the commodity

sector in 2014-2016.

• Growing by diversifying to copper. The company has

diversified its portfolio from gold to copper and other

products. The diversification of products is ongoing

following the ramp-up of newly acquired mines and

continuous capex. In particular, mined copper should be a

key product that would drive the group’s earnings in the

next decade in anticipation of the metal’s annual sales

growth of 11.5% over 2017-2021 – to reach 324k tonnes in

2021. Accordingly, we expect revenue and gross profit for

mined copper to register CAGRs of 12.2% and 11.1%,

respectively, in the same period. This will help drive group

earnings CAGR of 7.7% by 2021.

• Cost competitiveness and stable operations over many

cycles. Zijin has registered robust profitability and stable

earnings over many cycles with EBITDA margins of 6.6%-

12.2% since 2013, thanks to its product diversification in

the space of industrial and precious metals – which have

different dynamics and provide some natural hedging across

its portfolio. A key reason for its lucrative profit is its cost

competitiveness in mining operations. Zijin’s mining business

registered gross margins of 47% in 2017, up from 39% in

2015 and 38% in 2016, thanks to the recovery in

commodity prices.

Valuation Risks

Our HK$3.7 TP is based on DCF model. Our TP is derived

from DCF model using 9% WACC and 1.5% terminal

growth rate. Our TP implies 20x PE and 2.0x P/BV based on

2019 earnings forecast, which are below the historical

averages.

Volatile metal prices and execution risk of new mines. Key

risks include i) volatility in metal prices; ii) mine exploration

and project execution risks, iii) geopolitical risks including

changes in mining code in the DRC, and iv) financial burden

arising from M&As. Note that huge capital outlay is required

to execute its recent M&A deals (RTB Bor mine in Serbia and

cash offer to acquire Nevsun in Canada). Source: DBSVHK

Company Focus

Zijin Mining

SWOT Analysis

Strengths Weakness

• Strong position in China mining sector and has diversified

its business to other metals on a global scale

• Substantial reserves of gold, copper, lead and zinc. Owns

largest copper reserves and the third-largest gold reserves

among Chinese miners

• Well-integrated operations spanning the overall value

chain of upstream mining, midstream smelting and refining,

and downstream trading and retail products

• Low cost producer with advanced exploration techniques

that have improved production volume as well as efficiency

• Strong relationship with the Shanghang County

Government, and enjoy rights to import gold and good

access to funding

• Mines susceptible to accidents. In 2010, the company

did not disclose an acid leak that affected a river. The

group had to pay penalties, which impacted its share price

• Most of its overseas equity investments are in regions

with geopolitical uncertainty

Opportunities Threats

• Strong metal prices

• Inorganic growth through strategic alliances and

acquisitions. The company is always eyeing healthy strategy

alliances to grow inorganically with a view of gaining

sustainable competitive advantages

• Numerous sites are under the construction phase and

should commence production in the near future. One such

site, located in the DRC, is anticipated to be one of largest

high-grade copper mines in the world

• Slowing macroeconomic conditions globally bode ill for

supply-demand dynamics as well as prices of metals

• Potential geopolitical issues in countries where its mines

are located (the DRC and Peru)

• The company operates in a highly regulated industry

(by the government). Any regulation changes to

environmental/safety norms might impact the profitability

of the company (for example, a new mining code in the

DRC that requires higher royalty)

Source: DBSVHK

Company Focus

Zijin Mining

Company Overview

• Solid mining company with #1 copper reserves in China.

Established in 2000, Zijin Mining is a local state-owned

enterprise in Shanghang County and a dominant base metal

producer in China. It ranks #1 for copper and #3 for zinc in

terms of mineral R&R in China. The company was listed on

The Stock Exchange of Hong Kong Limited in Dec 2003, and

on the Shanghai Stock Exchange in Apr 2008.

• Mining and smelting are the key businesses. The

company is mainly engaged in the exploration and mining of

gold, copper, zinc and other metal mineral resources,

supplemented by refining, processing and sales of related

products. The mining business is a key contributor with 24%

and 80% contribution to group revenue and gross profit,

respectively, while the smelting business (zinc and copper)

accounts for 24% and 10% of group revenue and gross

profit, respectively. Refining and processing gold contributed

50% to total revenue but its contribution to total profit is

limited to 2% in 2017. It has four gold mines, six copper

mines, three zinc mines and two smelting plants (one for

copper and one for zinc) in China.

• Diversified metals portfolio with copper and gold as

biggest contributors. Zijin is among the top three domestic

miners in terms of production volume for gold, copper and

zinc. The company is more known as a gold miner, but it has

been diversifying its products to copper and zinc. In 2017, the

copper business contributed 22% of total revenue and 34%

of total gross profit. Gold remained the largest contributor to

the group’s total revenue (50%), accounting for 25% of the

its gross profit.

Sales Trend Profitability Trend

Source: Company, DBSVHK

Revenue and gross profit mix by metal (2017)


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

20,000

40,000

60,000

80,000

100,000

2016A 2017A 2018F 2019F 2020F

RMB m

Total Revenue Revenue Growth (%) (YoY)

1,839

2,839

3,839

4,839

5,839

6,839

7,839

2016A 2017A 2018F 2019F 2020F

RMB m

Operating EBIT Pre tax Profit Net Profit

Gold50%

Copper22%

Lead & Zinc7%

Iron Ore, Silver &

Other Products

21%

Revenue Break up (2017)

Gold25%

Copper34%

Lead & Zinc22%

Iron Ore, Silver & Other

Products19%

Gross Profit Break up (2017)

Company Focus

Zijin Mining

• Management Composition. The company has an

experienced and strong management team, and benefits

from its two-tier governance structure (i.e. the Board of

Directors and the Supervisory Committee) to ensure

balanced, responsible decision-making and sustainable long-

term growth. The Board consists of 11 Directors (including six

Executive Directors and five Non-Executive Directors – of

which four are Independent Directors). The Supervisory

Committee comprises five members (including two

supervisors who represent the workers). The management

team is headed by Mr. Chen Jinghe (Founder and Chairman)

and Mr. Lan Fusheng (President and Vice Chairman). They

have been actively involved in the group’s operations,

processes and business strategies. Under their leadership, Zijin

has consistently managed to achieve profitable operations

and maintain steady dividends.

• Shareholding structure. The company currently has a

total registered capital of RMB2.3bn, consisting of 5.7m H

Shares (c.25% of the total issued shares) and 17.3m A Shares

(c.75% of the total issued shares). Minxi Xinghang State-

owned Asset Investment Company Limited (a local state-

owned enterprise in Shanghang County) is the largest

shareholder with a 25.9% stake in Zijin.

Key Management Team

Chen Jinghe

Founder, Chairman

Mr. Chen Jinghe is Zijin’s founder and core leader, and was appointed as chairman since 2000. He also served as the president from 2006-2009. Currently, he also serves as the head of the company’s national key gold laboratory. He holds a bachelor’s degree in geology from Fuzhou University and an EMBA degree from Xiamen University.

Lan Fusheng

President, Vice Chairman

Mr. Lan Fusheng joined the company in 1994 and served as director and standing deputy general manager from 2000-2006. He has been its vice-chairman since Aug 2006 and its president since Dec 2016. He holds a bachelor’s degree in geology and a master’s degree in business administration from Fuzhou University.

Zou Laichang

Executive Director and Vice President

Mr. Zou Laichang joined the company in 1996 and served as director and senior vice-president from 2006-2009 and standing vice president from 2009-2013, and is its current vice-president since 2013. He is a graduate of Fujian Agriculture and Forestry University Forestry College with a bachelor’s degree in chemical engineering for forestry and an MBA degree.


Shareholding Structure

Particulars

Domestic H Shares Total

Issued Capital (m Shares) 17,294 5,737 23,031

Market Cap (HK$) 84,306

Market Cap (US $) 10,838

Major Shareholder - Domestic Shares Minxi Xinghang State-Owned Assets Investment 34.5% 25.9%

National Social Security Fund 4.1% 3.1%

China Securities Finance Corp. Ltd. 3.2% 2.4%

Major Shareholder - H Shares Van Eck Associates Corp. 6.0% 1.5%

The Vanguard Group, Inc. 3.4% 0.9%

Black Rock Inc. 1.9% 0.5%

Source: Bloomberg Finance L.P., Company, DBS Bank

Company Focus

Zijin Mining

Transforming into diversified global player from China’s gold miner Strong position in Chinese mining sector. Zijin’s operations

are geographically well diversified with 226 mining rights and

188 exploration rights spread across 24 provinces in China

and nine overseas countries. It holds one of the largest metal

mineral resources in China with 31.5m tonnes of copper (#1

ranking among public companies by total copper resources in

China), c.1.32k tonnes of gold (third largest in China) and

7.8m tonnes of zinc (second largest in China) under the

equity method.

More than just a Chinese mining company. However, Zijin is

also a global player in this arena. In 2017, 54.4% of gold and

14% of mined copper and 34.6% of zinc were produced in

overseas mines. Note that the R&R of gold, copper, lead and

zinc of overseas projects stood at 687.65 tonnes, 20.3987m

tonnes and 0.9427m tonnes, accounting for 52.09%,

64.81% and 10.17% of the group’s total R&R for the

respective metals.

Successful M&As. The current global footprint of Zijin is the

result of a series of M&As overseas since 2012. In particular,

it has executed a series of large M&As during the industry

downturn from 2014-2016, including the acquisition of the

Kolwezi Copper Mine in the DRC (Democratic Republic of

Congo) for RMB477m in 2014; the Progera Gold Mine in

Papua New Guinea for RMB1.9bn in 2015; the Kamoa

Copper Mine for RMB2.7bn in the DRC in 2015. In 2016, it

also has acquired an additional 21% stake in Kolwezi Copper

Mine and the Heilong Mining Group in Heilongjiang China

for RMB1.6bn. This acquisition increased Zijin's metal

resources and its production scale, which led to the group

posting revenue and EBITDA GAGRs of 17.2% and 22.5%

over 2014-2017 respectively.

Backed by major shareholder, Chinese local government. We

believe the support of its major shareholder, Shanghang

county local government, is a key factor for its success. Zijin’s

sizeable capital of c.RMB9.2bn enabled it to undertake M&As

over the last few years via debt-financing and capital increase.

We understand that the company has sound credit lines from

top Chinese banks, which allows the company to raise capital

for M&As when need be. In particular, it had issued

RMB1.49bn A shares (7% of outstanding shares) to raise

RMB4.6bn for developing the Kolwezi Copper Mine in the

DRC and domestic capex in 2017. The issuance price was

RMB3.11/share (HK$3.6/share), which was c.40% higher

than H share prices. The subscribers for the placement were

government-related entities, including China-Africa

Development Fund Co. Ltd and Minx Xinghang State-owned

Assets Investment Company Limited.

Strong overseas contribution to profit. In light of the vast

geographical spread of its R&R, the contribution of overseas

mines will grow going forward. While overseas revenue

accounted for only 6% to its total revenue in 2017, the gross

profit contribution from overseas operations was an

impressive 24%. This is in line with the fact that gross

margins for the domestic and overseas businesses stood at

9.7% and 43.7% respectively. This implies that its earnings

can grow at a faster pace if and when the group’s revenue

growth is led by overseas mines. We noticed that the small

revenue contribution of overseas operations is due to the fact

that 50% of its revenue comes from refining and processing

gold. The gold segment has trading characteristics with very

minimal margins of below 1%. Excluding this segment, the

revenue contribution of its overseas business is estimated to

be 11% and the gross margins for its domestic business

would be 17.5%.

Geographically diversified miner


Company Focus

Zijin Mining

Zijin Mining’s position in China by resource and production volume

(m tonnes) Zijin Mining (2017) China total As % of China total Rank

Copper resources 31.5 101.1 31.1% 1

Copper mine production 0.2 1.7 12.6% 3

Zinc resources 7.8 178.0 4.4% 2

Zinc mine production 0.3 3.3 8.3% 1

Gold resources (tonnes) 1,320 12,167.0 10.8% 3 Gold mine production (tonnes) 37.5 369.2 10.2% 3


Reserves resource position as at end-of period (equity basis)

Type of mineral Unit Total Resources

2016 2017 Gold t (metal) 1,347 1,320 Copper Mt (metal) 30.1 31.5 Silver t (metal) 934 836 Molybdenum Mt (metal) 0.68 0.68 Zinc Mt (metal) 8.01 7.83 Lead Mt (metal) 1.50 1.44 Tungsten WO3, t 80,000 75,600 Tin Mt (metal) 0.14 0.14 Iron Mt (ore) 209 206 Coal Mt 457 69 Platinum t (metal) 249.23 235.8 Palladium t (metal) 157.2 148.8


Zijin Mining: M&A History

Year Asset acquired

% stake involved

Reserves acquired

Deal value (RMB m)

2012 Norton Gold Field Ltd (Australia) 72% 180t Gold 1,031

2014 NKWE Platinum Limited (South Africa) 23% 141t PGMs 126

2014 Bullabulling Gold Limited (Australia) 100% 117t Gold 155

2014 Kolwezi copper mine (Congo) 51% 0.79Mt Copper 477

2014 Luoyang Kunyu Mining Co., Ltd (China) 70% 40t Gold 700

2015 Norton Gold Field (Australia) 11% Gold 193

2015 Porgera gold mine (Papua New Guinea) 48% 157t Gold 1,904

2015 Kamoa copper mine (Congo) 47% 10.4Mt Copper 2,675

2015 NKWE Platinum Limited (South Africa) 34% PGMs 138

2016 Heilong Mining Group Co., Ltd (China) 100% Copper 1,561

2016 Kolwezi copper mine (Congo) 21% Copper 236

2018 RTB Bor (Serbia) 63% Copper 2,398


Company Focus

Zijin Mining

Zijin Mining: Geographical revenue and margins

(m RMB) 2016 2017 2018

Revenue Group 74,304 78,851 94,549

China 79,000 89,391 108,454

Outside China 2,638 5,308 7,497

Less: Internal Sales -7,334 -15,848 -21,403

Contribution China 97% 94% 94%

Outside China 3% 6% 6%

Gross margins Group 8% 12% 14%

China 7% 9% 10%

Outside China 34% 34% 44%


Growing via product diversification – from gold to copper and other metals

Well-diversified in terms of products. Comparing the

revenue breakdowns of 2014 and 2017, we can see that the

contribution of gold declined from 59% in 2014 to 50% in

2017. Copper’s revenue grew at a CAGR of 19.6% over the

same period and maintained 22% contribution to the total

revenue. Zinc and other products’ contribution to group

revenue has also been growing. Zijin’s gross profit

composition has shifted quite drastically from gold to copper

and other products – gold accounted for 25% of total gross

profit in 2017, down from 37% in 2014, while copper’s

contribution increased to 34% in 2017 from 31% in 2014.

During this period, the gross profit contribution of gold and

copper has expanded at CAGRs of 4% and 23.1%,

respectively. The strongest gross profit CAGR (by product)

recorded in the same period was 74.3% for zinc, backed by

an annual mined zinc production growth of 41%.

Revenue breakdown by product


Gold59%

Copper22%

Lead & Zinc5%


Products14%


Gold50%

Copper22%

Lead & Zinc7%

Iron Ore, Silver &

Other Products

21%


Gold46%

Copper24%

Lead & Zinc6%

Iron Ore, Silver &

Other Products

24%

Revenue Break up (2020F)

Company Focus

Zijin Mining

Gross Profit breakdown by product


Mined copper, a key growth driver. The diversification of

products is ongoing following the ramp-up of newly

acquired mines and continuous capex. In particular, mined

copper should be a key product that would drive the

group’s earnings in the next decade in anticipation of the

metal’s annual sales growth of 11.5% over 2017-2021 – to

reach 324k tonnes in 2021. Accordingly, we expect

revenue and gross profit for mined copper to register

CAGRs of 12.2% and 11.1%, respectively, in the same

period. As a result, the contribution of mined copper to

group revenue and gross profit will grow to 10% and 37%

in 2021, from 8% and 28% in 2017, respectively.

Kolwezi and Duobaoshan, key contributing mines. The key

contributing mines are the Fujian Zijinshan gold and copper

mine, Heilongjiang Duobaoshan copper mine and Kolwezi

copper mine in the DRC. The capacity of Fujian Zijinshan

gold and copper mine will be extended to 80k-100k tonnes

p.a., from 75k tonnes currently, by end of 2018, thanks to

capex over the last few years. Heilongjiang Duobaoshan

copper mine’s production capacity will grow to 90k tonnes

p.a. in 2019, from 25k tonnes p.a. in 2016, on the back of

stage 2 expansion. With regard to the Kolwezi mine in the

DRC, the commencement of the floatation system in June

2017 will lead to a capacity of 50-60k tonnes p.a. after the

mine’s production ramp-up. In addition, a hydrometallurgy

system (SX-EW) is now under construction, with the mine’s

annual total capacity expected to reach 100k tonnes for

copper and 2.4k tonnes for cobalt by 2019. Beyond 2020,

the Kamoa mine in the DRC will be prepared to commence

operations with a targeted annual capacity of 300k tonnes

for copper.

Zinc and other products’ growth beyond 2020. The zinc

segment is expected to be stagnant over the next two years

as production would be stable and zinc prices are likely to

decline. Accordingly, its gross profit would register 2%

annual growth by 2020. However, it will increase its mining

capacity in zinc mine in Xinjiang to 120k-150k tonnes p.a.

from 80k tonnes in 2017, coupled with a smelting capacity

of 100k tonnes p.a. As it requires another two years to

complete this phase III project, we expect zinc revenue

growth to only materialise from 2021. In addition, we

would like to highlight that it commenced the production

of cobalt in the Kolwezi mine in 2020, which is estimated

to generate revenue of c.RMB800m based on cobalt prices

of US$50,000/tonne.

Gold37%Copper

31%

Lead & Zinc7%

Iron Ore, Silver &

Other Products

25%


Gold25%

Copper34%

Lead & Zinc22%


Products19%


Gold22%

Copper43%

Lead & Zinc17%


Products18%

Gross Profit Break up (2020F)

Company Focus

Zijin Mining

Zijin Mining: Copper production forecasts by mine

Production (tonnes)

Name Ownership 2017 2018F 2019F 2020F 2021F

Fujian Zijinshan gold and copper mine 100% 75,850 75,850 83,435 87,607 87,607

Xinjiang Ashele copper mine 51% 44,057 44,057 44,057 44,057 44,057

Heilongjiang Duobaoshan copper mine 100% 33,735 40,482 60,000 70,000 80,000

Kolwezi copper mine in the DRC 72% 21,940 50,000 60,000 80,000 85,000 Jilin Hunchun Shuguang gold and copper mine 100% 11,745 11,745 11,158 10,600 10,070

Qinghai Deerni copper mine 100% 9,767 9,767 9,279 8,815 8,374

Other mines 10,893 10,893 10,348 9,831 9,339

Total 207,987 242,794 278,277 310,909 324,447


Zijin: copper production volume Revenue and gross profit for mined copper


0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F

Mine-produced copper (t) Refinery copper (t)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2013A 2015A 2017A 2019F 2021F

(m RMB)(m RMB)

Revenue(L) Gross profit(R)

Company Focus

Zijin Mining

Cost competitiveness and stable operations capability over many cycles Integrated operations. The group operates an integrated

business model spanning the overall value chain of

upstream mining, midstream smelting and refining, and

downstream trading and retail products. Its diversified

business model allows the company to enjoy stable

operating profit and solid growth potential, as it can

distribute the cashflows among projects at different stages

of development and thus mitigate any cashflow volatility.

Upstream mining operations contributed 79% of its FY17

gross profit, with the midstream smelting and refining

segment contributing 11% and downstream trading, retail

and other businesses accounting for the remaining 10%.

Note that the mining, midstream and downstream

segments accounted for 24%, 71% and 5.7% of FY17

group revenue, respectively.

Zijin: Gross profit by value chain Zijin: Revenue and EBITDA margins


Stable earnings over many cycles on the back of natural

hedging between base metals and gold. Zijin has registered

robust profitability over many cycles. The group’s EBITDA

margins have been solid, coming in at 6.6%-12.2% since

2013 and with the lowest point of 6.6% recorded in the

downcycle of 2015. This represents relatively stable

profitability compared to its peers, though its EBITDA

margins are inferior due to low margins for its gold

processing segment. We believe its steady performance

stems from its product diversification efforts between

industry metals and precious metals which have different

dynamics and provide some natural hedging across its

portfolio. When the global economy slumps, the prices of

precious metals tend to strengthen due to investor

preference for safe assets, e.g. gold prices could be buoyed

by low interest rates in the wake of a global financial crisis.

In fact, the gross profit of the gold segment has jumped

27% in 2016, thus providing a potential cushion against

earnings decline in other segments.

Cost advantages in mining operations. A key reason for its

lucrative profit is its cost competitiveness in mining

operations. Zijin’s mining business registered gross margins

of 47% in 2017, up from 39% in 2015 and 38% in 2016,

thanks to the recovery in commodity prices. Mined zinc has

registered the highest gross margins of 66.1%, followed by

50.6% for mined copper and 39.1% for silver and 34% for

gold in 2017. Though the contribution of iron ore to group

revenue is a mere 1% in 2017, its contribution to gross

profit was 6% due to its whopping gross margins of 66%.

We believe that its potential cost advantages will stem from

i) its acquisition of mines with premium mineral resources

at competitive prices, ii) its ability to upgrade mines and

increase capacity by ramping up economies of scale via

adequate capex, and iii) its rich experience in the mining

business, coupled with its willingness to undertake research

and development to develop technological innovations.

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

2013A2014A2015A2016A2017A 2018F 2019F 2020F

(m RMB)

Revenue EBITDA Margin (%) - RHS-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F

(m RMB)

Mining Smelting Others

Company Focus

Zijin Mining

Zijin: Gross margins by product (2017)


Zijin: ASP and gross profit per tonne of mined gold Zijin: ASP and gross profit per tonne of mined zinc


Zijin: ASP and gross profit per tonne of mined copper Zijin: ASP and gross profit per tonne of iron ore


34.0%

0.6%

39.1%

50.6%

5.6%

66.7%

9.0%

66.1%

7.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Gross margins

200

210

220

230

240

250

260

270

0

20

40

60

80

100

120

2013A 2015A 2017A 2019F 2021F

Gross profit of mined gold(RMB/g) ASP(RHS, RMB/g)

5,000

7,000

9,000

11,000

13,000

15,000

17,000

0

2,000

4,000

6,000

8,000

10,000

12,000

2013A 2015A 2017A 2019F 2021F

Gross profit of mined zinc(RMB/ton)ASP(RHS, RMB/ton)

20,000

24,000

28,000

32,000

36,000

40,000

0

5,000

10,000

15,000

20,000

25,000

2013A 2015A 2017A 2019F 2021F

Gross profit of mined copper(RMB/ton)

ASP(RHS,RMB/ton)

100

200

300

400

500

600

700

0

50

100

150

200

250

300

350

400

450

2013A 2015A 2017A 2019F 2021F

Gross profit of iron ore(RMB/ton) ASP(RHS,RMB/ton)

Company Focus

Zijin Mining

Forging ahead with ongoing M&As

Stable earnings in 2019 but surge expected from 2020.

We expect its group revenue in 2018 and 2019 to merely

inch up 1.4% y-o-y despite expectations of mined copper

revenue growth of 15.4% and 13.9%, respectively, as we

anticipate gold and silver revenue to decline due to price

weakness. Its EBITDA is expected to edge up in 2018 and

then grow at 7.4% in 2019. In the near term, 3Q18

earnings are likely to deteriorate q-o-q on negative impact

from the fall in metal prices. Nonetheless, its top-line and

bottom-line growth is projected to accelerate from 2020

onwards, as its major investments to increase the capacity

of its key mines will be completed by 2019. We its expect

revenue and EBITDA to grow 5.8% and 6.5% in 2020 and

8.9% and 7.7% in 2021, respectively.

Kamoa mine in DRC to provide visible growth from 2020

onwards. Zijin has entered into a number of M&As and JVs

globally to ensure the sustainable development of resources

and reserves. It is also starting to reap the benefits of

geographical diversification. In particular, the Kamoa mine

in the DRC is one of the largest high-grade copper mines

yet to be developed in the world. Kamoa was recognised

to have 24m tonnes copper resources when Zijin acquired it

in 2015, but the latest survey has lifted this figure to

42.49m tonnes with 2.56% cu content, which is equivalent

to almost 42% of total copper resources in China

(101.11m tonnes @0.60%). When and if the mine achieves

its targeted capacity of 300k tonnes p.a., it is estimated to

generate c.RMB12bn revenue and c.RMB4bn gross profit,

which form c.13% and 30% of group revenue and gross

profit in 2017 respectively. This provides visible growth

potential for the company over the mid to long term.

RTB Bor Group in Serbia. In 2018, the company plans to

invest c.RMB4.2bn in project construction, RMB12.1bn in

M&As and RMB190m in geological exploration. It has

recently won the tender to become a strategic partner in

Serbia's state-owned RTB Bor Group that is the country’s

sole copper player, with a total investment of US$1.26bn

within six years. For this venture, the company will initially

invest US$350m (RMB2.4bn) for a 63% stake with the

following payment schedule – the first payment is at least

US$100m on the deal closing date and the remaining

tranches shall be paid in three years from the closing date.

RTB Bor has four mines with 7.9m copper resources and a

copper smelting plant with a capacity of 400k tonnes p.a.

RTB currently has a negative net asset of US$536bn, and

delivered revenue of US$139m and a net loss of US$18m in

1H18. Zijin will invest US$1.26bn (including the US$350m

capital investment) over the next six years on technological

upgrades, the expansion and construction of mines and

smelting plants, and repayment of debt. The potential

economic value of R&R in RTB Bor is estimated at

US$13.8bn, premised on copper prices of US$6,500.

Resources of RTB Bor mine in Serbia

Resource Resources volume (Mt)

Grade Cu % Metal Cu (kt) Potential economic value (US$ m)

Chance of mineralisation

classification

Indicated 863 0.39 3,327 10,813 50%

Inferred 1,137 0.40 4,531 2,945 10%

Indicated + Inferred 1,999 0.39 7,858 13,758

Based on assumption of US$6,500/tonne copper price


Cash offer for Nevsun in Canada. On 5 Sep 2018, Zijin

proposed to make an all-cash takeover of Nevsun for a

consideration of CAD6 per common share and the offer

shall be accepted by at least 66⅔% of Nevsun’s

shareholders by 31 Dec 2018. In May, a mining company,

Lundin Mining (Lundin) Initially, had pursued a hostile

takeover at CAD4.75 per share and the management of

Nevsun had vehemently opposed this offer. Based on Zijin’s

offer price, the total capital outlay would be c.US$1.39bn if

100% of Nevsun’s shareholders accept this offer. Nevsun

has 60% interest in the Bisha copper-zinc mine In Eritrea,

Africa, as well as 100% interest in Upper Zone and 64% in

Lower Zone of the Timok copper-gold mine project in

Serbia. The total copper reserves and resources are

estimated at 174k tonnes and 2.3m tonnes, respectively.

The potential economic value of mineral in the mine would

reach to US$23.1bn based on US$6,500 copper prices and

US$1,200/oz gold prices.

M&As to enhance growth potential, but could be a near-

term financial burden. We believe that these M&As should

enhance Zijin’s growth potential and sustainability as a

miner over the long term, on top of honing its skills and

ability to develop mines as well as optimising the

performance of these assets. However, we note that huge

capital outlay is required to implement recent M&A deals,

in particular, when the offer for Nevsun is successfully

executed. To maintain its financially stability, we expect

possible fund raising in the capital market in 2019. This

could be a risk for investors.

mailto:42.49m%20tonne%20with%202.56%25

mailto:42.49m%20tonne%20with%202.56%25

mailto:[email protected]%25

mailto:[email protected]%25

Company Focus

Zijin Mining

Reserves and resources in the Bisha mine of Nevsun

Metal

Potential economic value (US$m) Chances of mineralisation

Zn Cu Au Ag Zn Cu Au Ag Sub total

(k tonnes) (k tonnes) (tonne) (tonne)

Reserves

Proven 25 4 0 16 63 26 0 1 89 100%

Probable 505 81 6 351 1,136 474 14 12 1,636 90%

Total 530 85 6 367 1,199 500 14 12 1,725

Resources

Measured 103 7 2 72 232 41 5 2 280 90%

Indicated 1,391 340 19 1,117 1,739 1,105 25 21 2,890 50%

Measured + Indicated

1,494 347 21 1,189 1,971 1,146 30 23 3,170

Inferred 1,634 308 17 818 409 200 4 3 616 10%

Based on assumptions of US$6,500/tonne copper price, US$2,500/tonne zinc price, US$1,200/oz gold price and US$17/oz

silver price


Reserves of the Upper Zone at Timok copper-gold mine

Tonnes Grade Contained metal Potential economic value

Cu Au As Cu Au Cu Au Sub total

(Mt) (%) (g/t) (%) (Mt) (Moz) (US$ m) (US$ m)

Proven 0 0.00 0.00 0.00 0.00 0.00 0 0 0

Probable 27 3.30 2.10 0.17 0.89 1.80 5,207 1,944 7,151

Proven + probable

27 3.30 2.10 0.17 0.89 1.80 5,207 1,944 7,151

As at 8 March 2018

Based on assumptions of US$6,500/tonne copper price and US$1,200/oz gold price


Resources volume of the Lower Zone at Timok copper-gold mine

Type Tonnes Grade

Contained metal Potential economic value (US$m)

(m tonnes) Cu (%) Au (g/t) Cu (m tonnes) Au (m oz) Cu Au Sub total

Inferred 1,659 0.86 0.18 14.30 9.60 9,295 1,152 10,447

Total 1,659 0.86 0.18 14.30 9.60 9,295 1,152 10,447

as of 19 June 2018

Based on assumptions of US$6,500/tonne copper price and US$1,200/oz gold price


Company Focus

Zijin Mining

Valuation Our HK$3.7 TP is based on DCF model. Our TP is derived from

DCF model using 9% discount rate and 1.5% growth rate. Our

TP implies 20x PE and 2.0x P/BV based on 2019 earnings

forecast, which are below the historical averages. We believe

that its recent share price pullback offers a good opportunity to

accumulate in view of i) its proven capability in exploring and

managing mines, ii) its potentially strong earnings growth that is

backed by ample reserves of copper in mines that were recently

acquired, and iii) its strong profitability in the mining business

and integrated operations (from mining to trading).

Key Risks



and project execution risks, iii) geopolitical risks including

changes in mining code in the DRC, and iv) financial burden

arising from M&As. Note that huge capital outlay is required

to execute recent M&A deals (RTB Bor mine in Serbia and

cash offer to acquire Nevsun in Canada). To maintain its

financially stability, we expect possible fund raising in the

capital market in 2019. This could be a risk for investors.

Company Focus

Zijin Mining

CRITICAL DATA POINTS TO WATCH

Critical Factors

Gold and copper prices. As gold and copper account for 50%

and 22% of group revenue and 25% and 34% of group

gross profit, respectively, metal prices are definitely key critical

factors for the company’s performance.

Copper production and sales volume. Copper has become a

key product that can drive its earnings growth in the wake of

robust production growth in the copper mines under

development. Thus, copper production volume for its key

mines is another critical factor for the group’s performance.

On-schedule capacity expansion and commencement of

operations. Currently, the company is expanding the capacity

in its key mines, including Fujian Zijinshan gold and copper

mine, Heilongjiang Duobaoshan copper mine and Kolwezi

copper mine in the DRC. The capacity of Fujian Zijinshan gold

and copper mine will be extended to 80k-100k tonnes p.a.,

from the current 75k tonnes, by 2018, thanks to capex over

the last few years. Heilongjiang Duobaoshan copper mine’s

production capacity will grow to 90kt p.a. in 2019, from 25kt

p.a. in 2016, on the back of stage 2 expansion. With regard

to the Kolwezi mine in the DRC, the commencement of the

floatation system in June 2017 will lead to a capacity of 50-

60kt p.a. after the mine’s production ramp-up. In addition, a

hydrometallurgy system (SX-EW) is now under construction,

with the mine’s annual total capacity expected to reach 100kt

for copper and 2.4kt for cobalt by 2019. Beyond 2020, the

Kamao mine in the DRC will be prepped to commence

operations with a targeted annual capacity of 300k tonnes for

copper. Hence, the on-schedule completion of capacity

expansion and commencement of operations should be the

other key critical factors to watch.

M&A and exploration activities for mines. Zijin has entered

into a number of M&As and JVs globally to ensure the

sustainable development of resources and reserves. Hence, its

M&A activities should have a huge impact on its long-term

earnings and share price. In 2018, the company plans to

invest c.RMB4.2bn in project construction, RMB12.1bn in

M&As and RMB190m in geological exploration. In Sep 2018,

it won the tender to become a strategic partner of Serbia's

state-owned RTB Bor Group that is the country’s sole copper

player, with a total investment of US$1.26bn within six years.

For this venture, the company will initially invest US$350m

(RMB2.4bn) for a 63% stake. Also, Zijin has proposed to make

an all-cash takeover of Nevsun for a consideration of CAD6

per common share and the offer shall be accepted by at least

66⅔% of Nevsun’s shareholders by 31 Dec 2018.

Mined gold sales volume (tonne)

Mined copper sales volume (k tonnes)

Refined copper sales volume (k tonnes)

Gold prices(US$/oz)

LME Copper prices(US$/tonne)


41.6

37.4

34 35.2 35.5

0.0

6.0

12.0

18.0

24.0

30.0

36.0

42.0

2016A 2017A 2018F 2019F 2020F

151

208

240

275

308

0.0

62.8

125.6

188.4

251.2

314.0

2016A 2017A 2018F 2019F 2020F

406431 430 435

456

0.00

93.11

186.23

279.34

372.46

465.57

2016A 2017A 2018F 2019F 2020F

1248 1258 12641220 1219

0.0

255.3

510.6

765.9

1021.2

1276.5

2016A 2017A 2018F 2019F 2020F

4863

61666471 6425 6562

0.0

1325.5

2650.9

3976.4

5301.9

6627.3

2016A 2017A 2018F 2019F 2020F

Company Focus

Zijin Mining

Balance Sheet:

Following a spate of mine acquisitions, the company’s net

debt had almost tripled to RMB29.4bn in 2016 from

RM10.7bn in 2013, with net gearing surging to 0.9x from

0.4x in the same period. However, thanks to its capital

increase of RMB4.6bn in June 2017, its net gearing ratio

declined to 0.6x at the end of 2017. We forecast its net

gearing to rise to 0.8x at the end of 2019 due to the recent

M&As that the company has undertaken. We have factored

the acquisition of the RTB Bor mine in Serbia in our

projections.

Share Price Drivers:

Metal prices. The company’s share price closely tracks the

prices of gold and copper, which are set to remain as its first

and second largest earnings contributors respectively.

Key Risks:

Key risks include i) volatility in metal prices; ii) mine

exploration and project execution risks, iii) geopolitical risks

including changes in mining code in the DRC, and iv)

financial burden arising from M&As. Note that huge capital

outlay is required to execute its recent M&A deals (RTB Bor

mine in Serbia and cash offer to acquire Nevsun in Canada).

Company Background

Established in 2000, Zijin Mining is a local state-owned

enterprise in Shanghang County and a dominant base metal

producer in China. It ranks #1 for copper and #3 for zinc in

terms of mineral reserves and resources in China. The

company was listed on The Stock Exchange of Hong Kong

Limited in Dec 2003, and on the Shanghai Stock Exchange in

Apr 2008.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.8

0.9

0.9

1.0

1.0

1.1

1.1

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2016A 2017A 2018F 2019F 2020F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2016A 2017A 2018F 2019F 2020F

Capital Expenditure (-)

RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2016A 2017A 2018F 2019F 2020F

Avg: 18.6x

+1sd: 22.7x

+2sd: 26.7x

-1sd: 14.6x

-2sd: 10.6x9.5

14.5

19.5

24.5

29.5

34.5


(x)

Avg: 1.62x

+1sd: 1.86x

+2sd: 2.09x

-1sd: 1.38x

-2sd: 1.15x

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4


(x)

Company Focus

Zijin Mining

What drives its share price?

Zijin Mining share price vs gold spot price Remark

The company’s share price tends to move in tandem with gold price, as gold is the biggest revenue contributor. In 2017, gold segment accounted for c.50% of the company’s revenue and 25% of gross profit.


Zijin Mining share price vs Dollar Index Remark

Its share price tends to move in opposite direction with US dollar. This is in line with the general trend in gold and base metal prices moving in opposite direction with US dollar.


1

2

3

4

5

6

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

(HKD)(US$/oz) Gold Spot $/Oz Zijin Mining share price (R)

1

2

3

4

5

6

70

75

80

85

90

95

100

105


(HKD)(pts) Dollar Index Zijin Mining share price (R)

Zijin Mining share price vs LME copper price Remark

Copper segment is another important source of earnings for the company, which accounted for 22% of revenue and 34% of gross profit in 2017. As such, the company’s share price shows similar trend with copper price movements.


1

2

3

4

5

6

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


(HKD)(US$/ton) LME Copper Price Zijin Mining share price (R)

Company Focus

Zijin Mining

Key Assumptions

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Mined gold sales volume(ton)

35.6 41.6 37.4 34.0 35.2 35.6

Mined copper sales volume(k ton)

151 151 208 240 275 308

Refined copper sales volume(k ton)

259 406 431 430 435 456

Gold prices(US$/oz) 1,159 1,248 1,258 1,264 1,220 1,219

LME Copper prices(US$/ton)

5,495 4,863 6,166 6,471 6,425 6,562

Segmental Breakdown

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Revenues (RMBm)

Mine-produced gold 7,659 9,762 9,320 8,244 8,239 8,302

Refinery and processed gold

49,307 45,772 48,437 48,219 47,893 50,176

Mine-produced silver 457 514 603 492 505 529

Mine-produced copper 4,391 4,031 7,163 8,263 9,408 10,722

Others 9,018 13,220 18,061 17,920 17,998 19,291

Total 74,304 78,851 94,549 95,877 96,186 101,156

Gross Profit (RMBm)

Mine-produced gold 2,827 3,314 3,164 2,621 2,704 2,706


74.8 380 268 116 279 323

Mine-produced silver 137 230 236 122 113 114

Mine-produced copper 1,746 1,526 3,625 4,069 4,544 5,208

Others 164 851 1,008 612 693 813

Total 6,296 9,069 13,177 12,605 12,948 13,855

Gross Profit Margins (%)

Mine-produced gold 36.9 33.9 34.0 31.8 32.8 32.6


0.2 0.8 0.6 0.2 0.6 0.6

Mine-produced silver 29.9 44.8 39.1 24.8 22.4 21.6

Mine-produced copper 39.7 37.9 50.6 49.2 48.3 48.6

Others 1.8 6.4 5.6 3.4 3.8 4.2

Total 8.5 11.5 13.9 13.1 13.5 13.7


Company Focus

Zijin Mining

Income Statement (RMBm)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Revenue 74,304 78,851 94,549 95,877 96,186 101,156

Cost of Goods Sold (68,008) (69,782) (81,372) (83,272) (83,238) (87,301)

Gross Profit 6,296 9,069 13,177 12,605 12,948 13,855

Other Opng (Exp)/Inc (4,718) (4,202) (6,293) (5,219) (4,836) (5,094)

Operating Profit 1,577 4,867 6,884 7,386 8,112 8,761

Other Non Opg (Exp)/Inc 142 (186) (459) 3.46 (80.0) (80.0)

Associates & JV Inc (44.2) 92.4 (29.3) (27.6) (30.0) (30.0)

Net Interest (Exp)/Inc (946) (582) (2,013) (1,981) (2,405) (2,666)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 2,086 2,126 4,568 5,544 5,748 6,220

Tax (743) (439) (1,320) (1,209) (1,254) (1,357)

Minority Interest 313 153 260 (721) (748) (809)

Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 1,656 1,840 3,508 3,613 3,746 4,054

Net Profit before Except. 1,656 1,840 3,508 3,613 3,746 4,054

EBITDA 4,886 8,984 11,211 11,698 12,565 13,382

Growth

Revenue Gth (%) 26.5 6.1 19.9 1.4 0.3 5.2

EBITDA Gth (%) (20.0) 83.9 24.8 4.3 7.4 6.5

Opg Profit Gth (%) (54.4) 208.5 41.4 7.3 9.8 8.0

Net Profit Gth (Pre-ex) (%)

(29.4) 11.1 90.7 3.0 3.7 8.2

Margins & Ratio

Gross Margins (%) 8.5 11.5 13.9 13.1 13.5 13.7

Opg Profit Margin (%) 2.1 6.2 7.3 7.7 8.4 8.7

Net Profit Margin (%) 2.2 2.3 3.7 3.8 3.9 4.0

ROAE (%) 6.0 6.7 11.2 10.2 10.1 10.5

ROA (%) 2.0 2.1 3.9 4.0 3.7 3.9

ROCE (%) 1.2 1.9 2.1 2.2 1.6 1.6

Div Payout Ratio (%) 78.1 70.2 59.1 57.4 55.3 51.1

Net Interest Cover (x) 1.7 8.4 3.4 3.7 3.4 3.3


Margins Trend

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2016A 2017A 2018F 2019F 2020F

Operating Margin % Net Income Margin %

Company Focus

Zijin Mining

Quarterly / Interim Income Statement (RMBm)

FY Dec 2H2016 1H2016 2H2016 1H2017 2H2017 1H2018

Revenue 35,471 38,890 39,961 37,524 57,025 49,814 Cost of Goods Sold (32,993) (34,594) (35,188) (32,049) (49,323) (42,717)

Gross Profit 2,479 4,296 4,773 5,475 7,702 7,097 Other Oper. (Exp)/Inc (2,995) (2,789) (1,413) (2,025) (4,268) (2,787)

Operating Profit (517) 1,507 3,360 3,450 3,434 4,310 Other Non Opg (Exp)/Inc 148 5.99 (192) (164) (295) 3.46 Associates & JV Inc 118 167 (74.4) 16.6 (45.8) (27.6) Net Interest (Exp)/Inc (511) (440) (142) (1,218) (795) (660) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 179 617 1,509 2,151 2,417 3,781 Tax (247) (40.1) (399) (388) (932) (712) Minority Interest 382 (38.3) 191 (257) 517 (542)

Net Profit 315 538 1,301 1,505 2,002 2,526 Net profit bef Except. 315 538 1,301 1,505 2,002 2,526 EBITDA 1,270 3,167 5,817 5,604 5,608 6,426 Growth Revenue Gth (%) (8.7) 9.6 2.8 (6.1) 52.0 (12.6) EBITDA Gth (%) (64.9) 149.4 83.6 (3.7) 0.1 14.6 Opg Profit Gth (%) (124.7) (391.6) 123.0 2.7 (0.5) 25.5 Net Profit Gth (%) (76.5) 71.2 141.7 15.7 33.0 26.2 Margins Gross Margins (%) 7.0 11.0 11.9 14.6 13.5 14.2 Opg Profit Margins (%) (1.5) 3.9 8.4 9.2 6.0 8.7 Net Profit Margins (%) 0.9 1.4 3.3 4.0 3.5 5.1

Revenue Trend


Company Focus

Zijin Mining

Balance Sheet (RMBm)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 35,760 36,710 33,433 32,645 32,558 32,411

Invts in Associates & JVs 6,941 7,909 6,797 9,326 18,826 18,826

Other LT Assets 19,418 20,459 20,410 21,705 22,129 22,629

Cash & ST Invts 5,498 5,023 5,936 5,674 5,486 6,581

Inventory 10,951 12,003 11,090 12,366 12,361 12,964

Debtors 1,129 1,659 2,812 3,174 3,185 3,349

Other Current Assets 4,216 5,456 8,837 6,180 6,414 6,514

Total Assets 83,914 89,218 89,315 91,070 100,959 103,276

ST Debt

5,394 12,350 9,856 12,553 12,000 11,000

Creditor 4,674 4,979 4,396 4,407 4,406 4,621

Other Current Liab 21,458 16,522 14,541 11,960 11,983 12,294

LT Debt 17,551 22,046 20,378 20,666 28,666 28,666

Other LT Liabilities 2,908 2,203 2,501 2,483 2,483 2,483

Shareholder’s Equity 27,537 27,762 35,000 36,075 37,748 39,729

Minority Interests 4,391 3,354 2,643 2,925 3,673 4,482

Total Cap. & Liab. 83,914 89,218 89,315 91,070 100,959 103,276

Non-Cash Wkg. Capital (9,835) (2,384) 3,801 5,353 5,571 5,913

Net Cash/(Debt) (17,447) (29,373) (24,298) (27,546) (35,181) (33,085)

Debtors Turn (avg days) 5.5 7.7 10.9 12.1 12.1 12.1

Creditors Turn (avg days) 26.4 27.7 20.8 20.4 20.4 20.4

Inventory Turn (avg days) 61.8 66.7 52.5 57.2 57.3 57.2

Asset Turnover (x) 0.9 0.9 1.1 1.1 1.0 1.0

Current Ratio (x) 0.7 0.7 1.0 0.9 1.0 1.1

Quick Ratio (x) 0.2 0.2 0.3 0.3 0.3 0.4

Net Debt/Equity (X) 0.5 0.9 0.6 0.7 0.8 0.7

Net Debt/Equity ex MI (X) 0.6 1.1 0.7 0.8 0.9 0.8

Capex to Debt (%) 20.9 15.2 16.3 10.5 8.6 9.3


Asset Breakdown

Net Fixed Assets -51.7%

Assocs'/JVs -14.8%

Bank, Cash and Liquid

Assets -9.0%

Inventory -19.6%

Debtors -5.0%

Company Focus

Zijin Mining

Cash Flow Statement (RMBm)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 2,086 2,126 4,568 5,544 5,748 6,220

Dep. & Amort. 3,308 4,117 4,327 4,313 4,453 4,622

Tax Paid (743) (439) (1,320) (1,209) (1,254) (1,357)

Assoc. & JV Inc/(loss) 44.2 (92.4) 29.3 27.6 30.0 30.0

Chg in Wkg.Cap. 7,351 95.2 (7,823) (416) (219) (341)

Other Operating CF (1,777) 2,794 9,983 (2,262) (30.0) (30.0)

Net Operating CF 10,269 8,602 9,764 5,997 8,729 9,143

Capital Exp.(net) (4,794) (5,238) (4,942) (3,483) (3,494) (3,678)

Other Invts.(net) (1,292) (1,346) 351 (374) (1,297) (1,297)

Invts in Assoc. & JV (759) (535) 263 (2,300) (9,500) 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0

Other Investing CF (1,848) (1,360) (1,620) 1,181 0.0 0.0

Net Investing CF (8,693) (8,479) (5,948) (4,977) (14,291) (4,975)

Div Paid (3,414) (2,865) (3,188) (3,267) (2,073) (2,073)

Chg in Gross Debt 5,383 4,133 (5,708) 1,857 7,447 (1,000)

Capital Issues 0.0 0.0 0.0 0.0 0.0 0.0

Other Financing CF (2,242) (1,776) 6,223 57.4 0.0 0.0

Net Financing CF (273) (508) (2,674) (1,353) 5,374 (3,073)

Currency Adjustments 30.7 252 (101) 188 0.0 0.0

Chg in Cash 1,334 (133) 1,041 (145) (188) 1,096

Opg CFPS (HK cts) 15.4 45.0 89.4 31.7 44.2 46.8

Free CFPS (HK cts) 29.0 17.8 24.5 12.4 25.8 27.0


Capital Expenditure

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2016A 2017A 2018F 2019F 2020F


RMBm

ed: JS, SA: JY, CS

BUY (Initiating Coverage)

Last Traded Price (2 Oct 2018): HK$3.95 (HSI : 27,126)


Potential Catalyst: Higher metal prices Analyst Lee Eun Young +65 6682 3708 [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$m) 2017A 2018F 2019F 2020F

Revenue 4,143 3,836 4,170 4,286 EBITDA 2,210 1,974 2,201 2,289 Pre-tax Profit 744 605 889 1,063 Net Profit 147 238 355 425 Net Pft (Pre Ex.) (31.5) 263 355 425 EPS (HK cts) 14.5 23.2 34.7 41.5 EPS Pre Ex. (HK cts) (3.1) 25.7 34.7 41.5 EPS Gth (%) nm 60 50 19 EPS Gth Pre Ex (%) 84 nm 35 19 Diluted EPS (HK cts) 14.2 23.1 34.5 41.2 Net DPS (HK cts) 0.0 0.0 0.0 0.0 BV Per Share (HK cts) 119 139 174 215 PE (X) 27.2 17.0 11.4 9.5 PE Pre Ex. (X) nm 15.3 11.4 9.5 P/Cash Flow (X) 1.7 2.2 2.2 2.2 EV/EBITDA (X) 6.4 6.6 5.6 5.0 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 3.3 2.8 2.3 1.8 Net Debt/Equity (X) 2.8 2.3 1.7 1.2 ROAE (%) 13.1 18.0 22.1 21.2 Consensus EPS (HK cts): 0.05 0.06 0.07 Other Broker Recs: B:9 S:0 H:3 ICB Industry : Basic Materials ICB Sector: Industrial Metals Principal Business: MMG Limited is a mid-tier global resources company which explores, develops and mines base metal projects around the world. The Company currently owns and operates four mines, in Australia, Democratic Republic of Congo (DRC) and Peru.

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

At A Glance


Mkt Cap (HK$m/US$m) 32,124 / 4,101


China Minmetals Non-Ferrous Metals Co., Ltd. 72.6

Free Float (%) 27.4


ICB Industry: Basic Materials / Industrial Metals & Mining


4 Oct 2018


MMG Ltd Version 1 | Bloomberg: 1208 HK Equity | Reuters: 1208.HK Refer to important disclosures at the end of this report

No-frills copper mining play • Mid-tier miner with a focus on copper and zinc, with

quality assets across various regions

• Clear beneficiary of our long-term positive outlook on copper

• Attractive double-digit EPS growth and strongest ROE among peers

• Initiating coverage with BUY call and HK$4.7 TP

Ideal proxy for copper. MMG operates four mines globally,

producing copper and zinc as main products along with some by-

products (lead, gold, silver, and molybdenum). The mining assets

include Las Bambas and Dugald River, which are among the

world’s top copper and zinc mines, respectively, with strong cost

competitiveness. The company sold 586.8k tonnes of copper (86%

of total revenue) in 2017. Having divested non-core assets over the

years and cleaned up its asset portfolio in line with its long-term

objective of gaining prominence as a global miner with a focus on

copper, we think MMG is an ideal proxy to track copper markets.

Strong earnings growth. We estimate FY18F/19F EPS to surge by

60% and 50% respectively. Following the disposal of Sepon mine

in 1H18, Dugald River zinc mine will support the company’s

earnings as it should achieve 170k tonne p.a. production. It should

also reduce the company’s reliance on any single metal. Besides,

the company’s efforts to deleverage should lead to finance cost

savings; its net debt is forecast to decrease to US$5.3bn in 2020

from US$8.4bn in 2017.

Initiate with BUY call and HK$4.7 TP. We believe that recent share

price pullback following the fall in copper prices is a good

opportunity for investors to accumulate the shares as we are

positive on copper’s outlook on a long-term horizon, and earnings

will benefit from MMG proven capability and vast experience in

the mining business. Valuation: Our HK$4.7 TP is based on DCF. Our target price is derived from DCF valuation methodology which assumes 9.1% WACC and 1.5% terminal growth rate. This implies 13.5x PE, 2.7x P/BV and 6x EV/EBITDA based on 2019 earnings forecast, which are below MMG’s historical average multiples. Key Risks to Our View:

Volatility in metal prices; Implications of 2018 Mining Code by

the Democratic Republic of Congo, FX rate fluctuations and

project execution risk

51

71

91

111

131

151

171

191

211

1.1

2.1

3.1

4.1

5.1

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7.1


Relative IndexHK$

MMG Ltd (LHS) Relative HSI (RHS)

Company Focus

MMG

Table of Contents

Investment Thesis

SWOT Analysis

Company Overview

Highlights

World-class miner

Strong earnings growth ahead, coupled with deleveraging

Riding on copper demand growth

Zinc to lead the next phase of growth

Valuation

Key risks

Financials

Company Focus

MMG

Investment Thesis

Profile Rationale

• Global copper/zinc miner. MMG is a mid-tier global

resources company that mines, explores and develops base

metal projects with focus on copper and zinc. As at Sep

2018, the company owns a total of four mines across

Australia, the Democratic Republic of the Congo (DRC),

and Peru. This includes Las Bambas and Dugald River,

which are among world’s top copper and zinc mines,

respectively. On payable metal basis, in 2017, the company

sold 586.8k tonnes of copper, 67.9k tonnes of zinc, 23.8k

tonnes of lead, as well as some gold, silver and

molybdenum. It has a primary listing in Hong Kong (1208

HK), and secondary listing on Australian Securities

Exchange (MMG ASX).

• Quality resources, geographically diversified. The

company holds c.13.9m tonnes of copper and c.11.9m

tonnes of zinc resources (on 100% basis; contained metal).

The company has four operating mines located across

Australia, Peru and DRC. Separately, the company has

significant exploration projects and partnerships across

Australia, Africa and the Americas, including US$6.5bn

Izok Corridor Project (comprising of c.30m tonnes of

zinc/copper mineral resources at Izok Lake and High Lake

deposits located in the Canadian arctic).

• Initiate with BUY call and HK$4.7 TP. We believe that

recent share price pullback following the fall in copper

prices is a good opportunity for investors to accumulate

the shares as we are positive on copper’s outlook on a

long-term horizon, and earnings will benefit from MMG

proven capability and vast experience in the mining

business.

• Good proxy for copper. Since its incorporation in

2009, the company had identified copper and zinc as its

primary focus based on the long-term fundamentals back

in 2009 and has kept to it since. Among the mines

purchased are Las Bambas, the world’s top 8 copper mine

by capacity, and Dugald River, which is set to be on the

top 10 zinc mines upon completion of its ramp-up by

2020. In the past five years, the combined revenue

contribution by copper and zinc has stayed high at 80-

90%, which makes the company a good proxy to track the

copper and zinc markets.

• Strong earnings growth ahead. Despite the disposal

of Sepon mine in 1H18, MMG’s top-line will be supported

by the sizeable production from Las Bambas as well as the

ramp-up of Dugald River. We are positive on long-term

outlook of its key metals. In all, we estimate

2018F/2019F/2020F EPS to register 60%/50%/19% y-o-y

growth on finance cost savings from ongoing debt

reduction; while minority interest declines following the

divestment of 90% stake in Sepon. Earnings contribution

from its 100%-owned mines should rise while that from

Las Bambas falls (in which it owns 62.5% stake).

• Highest ROE among peers. MMG’s return on equity (ROAE) was 13.1% in 2017. We expect the company to continue delivering double-digit ROE. Our ROAE forecast for 2018/2019 are 18%/22.1%.

Valuation Risks

Our HK$4.7 TP is based on DCF model. Our target price is

derived from DCF model assuming 9.1% WACC and 1.5%

terminal growth rate. This implies 13.5x PE, 2.7x P/BV and 6x

EV/EBITDA based on 2019 earnings forecast, which are

below historical average.

Key risks include (1) Volatility in metal prices; (2) Implications of 2018 Mining Code announced by the DRC Government (3) FX rate fluctuations; (4) Project execution risk.

Source: DBS Bank

Company Focus

MMG

SWOT Analysis

Strengths Weakness

• Large reserve/resources base including Las Bambas, one of the top copper mines in the world

• Has support from major shareholder CMC (China Minmetals Corporation Limited) which is China’s biggest metal ore mining company with projects spread over 60 countries

• Competitive cost advantage with low-cost operations at Las Bambas and Dugald River

• Net gearing is still high at 2.8x in 2017, albeit lower from 4.4x in 2015.

• Concentration risk as major source of revenue is from Las Bambas mine (71% in 2017). Similarly, copper is the major product and accounted for 86% of revenue in 2017.


• Quick ramp-up of Dugald River will provide the next leg of growth for the company. Once fully ramped up, this mine will be among the world’s top 10 zinc mines with a capacity of 170k tonnes p.a.

• Significant organic growth potential through a strong exploration and development pipeline including Izok Corridor project in Nunavut, northern Canada

• Better-than-expected metal supply/demand dynamics and prices.

• Significant regulatory changes with the recent enactment of a new mining code in the DRC. Key changes include increased royalties, fees, duties, State’s rights and super profits tax.

• Slowdown in global economic environment leading to weaker metal demand and prices.

Source: DBS Bank

Company Overview

Corporate History. Minerals and Metals Group or MMG was

incorporated by China Minmetals Non-Ferrous Metals (CMN)

through an acquisition of a portfolio of mining assets from

OZ Minerals in 2009. In 2010, China Minmetals’ subsidiary,

HK-listed Minmetals Resources, acquired MMG. With this, the

company has a primary listing on the Hong Kong Stock

Exchange (1208 HK, Dec 1994). The company also has a

secondary listing on Australian Securities Exchange since Dec

2015 (MMG ASX). Its head office is located in Melbourne,

Australia.

Copper/zinc miner with world-class assets. MMG is a mid-tier

global resources company that mines, explores and develops

base metal projects with focus on copper and zinc. As at Sep

2018, the company owns a total of four mines across

Australia, the Democratic Republic of the Congo (DRC), and

Peru. This includes Las Bambas and Dugald River, which are

among world’s top copper and zinc mines, respectively.

Copper and zinc generate most of its revenue. Historically,

copper and zinc have been the main revenue contributors to

the company’s revenue. The two metals accounted for at

least 85% of the company’s revenue in the past five years. In

2017, copper’s contribution jumped significantly to 86%

while zinc fell to 4%, as its new major copper mine started

full year operations and it disposed of two zinc mines in

2015/2016. Beside the two major commodities, the company

also sells lead, gold, silver and molybdenum, which are by-

products at its copper and zinc mines.

Las Bambas and Dugald River are the most important assets.

By mines, Las Bambas accounted for 71% of the company’s

revenue. Dugald River started production in 2H17

(commercial production since 1H18) and the mine is expected

to be among the world’s top 10 zinc mines once the ramp-up

is completed by 2019 (c.170k tonnes p.a. of zinc

concentrate). Accordingly, Dugald River will also claim a

significant share of the company’s revenue in coming years,

while reducing reliance on Las Bambas.

Company Focus

MMG


Sales breakdown by commodity since 2013 Sales breakdown by mines (2017)


Management Composition. MMG has an experienced and

strong management team led by Mr Guo (Chairman) and Mr

Gao (CEO). The roles of Chairman of the Board and the CEO

are segregated, which helps to ensure their respective

independence, accountability and responsibility. The Board

consists of 9 Directors (including 2 Executive Directors, 3 Non-

Executive Directors and 4 Independent Directors). The Board

has established Audit, Remuneration, Governance and

Nomination, and Risk management committees to assist in

carrying out its responsibilities.

Shareholding structure. CMC (China Minmetals Corporation

Limited) is the majority shareholder in the company with

5,847m shares (representing c.73% of the total issued

shares). CMC is China’s major metal ore mining company

with projects spread over 60 countries.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2016A 2017A 2018F 2019F 2020F

US$ m


(153)

47

247

447

647

847

1,047

1,247

2016A 2017A 2018F 2019F 2020F

US$ m


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F

(US$m)

Revenue breakdown evolution

Copper Zinc Lead Gold Silver Molybdenum

Las Bambas71%

Kinsevere12%

Dugald River0%

Rosebery7% Sepon

10%

Others0%

Revenue Breakdown (2017)

Company Focus

MMG

Key Management Team

Mr Guo Wenqing

Chairman

Mr Guo was appointed as a Non-Executive Director and the Chairman of the Company in February 2017. He is also a director and President of China Minmetals Corporation (CMC) and Chairman of China Metallurgical Group Corporation (MMC Group). He holds a bachelor’s degree in Business Administration from Hebei University of Science and Technology and MBA from Tsinghua University in the PRC.

Mr Geoffrey (Xiaoyu) Gao

Executive Director, CEO

Mr Gao was appointed as CEO and Executive Director in August 2018, prior to which he served as Non-Executive Director of the company for 7+ years. He also serves as director of various subsidiaries of CMC. He holds a Master’s degree in Business Management from The Renmin University of China in the PRC and has wide experience in enterprise risk management and control.

Mr Xu Jiqing

Executive Director, Executive GM – Marketing and Risk

Mr Xu was appointed as Executive Director and Executive General Manager - Strategic Planning of the company in May 2013. He also serves as director of various subsidiaries of the company and has 25+ years of experience in finance, strategy and investment. He holds a Bachelor’s degree in Accounting from the University of International Business and Economics in the PRC and MBA degree from Saint Mary’s University in Canada.

Company Focus

MMG

World-class miner Establishing a name in copper/zinc mining. MMG has carried

out a series of acquisitions while divesting non-core assets

since its incorporation in 2009. We think it is commendable

that the company had identified copper and zinc as its

primary targets based on the long-term fundamentals back in

2009 and has kept to it since. Among the mines purchased

are Las Bambas, among the world’s top 8 copper mines by

capacity, and Dugald River, which is set to be one of the top

10 zinc mines upon completion of ramp-up by 2020.

Accordingly, it is on track to gaining prominence in the

copper/zinc mining scene.

Quality resources diversified geographically. MMG holds

c.13.9m tonnes of copper and c.11.9m tonnes of zinc

resources (on 100% basis; contained metal). The company

has four operating mines located across Australia, Peru and

the DRC. Separately, the company has significant exploration

projects and partnerships across Australia, Africa and the

Americas, including the US$6.5bn Izok Corridor Project

(comprises of c.30m tonnes of zinc/copper mineral resources

at Izok Lake and High Lake deposits located in the Canadian

arctic).

Strong backing from its major shareholder. MMG’s major

shareholder, CMC, is China’s major metal ore mining

company with projects spread over 60 countries. The size

(2017 revenue of c.RMB500bn), stability and insights of CMC

provides a competitive edge to the company. With access to

long term capital through shareholder loans, MMG is able to

take a countercyclical approach and acquire new assets to

secure new growth drivers. Also, MMG can utilise CMC’s

network of distribution and marketing channels of China’s

base metals market.

Strong earnings growth ahead, coupled with

deleveraging

Deleveraging on the way. The company had taken out

facilities and shareholder loans to finance the mine

acquisitions, resulting in its net debt rising to US$9.7bn and

net gearing to 4.4x in 2015. However, the company is taking

steps to reduce this and net debt stood at US$8.4bn in 2017

with net gearing down to 2.8x. Given the company’s

emphasis on debt reduction, we forecast its net debt level to

continue trending down to US$7.2bn in 2018 and US$6.3bn,

with net gearing falling to 2.3x in 2018 and 1.7x in 2019.

Double-digit EPS growth. During our forecast period of

2018F-2020F, the company is set to deliver outstanding

earnings growth. Despite the sale of Sepon mine in 1H18,

production ramp-up at Dugald River mine should increasingly

support the company’s top-line growth. Overall, net income

growth will be underpinned by i) finance cost savings from

ongoing debt reduction; while ii) minority interest falls

following the divestment of 90% stake in Sepon mine.

Earnings contribution from its 100%-owned mines should

rise while that from Las Bambas falls (in which it owns 62.5%

stake). In all, we estimate 2018F/2019F/2020F EPS to register

60%/50%/19% y-o-y growth.

Highest ROE among peers. MMG’s return on equity (ROAE)

stood at 13.1% in 2017. We expect the company to continue

delivering double-digit ROE. Our ROAE forecast for

2018/2019 are 18%/22.1%. This is higher than peers in the

market.

Company Focus

MMG

MMG Asset Portfolio

Source: Company, DBS Bank Note: Sepon mine was sold in 1H18

MMG Reserves & Resources (as at 30 Jun 2017, excluding Sepon)

Project Copper

(k tonnes) Zinc

(k tonnes) Lead

(k tonnes) Silver

(m oz) Gold

(m oz) Molybdenum

(k tonnes)

Ore Reserves - Contained Metal (100% asset basis)

Las Bambas 7,493 118 1.8 207

Kinsevere 486 Dugald River 3,903 722 46 Rosebery 13 482 185 22 0.2 Total 7,992 4,385 907 186 2.0 207

Mineral Resources – Contained Metal (100% asset basis)

Las Bambas 11,625 182 2.7 341

Kinsevere 1,431 Dugald River 79 7,883 1,401 65 0.03 Rosebery 51 1,526 537 64 0.8 High Lake 347 536 50 37 0.6 Izok Lake 342 1,910 209 34 0.1 Total 13,875 11,855 2,197 382 4.2 341


Company Focus

MMG

Riding on copper

Strong revenue base secured thanks to Las Bambas. Las

Bambas copper mine produced 453.7k tonnes of copper

concentrates in 2017, which represents c.2.2% of global

mine copper production. In terms of payable metal, the mine

sold 442.5k tonnes, or 75.4% of the company’s total copper

sales. Going forward, the mine’s outstanding scale provides a

stable base for copper sales volume and revenue, accordingly.

Growth driven by both price and volume in 2017. The

company’s copper business boomed following the start of

commercial production of Las Bambas mine in 2H16.

Revenue from copper increased by a whopping 86% y-o-y in

each of 2016 and 2017, driving the company’s top-line

growth. Besides volume growth from new output from Las

Bambas, a significant recovery in metal prices in 2017 also

contributed to revenue growth. The ASP of copper increased

by 40% backed by a hike in average LME copper prices of

26.8% y-o-y to US$6,166/tonne in 2017.

Copper segment to trend up over 2018F-2020F, albeit still

lower than 2017. Las Bambas recorded extraordinary

operating results in 2017 as it enjoyed early access to higher

grade skarn ore, usually found near the top of the ore body.

In line with the general trend that grades decline as mines get

older (quality of ore transitions into lower grade porphyry

ore), production volume from 2018 onwards will be lower vs.

2017. The company has guided that production for 2018 will

range between 375k-395k tonnes, which is revised down

from the earlier guidance of 410k-430k tonnes stated in the

2017 annual report. This is due to wall instability, limiting

access to certain sections of the mine, but production will

likely normalise at c.400k tonnes p.a. in 2019F-2020F.

Production at Kinsevere will remain stable at c.80k tonnes

p.a. over 2018F-2020F. Meanwhile, copper price has been

tepid YTD due to some uncertainty in the macroeconomic

outlook in the face of the global trade war. Given the resilient

fundamentals nonetheless, we forecast copper price to trend

up from the current level. All in all, we expect revenue from

the copper segment will steadily increase from US$2.8bn in

2018, to US$2.9bn and US$3bn in 2019 and 2020,

respectively.

Copper business margins to improve. Las Bambas also boasts

of a strong cost advantage, with its C1 copper cost at

US$0.99/lb in 2017 which is below the 20th percentile on the

global copper cost curve, and much lower than US$1.58/lb at

the Kinsevere mine. This can be attributed to i) sizeable

volume at Las Bambas vs. Kinsevere (442.5k tonnes vs. 80k

tonnes of copper sold in 2017), and ii) valuable by-products

at Las Bambas mine which are gold, silver and molybdenum.

In calculating the C1 cost of mines, revenue generated from

by-products is deducted from the production cost of the main

product – copper in this case. As such, C1 cost at Las Bambas

can further improve if market conditions for its by-products

are favourable. All in all, the addition of Las Bambas to the

portfolio will lead to higher profitability for MMG’s copper

business. Las Bambas’ EBITDA margin in 2017 was 59.3%,

highest among MMG’s mines.

Positive on copper market’s mid- to long-term outlook. We

like the company’s clear and consistent focus on copper as

we are optimistic about the metal’s outlook in the mid to

long term. Our in-depth analysis into the copper market

predicts global refined copper demand to grow at a CAGR of

3.1% over 2017-2022. Electric vehicle (EV) market

development and rising renewable energy adoption would

undoubtedly require more electricity, and copper is an

irreplaceable metal used in electrical wires/equipment thanks

to its superb electrical conductivity. As we predict supply

growth to be lower at c.3% CAGR over the same period, the

copper market is expected to be in deficit, this supporting an

uptrend in prices. Despite solid fundamentals, copper price is

also subject to sentiment change which has turned negative

in recent months on global trade war concerns. To reflect

this, we expect annual average copper price to weaken

slightly y-o-y in 2019, before trending higher in 2020.

Company Focus

MMG

Mines’ EBITDA margins (2017) C1 copper cost curve (2018)

Source: Company, DBS Bank *MMG consolidated C1 based on Las Bambas, Kinsevere and

Sepon in 2017 Source: Company, DBS Bank

EBITDA breakdown by mines since 2013 EBITDA breakdown by mines (2017)


59.3%

35.7%

51.1%

30.4%

0%

10%

20%

30%

40%

50%

60%

70%

Las Bambas Kinsevere Rosebery Sepon

EBITDA margins by mine

-500

0

500

1,000

1,500

2,000

2,500

2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F

(US$m)

EBITDA breakdown evolution

Las Bambas Kinsevere Dugald River Rosebery

Sepon Century Golden Grove

Las Bambas74%

Kinsevere7%

Dugald River0%

Rosebery7%

Sepon5%

Others-7%

EBITDA Breakdown (2017)

Company Focus

MMG

Zinc to lead the next phase of growth

Zinc contribution lower due to disposal of Gold Grove mine.

Zinc’s share of revenue declined drastically from c.30%

during 2013-2015, to just 4% in 2017 as the company

disposed of zinc-producing Golden Grove mine and Century

mine in 2015 and 2016, respectively. Also, the growth of

copper production following the ramp-up in Las Bambas was

another reason for a decline of zinc’s contribution. As a

result, copper accounted for a whopping 86% of MMG’s

total revenue in 2017, up from 55% in 2013.

Zinc’s revenue share to rise led by Dugald River. The

company’s major zinc mine – Dugald River – started

commercial production in 2H17. It will deliver its first full-year

production in 2018. Ramp-up is underway to reach

nameplate capacity rate of 170ktpa of zinc concentrate

through 2019 and 2020. This will position Dugald River

among the world’s top 10 zinc mines. Accordingly, we

forecast zinc segment’s share to total revenue will rise to

14% in 2020 supported by 52% CAGR top line growth over

3 years (2017-2020F). This is positive for MMG as it reduces

its heavy reliance on a single metal i.e. copper.

Strong profitability from Dugald River. The mine has a c.25

year life, operating at a C1 cost of US$0.68-0.78/lb. Coupled

with stable zinc prices, this will have a significant positive

impact on both revenue and profit margins. We estimate

EBITDA margin at Dugald River mine to be 40.7% in 2018.

We expect EBITDA contribution from Dugald River mine will

grow to US$194m, contributing 8% to total EBITDA in 2020

based on zinc price assumption of US$2,800/tonne

Upside from by-products. Beside zinc, Dugald River mine has

lead and silver as by-products. With the ramp-up of

production at Dugald River mine, the company could

potentially see more upside opportunities from by-products.

Sales trend by commodity Sales by mines

Source: Company, DBS Bank Source: Company, DBS Bank

Valuation

Our HK$4.7 TP is based on DCF model. Our TP is derived

from DCF model assuming 9.1% WACC and 1.5% terminal

growth rate. This implies 13.5x PE, 2.7x P/BV and 6x

EV/EBITDA based on 2019 earnings forecast. We believe that

recent share price pullback following the fall in copper prices

is a good opportunity for investors to accumulate the shares

as we are positive on copper’s outlook on a long term

horizon, and earnings will benefit from MMG proven

capability and vast experience in the mining business.

Key risks



and project execution risk; and iii) geopolitical risks including

changes in mining code in the DRC.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

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4,500

2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F

(US$m)


Copper Zinc Lead Gold Silver Molybdenum

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F

(US$m)


Las Bambas Kinsevere Dugald River RoseberySepon Century Golden Grove

Company Focus

MMG


Critical Factors Copper sales volume, an important revenue indicator for MMG.

Copper has been a major earnings contributor for MMG. Following

the acquisition of Las Bambas mine, copper’s share of revenue

reached as high as 86% in 2017. As such, copper production and

sales volume is a critical component of the company’s earnings as

well as share price.

Increase in zinc sales volume would determine future growth. With

the production and sales volume of copper likely to remain stable in

coming years, MMG’s revenue growth will be led by the ramp-up of

zinc production at Dugald River mine. While we have conservatively

forecast production at the lower end of the company’s guidance, it is

still important to monitor that the production increase sticks to its

schedule.

Earnings most highly correlated to copper price. Earnings from each

commodity depends on sales volume as well as prices. According to

the company’s sensitivity analysis, every US$1/tonne increase in

copper price lifts the company’s EBIT by US$0.54m.

Increasing leverage on zinc. With higher production volume expected

for zinc, its price will also be important to earnings. The company’s

sensitivity analysis shows that a US$1/tonne change in zinc price has

a US$0.18m impact on its EBIT.

Copper: payable metal sold (k tonnes)

Zinc: payable metal sold (k tonnes)

LME copper price (US$/tonne)

LME zinc price (US$/tonne)


472

587

466 483 483

0.0

84.7

169.3

254.0

338.7

423.3

508.0

592.7

2016A 2017A 2018F 2019F 2020F

134

67.9

189

229 236

0.0

48.2

96.4

144.6

192.8

241.0

2016A 2017A 2018F 2019F 2020F

4863

61666471 6425 6562

0.00

1338.59

2677.17

4015.76

5354.35

6692.94

2016A 2017A 2018F 2019F 2020F

2095

2896 2908 2825 2800

0.0

587.5

1175.0

1762.4

2349.9

2937.4

2016A 2017A 2018F 2019F 2020F

Company Focus

MMG

Balance Sheet:

Due to financing for its mine acquisitions, the company’s net debt

rose to US$9.7bn and net gearing to 4.4x in 2015. However, the

company is committed to reducing this, and net debt stood at

US$8.4bn in 2017 with net gearing dropped to 2.8x. Given the

company’s emphasis on debt reduction, we forecast its net debt level

to continue trending down to US$7.2bn in 2018 and US$6.3bn in

2019, and net gearing to fall 2.3x in 2018 and 1.7x in 2019.


Metal prices. The company’s share price moves in tandem with

copper and zinc prices, as sales of copper and zinc are first and

second highest contributors to earnings.

Key Risks: Key risks include (1) Volatility in metal prices; (2) Implications of 2018 Mining Code by the DRC Government (3) FX rate fluctuations; (4) Project execution risk

Company Background MMG is a mid-tier global resources company that mines, explores and

develops base metal projects with focus on copper and zinc. As at Sep

2018, the company owns a total of four mines across Australia, the

Democratic Republic of the Congo (DRC), and Peru. This includes Las

Bambas and Dugald River, which are among the world’s top copper

and zinc mines, respectively. On payable metal basis, the company sold

586.8k tonnes of copper, 67.9k tonnes of zinc, 23.8k tonnes of lead,

as well as some gold, silver and molybdenum. It has a primary listing

in Hong Kong (1208 HK), and secondary listing on Australian Securities

Exchange (MMG ASX).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

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2016A 2017A 2018F 2019F 2020F


0.0

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600.0

700.0

800.0

900.0

2016A 2017A 2018F 2019F 2020F


US$m

0.0%

5.0%

10.0%

15.0%

20.0%

2016A 2017A 2018F 2019F 2020F

6.0

16.0

26.0

36.0

46.0

56.0

66.0

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

(x )

+2sd: 40x

+1sd: 30.7x

Avg: 21.5x

-1sd: 12.3x

Avg: 2.26x

+1sd: 3.37x

+2sd: 4.48x

-1sd: 1.15x

-2sd: 0.04x0.0

1.0

2.0

3.0

4.0

5.0


(x)

Company Focus

MMG


MMG share price vs LME copper price Remark

Copper has been a major earnings contributor for MMG. Following the acquisition of Las Bambas mine, copper’s share of revenue reached as high as 86% in 2017. We note that MMG ‘s share price has moved in tandem with LME copper price.


MMG share price vs LME zinc price Remark

Zinc is the second biggest contributor to MMG’s revenue. But, zinc’s share of revenue plunged from as high as 36% in 2014 to 4.1% in 2017, due to disposal of mines (Century & Golden Grove). This is set to rise again with the acquisition of Dugald River mine, which started commercial production in 2H17.


MMG share price vs LME index Remark

As a miner of major metals traded on the LME – copper and zinc – the company’s share price also shows significant correlation with the LME index.


0

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5

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7

3,000

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(HKD)(US$/ton) LME Copper Price MMG share price (R)

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1,000

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(HKD)(US$/ton) LME ZINC SPOT ($) OFF MMG share price (R)

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1,500

2,000

2,500

3,000

3,500

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5,000


(HKD)(pts) LME Index (L) MMG share price (R)

Company Focus

MMG

Key Assumptions

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Copper: payable metal sold (k tons)

197 472 587 466 483 483

Zinc: payable metal sold (k tons)

460 134 67.9 189 229 236

LME copper price (US$/ton)

5,495 4,863 6,166 6,471 6,425 6,562

LME zinc price (US$/ton) 1,928 2,095 2,896 2,908 2,825 2,800

Segmental Breakdown

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Revenues (US$m)

Las Bambas 0.0 1,224 2,937 2,740 2,872 2,961

Kinsevere 418 400 501 516 511 522

Dugald River 0.0 0.0 0.0 229 442 459

Rosebery 201 449 305 353 345 344

Others 497 391 392 0.0 0.0 0.0

Total 1,951 2,489 4,143 3,836 4,170 4,286

EBITDA by Mine (US$m)

Las Bambas (72.1) 655 1,741 1,492 1,595 1,654

Kinsevere 132 116 179 228 228 239

Dugald River 0.0 0.0 0.0 92.9 179 194

Rosebery 79.1 179 156 203 199 202

Others 249 102 119 0.0 0.0 0.0

Total 421 949 2,210 1,974 2,201 2,289

EBITDA by Mine Margins (%)

Las Bambas N/A 53.5 59.3 54.5 55.5 55.9

Kinsevere 31.5 29.0 35.7 44.1 44.6 45.8

Dugald River N/A N/A N/A 40.5 40.5 42.2

Rosebery 39.3 40.0 51.1 57.4 57.7 58.6

Others 50.1 26.0 30.4 N/A N/A N/A

Total 21.6 38.1 53.3 51.5 52.8 53.4


Company Focus

MMG

Income Statement (US$m)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Margins Trend

Revenue 1,951 2,489 4,143 3,836 4,170 4,286


Gross Profit 280 592 1,648 1,468 1,675 1,779

Other Opng (Exp)/Inc (508) (328) (550) (346) (360) (343)

Operating Profit (229) 265 1,098 1,122 1,315 1,437

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 4.60 0.0 0.0

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc (85.0) (313) (534) (497) (426) (374)

Exceptional Gain/(Loss) (897) 0.0 179 (25.7) 0.0 0.0

Pre-tax Profit (1,211) (48.3) 744 605 889 1,063

Tax 162 (50.4) (395) (248) (356) (425)

Minority Interest 22.2 (54.0) (201) (119) (178) (213)


Net Profit (1,027) (153) 147 238 355 425

Net Profit before Except. (130) (153) (31.5) 263 355 425

EBITDA (476) 949 2,210 1,974 2,201 2,289

Growth

Revenue Gth (%) (21.3) 27.6 66.5 (7.4) 8.7 2.8

EBITDA Gth (%) nm nm 132.8 (10.7) 11.5 4.0

Opg Profit Gth (%) (193.8) (215.8) 315.0 2.2 17.2 9.2


nm (17.9) 79.4 nm 35.0 19.5

Margins & Ratio

Gross Margins (%) 14.3 23.8 39.8 38.3 40.2 41.5

Opg Profit Margin (%) (11.7) 10.6 26.5 29.3 31.5 33.5

Net Profit Margin (%) (52.6) (6.1) 3.6 6.2 8.5 9.9

ROAE (%) (87.3) (18.0) 13.1 18.0 22.1 21.2

ROA (%) (7.0) (1.0) 1.0 1.8 2.7 3.3

ROCE (%) (1.5) (3.2) (4.0) (1.9) (0.6) 0.4

Div Payout Ratio (%) N/A N/A 0.0 0.0 0.0 0.0

Net Interest Cover (x) (2.7) 0.8 2.1 2.3 3.1 3.8


-7.0%

-2.0%

3.0%

8.0%

13.0%

18.0%

23.0%

28.0%

33.0%

2016A 2017A 2018F 2019F 2020F


Company Focus

MMG

Quarterly / Interim Income Statement (US$m)

FY Dec 2H2015 1H2016 2H2016 1H2017 2H2017 1H2018 Revenue Trend

Revenue 837 586 1,903 1,942 2,201 1,899 Cost of Goods Sold (764) (531) (1,366) (1,068) (1,427) (1,152)

Gross Profit 73.3 55.3 537 874 774 747 Other Oper. (Exp)/Inc (297) (122) (205) (445) (105) (170)

Operating Profit (224) (67.0) 332 429 669 577 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 4.60 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (43.2) (47.1) (266) (260) (273) (250) Exceptional Gain/(Loss) (897) 0.0 0.0 174 4.90 0.0

Pre-tax Profit (1,164) (114) 65.8 343 401 332 Tax 163 21.1 (71.5) (229) (166) (139) Minority Interest 20.4 0.50 (54.5) (95.9) (105) (64.7)

Net Profit (980) (92.5) (60.2) 17.8 129 129 Net profit bef Except. (83.3) (92.5) (60.2) (156) 124 129 EBITDA 45.0 134 815 855 1,177 989 Growth Revenue Gth (%) (24.8) (30.0) 224.6 2.1 13.3 (13.7) EBITDA Gth (%) (88.0) 198.4 506.8 4.9 37.6 (16.0) Opg Profit Gth (%) 4,370.0 (70.0) (595.1) 29.4 55.9 (13.7) Net Profit Gth (%) 2,021.9 (90.6) (34.9) (129.6) 626.4 (0.5) Margins Gross Margins (%) 8.8 9.4 28.2 45.0 35.2 39.3 Opg Profit Margins (%) (26.7) (11.4) 17.4 22.1 30.4 30.4 Net Profit Margins (%) (117.1) (15.8) (3.2) 0.9 5.9 6.8


-100%

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Revenue Revenue Growth % (YoY)

Company Focus

MMG

Balance Sheet (US$m)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 11,873 12,084 11,982 10,995 10,592 10,231

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0

Other LT Assets 1,153 1,114 1,111 947 922 898

Cash & ST Invts 613 553 936 676 643 666

Inventory 282 346 296 237 273 277

Debtors 719 851 408 502 577 586

Other Current Assets 20.2 282 56.2 52.0 52.0 52.0

Total Assets 14,660 15,230 14,790 13,409 13,058 12,709

ST Debt

277 737 694 521 521 521

Creditor 425 656 745 762 877 890

Other Current Liab 143 217 62.9 68.1 68.1 68.1

LT Debt 9,986 9,516 8,659 7,395 6,395 5,395

Other LT Liabilities 1,654 1,514 1,657 1,495 1,495 1,495

Shareholder’s Equity 667 1,031 1,211 1,432 1,788 2,212


Total Cap. & Liab. 14,660 15,230 14,790 13,409 13,058 12,709

Non-Cash Wkg. Capital 454 606 (48.2) (38.9) (43.4) (43.6)

Net Cash/(Debt) (9,650) (9,700) (8,417) (7,239) (6,273) (5,250)




Asset Turnover (x) 0.1 0.2 0.3 0.3 0.3 0.3

Current Ratio (x) 1.9 1.3 1.1 1.1 1.1 1.1

Quick Ratio (x) 1.6 0.9 0.9 0.9 0.8 0.8

Net Debt/Equity (X) 4.4 3.7 2.8 2.3 1.7 1.2

Net Debt/Equity ex MI (X) 14.5 9.4 6.9 5.1 3.5 2.4

Capex to Debt (%) 19.3 7.7 7.5 5.1 6.5 7.7


Asset Breakdown


Assocs'/JVs -0.0%


Assets -5.4%

Inventory -1.9%

Debtors -4.0%

Company Focus

MMG

Cash Flow Statement (US$m)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit (1,211) (48.3) 744 600 889 1,063

Dep. & Amort. 649 685 933 877 885 852

Tax Paid 162 (50.4) (395) (248) (356) (425)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 283 (163) (516) (40.1) 20.1 2.08

Other Operating CF 399 300 1,605 655 416 364

Net Operating CF 282 722 2,370 1,845 1,855 1,856

Capital Exp.(net) (1,984) (785) (705) (400) (447) (457)

Other Invts.(net) (1.6) 32.7 208 167 (15.6) (1.9)

Invts in Assoc. & JV (12.2) 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 (95.0) (25.0) 120 0.0 0.0

Net Investing CF (1,998) (847) (522) (113) (463) (459)

Div Paid (8.0) (3.5) 0.0 0.0 0.0 0.0

Chg in Gross Debt 2,118 (21.0) (1,072) (1,223) (1,000) (1,000)

Capital Issues 251 511 8.60 11.2 0.0 0.0

Other Financing CF (298) (407) (401) (767) (426) (374)

Net Financing CF 2,062 79.3 (1,464) (1,978) (1,426) (1,374)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0

Chg in Cash 347 (45.6) 383 (246) (33.5) 23.2

Opg CFPS (HK cts) (0.1) 113 284 184 179 181

Free CFPS (HK cts) (252) (8.0) 164

Source: Company, DBS Bank Capital Expenditure


0.0

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2016A 2017A 2018F 2019F 2020F


US$m

ed: JS /sa- CW, CS, AH

H:HOLD (Initiating Coverage)

Last Traded Price ( 2 Oct 2018): HK$9.02 (HSI : 27,126)


A: FULLY VALUED (Initiating Coverage)

Last Traded Price (A) ( 2 Oct 2018): RMB14.47 (CSI300 Index : 3,439)

Price Target 12-mth (A): RMB 9.2 (36% downside)

Potential Catalyst: Higher self-sufficiency of copper concentrates Analyst Lee Eun Young +65 6682 3708 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RMBm) 2017A 2018F 2019F 2020F

Revenue 204,234 206,193 213,675 222,354 EBITDA 5,001 5,286 5,368 5,850 Pre-tax Profit 2,904 2,768 2,801 2,946 Net Profit 1,650 1,841 1,836 1,903 Net Pft (Pre Ex.) 1,650 1,841 1,836 1,903 EPS (HK cts) 54.3 60.6 60.5 62.7 EPS Pre Ex. (HK cts) 54.3 60.6 60.5 62.7 EPS Gth (%) 97 12 0 4 EPS Gth Pre Ex (%) 97 12 0 4 Diluted EPS (HK cts) 54.3 60.6 60.5 62.7 Net DPS (HK cts) 22.8 22.8 22.8 22.8 BV Per Share (HK cts) 1,565 1,603 1,641 1,681 PE (X) 16.6 14.9 14.9 14.4 PE Pre Ex. (X) 16.6 14.9 14.9 14.4 P/Cash Flow (X) 11.0 3.4 9.7 9.4 EV/EBITDA (X) 6.4 5.4 5.7 5.5 Net Div Yield (%) 2.5 2.5 2.5 2.5 P/Book Value (X) 0.6 0.6 0.5 0.5 Net Debt/Equity (X) 0.0 CASH 0.0 0.0 ROAE (%) 3.5 3.8 3.7 3.8 Consensus EPS (HK cts): 0.72 0.87 0.97 Other Broker Recs: B:7 S:1 H:8 ICB Industry : Basic Materials ICB Sector: Industrial Metals Principal Business: Jiangxi Copper is the largest integrated copper producer and a state-owned entity in China. It is engaged in exploration, mining, ore dressing, smelting and processing in copper as well as other non-ferrous metals.

Source of all data on this page: Company, DBS HK, Bloomberg Finance L.P.

At A Glance


- Non H shrs (m shrs) 2,075

Mkt Cap (HK$m/US$m) 31,580 / 4,031


Jiangxi Copper Corporation Limited 14.3

Free Float (%) 85.7


ICB Industry: Basic Materials / Industrial Metals & Mining

51

71

91

111

131

151

171

191

211

6.6

8.6

10.6

12.6

14.6

16.6

18.6


Relative IndexHK$

Jiangxi Copper (LHS) Relative HSI (RHS)

60

80

100

120

140

160

180

200

220

10.7

15.7

20.7

25.7

30.7


Relative IndexRMB

Jiangxi Copper(A) (LHS) Relative CSI300 Index (RHS)


4 Oct 2018


Jiangxi Copper Version 1 | Bloomberg: 358 HK Equity | 600362 CH Equity | Reuters: 0358.HK | 600362.SS


Not fully leveraged to copper prices • Initiating coverage with HOLD call and TP of HK$10.4

• Not in a position to reap the full benefits of higher copper prices

• Limited visibility for improving profitability

• No imminent catalysts but share price to be supported by undemanding valuation

Well established global copper player in China. Jiangxi Copper

is the largest integrated copper producer in China engaged in

exploration, mining, ore dressing, smelting and processing in

copper and other non-ferrous metals. Copper products

accounted for 84% of revenue and 89% of gross profit in

2017. The company owns Dexing Copper Mine which is the

largest copper mine in China, and Guixi Smelter, the world’s

largest single smelting plant with capacity of 900k tonnes of

cathode p.a. It has c. 14.41m tonnes of copper resources

Low self-sufficency of concentrate is a hurdle to earnings growth.

Despite our positive outlook on copper, we believe the company

may not reap the full benefits of copper price hikes due to its low

self-sufficiency of concentrates and high dependency on

purchased raw materials for copper cathodes. Copper smelting

capacity expansion by Chalco and other domestic companies may

impact treatment charges/refining charges (TC/RCs), intensifying

competition in the domestic refined copper market. We initiate

coverage on Jiangxi Copper with HOLD call on lack of near term

catalysts. However, we believe the share price downside should

also be limited as it is trading at low end of its historical band at

0.6x P/BV

Margins diluted by growth of low-margin trading business. The

business of trading copper cathode generates margins of below

1%. The segment posted 0.5% gross margin in 2017, much lower

compared to 10.4% for manufacturing business. Due to the

significant growth of the trading business since 2011, the

company’s gross margins have been diluted from 10.6% in 2010

to 4.1% in 2017. In 1H18, the trading business contributed 53%

to total revenue, and is a drag of profitability improvement going

forward. Valuation:

Our TP is pegged to 0.65x FY19F P/BV which is based on a 30%

discount of regional peer average. This is justified given that its

ROE of 3.8% in 2019 and 2020 is only 20-30% of its peers. Also,

there is limited visibility on the outlook of the company’s ROE

over the long term Key Risks to Our View:

Key downside risks are copper price volatility and hedging risk.

Decrease in smelting processing fees (TC/RCs) would be negative.

Meanwhile, faster-than-expected increase of TC/RC and self-

sufficiency of copper concentrates are upside risks.

Company Focus

Jiangxi Copper

Table of Contents

Investment Thesis SWOT Analysis

Company Overview

Highlights

Integrated copper player but not in a position to fully benefit from copper price hikes Challenges to improving profitability Slow but clear growth strategy through securing copper resources

Valuation

Key Risks

Financials

Company Focus

Jiangxi Copper

Investment Thesis

Profile Rationale

• Copper player in China which owns the biggest

copper mine in China. Founded in 1979, Jiangxi

Copper is the largest integrated copper producer and a

state-owned entity in China. As an integrated player,

the company is engaged in exploration, mining, ore

dressing, smelting and processing in copper as well as

other non-ferrous metals. The company owns Dexing

Copper Mine which is the largest copper mine in

China, along with five other mines. Its metal resource

reserves attributable to the company (based on its

equity stake) include 4.43m tonnes of copper and 52

tonnes of gold. Its Guixi Smelter is the world’s largest

single smelting plant with capacity of 900k tonnes of

cathode per annum.

• Revenue mix. Copper business makes up the

largest part of the company’s earnings, having

accounted for 84% of the revenue and 89% of gross

profit in 2017. The company also produces gold (4% of

2017 revenue), silver (1%), sulfur and sulfuric

concentrate (1%) and others such as rare metals. By

geography, the company’s earnings are mostly

generated from China with over 80% of its revenue

arising from mainland China in 2017. Its customer

portfolio is well diversified, with the top five customers

accounting for only 10% of its total sales in 2017.

• Shareholding structure. Jiangxi Copper’s biggest

shareholder is Jiangxi Copper Corporation Limited

(JCC), which is 100% owned by state-owned Assets

Supervision and Administration Commission of Jiangxi

Office. According to the company’s 1H18 interim

report, JCC holds 1.4bn shares or 40.53% of the

company’s total shares.

• Initiate coverage with HOLD call and TP of HK$10.4. We

initiate coverage with a HOLD call and HK$10.4 TP. Despite our

positive outlook on copper, we believe the company may be unable

to reap the full benefits of higher copper prices given its high

dependency on purchased concentrates for copper cathodes. Also,

capacity expansion of copper smelting by Chalco and other

domestic companies may have a negative impact on TC/RC, and

intensify the competition in the domestic refined copper market.

However, we believe the share prices downside also should be

limited as the stock is trading at low end of historical band of 0.6x

P/BV.

• Not in the position to fully enjoy copper price hikes because of

low self-sufficency on concentrate. In 2017, the company produced

1.37m tonnes of copper cathode while its copper concentrate

production volume was 210k tonnes, indicating c.15% of self-

sufficiency ratio. Accordingly, c.85% of copper cathode production

relied on the purchased raw materials, which implies that TC/RC is a

key determinant of its profitability. Despite rising copper prices, its

gross profit margin dropped to 2.8% in 1H18 from 3.3% in 1H17.

We believe this is due to decline in TC/RC for copper concentrate

which led to higher raw material cost for copper cathode produced

using purchased concentrates. Going forward, copper concentrate

market is expected to remain tight, and hence the company may

not be able to fully enjoy the benefits of higher copper prices due

to its low TC/RC. On our expectation for copper prices to

US$6,425/tonne in 2019 and US$6,562/tonne in 2020 from

US$6,200/tonne currently, its EBITDA margin are likely to stable at

only over 3%.

• Margins diluted by growth of low-margin trading business. The

trading of copper cathode is a low margin business; trading posted

0.5% gross margin vs. 10.4% in manufacturing business in 2017.

As the revenue from trading as a percentage of total revenue has

grown from 26% to 71% during 2011 to 2016, its overall margins

have diluted accordingly. On a positive note, in 2017, revenue from

the trading business decreased for the first time since 2011, falling

by 14.2% and has continued to decline by 15% in 1H18,

contributing a lesser 52% to overall revenue.

Valuation Risks

Our TP is pegged to 0.65x FY19F P/BV which is based

on a 30% discount of regional peer average. This is

justified given that its ROE of 3.8% in 2019 and 2020

is only 20-30% of its peers. Also, there is limited

visibility on the outlook of the company’s ROE over

the long term. However, we believe the downside to

its share price should be limited as it is trading at the

low end of historical band, at 0.6x P/BV.

Key downside risks are copper price volatility and hedging risk.

Decrease in smelting processing fees (TC/RC) would be negative.

Meanwhile, faster-than-expected increase of TC/RC and self-

sufficiency of copper concentrates are upside risks.

Source: DBS Bank

Company Focus

Jiangxi Copper

SWOT Analysis

Strengths Weakness

• Biggest copper producer in China with output of over 1m tonnes of copper products annually, which enables the company to enjoy economies of scale.

• Owns the biggest copper mine in China and biggest single smelting capacity in the world (Guixi, 900k tonnes p.a. of cathode)

• Strong presence in Jiangxi Province as a state-owned company

• Concentration risk as copper accounts for over 80% of the company’s revenue.

• Stagnant self-sufficiency ratio of own copper concentrates for cathode production (difficulty in increasing copper production from its owned mines)

• Weakening margins on trading business


• Increase in mine-produced copper, which has higher margins vs. trading business

• M&A to help lift the company’s self-sufficiency ratio for copper cathode production

• Weakening copper demand and prices amid trade war and slowing global economic growth

• Capacity expansion of copper smelting by Chalco and other domestic companies may have a negative impact on TC/RC, and intensify the competition in the refined copper metal in the domestic market.

• Environmental protection measures in China potentially affecting its production and hinder new projects

Source: DBS Bank

Company Overview

Most prominent copper player in China... Founded in 1979,

Jiangxi Copper is the largest integrated copper producer and

a state-owned entity in China. It is engaged in exploration,

mining, ore dressing, smelting and processing in copper as

well as other non-ferrous metals. The company was listed on

both The Stock Exchange of Hong Kong and Shanghai Stock

Exchange in 2002.

…with biggest copper mine in China and global #1 single

smelting plant. The company owns Dexing Copper Mine

which is the largest copper mine in China. It has five other

mines - Yongping Copper Mine, Chengmenshan Copper

Mine, Wushan Copper Mine, Dongxiang Copper Mine and

Yinshan Lead-Zinc Mine. Its annual copper concentrate

production amounts to c.210k tonnes in total. The company

has 100% ownership in the proven resource reserves of

approximately 9.98m tonnes of copper, 296.5 tonnes of

gold, 9,774 tonnes of silver, and 209k tonnes of

molybdenum. Among the resources held under JVs, metal

resource reserves attributable to the company (based on its

equity stake) were approximately 4.43m tonnes of copper

and 52 tonnes of gold. Guixi Smelter, the world’s largest

single smelting plant with capacity of 900k tonnes of cathode

per annum, is also owned by Jiangxi Copper.

Top-line growth supported by trading business, amid limited

concentrate production. Beside mining and manufacturing of

metals, the company started its metal trading business in

2014. The trading segment has been supporting the

company’s top-line growth since then, and accounted for

60% of its total revenue in 2017. Increased volume of copper

traded by the company has also allowed it to gain higher

market share and defend its position as the largest copper

producer in China.

Revenue mix. Copper makes up the largest part of the

company’s earnings, at 84% of revenue and 89% of gross

profit in 2017. The company also produces gold (4% of 2017

revenue), silver (1%), sulfur and sulfuric concentrate (1%)

and others such as rare metals.

By geography, the company’s earnings are mostly generated

from China which accounted for over 81% of its revenue in

2017. Its customer portfolio is well diversified, with the top

five customers accounting for only 10% of total sales in

2017.

Company Focus

Jiangxi Copper


Revenue breakdown by product (2017) Gross profit breakdown by region (2017)


Shareholding structure. Jiangxi Copper’s biggest shareholder

is Jiangxi Copper Corporation Limited (JCC), which is 100%

owned by the state-owned Assets Supervision and

Administration Commission of Jiangxi Office. According to

the company’s 1H18 interim report, JCC holds 1.4bn shares

or 40.53% of the company’s total shares.

Uncertainty as a result of managements changes. The

company has been led by Mr Long Ziping (Chairman) since

Sep 2017. In Jul 2018, three of the company’s senior

management left - Mr Wu Yuneng (general manager), Mr

Zeng Qingjian (deputy general manager) and Mr Wu Jinxing

(chief financial officer). The company has since appointed Mr

Liao Xingeng as the new deputy general manager and Mr Yu

Tong as the new chief financial officer. The general manager

position remains vacant to date.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0

50,000

100,000

150,000

200,000

2016A 2017A 2018F 2019F 2020F

RMB m


837

1,337

1,837

2,337

2,837

3,337

2016A 2017A 2018F 2019F 2020F

RMB m


Copper cathodes, rods & processing

products84%

Gold4%

Silver1%

Sulphuric and sulphuric

concentrate1% Other

segments total10%

China81%

Hong Kong10%

Overseas9%

Company Focus

Jiangxi Copper

Integrated copper player but not in a position

to fully benefit from copper price hikes

Biggest copper company with an integrated value chain.

Jiangxi Copper in involved in the full spectrum of activities in

the copper industry including mining, ore dressing, smelting

and processing of copper, as well as sulphuric chemistry and

extraction and processing of precious and rare metals. The

company has c.11% market share for refined copper based

on 1.37m tonnes of copper cathode production in 2017 from

Guixi Smelter (900k tonnes capacity) and smelting plants. As

the company has been facing difficulties in increasing

production of concentrates from its mines (c.210k tonnes

p.a.), it has also been purchasing domestic as well as

imported concentrates, scrap and anodes, for cathode

production. Some cathodes are then processed into rods,

wires and other forms. It processed over 1m tonnes of copper

products p.a.

Lower TC/RC is negative for 2018 earnings. Despite rising

copper prices, the company’s gross profit margins dropped to

2.8% in 1H18 from 3.3% in 1H17. We believe this is due to

a decline in TC/RC for copper concentrate which has led to

higher raw material cost for copper cathode produced using

purchased concentrates. We note that the self-sufficiency

ratio of copper concentrate is only c.15%. In Dec 2017,

miners and smelters settled 2018 annual benchmark

contracts at the US$82.25/tonne (TC; Treatment charges) and

US¢8.225/lb (RC; Refining Charges). This is set by Freeport

McMoRan and Tongling Nonferrous, an 11% reduction

compared to the previous year. The spot market TC has fallen

even below the benchmark TC spurred by tight concentrate

supply in 1H18. After finalising shorter-than-expected strike

at Escondida Mine owned by Freeport-McMoRan, the spot TC

climbed up. However, overall concentrate market still faces

tight condition and spot TC still is settled at US$70-80/tonne

range, lower than the benchmark TC.

EBITDA margins to hold steady on stable prices in 2019 and

2020. As copper products’ contribution to revenue was 84%

in 2017, copper price is an important factor for earnings.

Historically, its EBITDA margins has been in line with the

direction of copper prices except in 2016 when copper prices

had started to recover, but average prices for the year were

still lower than the previous year. Based on our expectation of

copper prices of c.US$6,500/tonne in 2019 and 2020,

EBITDA margins are likely to remain steady at over 3%. We

expect its margins to edge up due to favourable TC/RC

compared to 2018. Based on company’s sensitivity analysis,

for every RMB1,000 increase in copper prices, the profits

from the company’s self-produced mines will increase by

RMB200m (before tax) equivalent to EPS (before tax) of

RMB0.06 per share.

Company Focus

Jiangxi Copper

EBITDA margins vs copper prices Gross profit breakdown by product (2017)


Spot TC vs LME copper price


8.8

9.5

7.6

4.4

3.3

2.0 1.4

2.6 2.7 2.5 3.0

3.6

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

0

10,000

20,000

30,000

40,000

50,000

60,000

09 10 11 12 13 14 15 16 17 18F 19F 20F

EBITDA Margins Copper prices(RMB/ton)

copper cathodes

69%

Copper rods & processing

products20%

Gold8%

Silver2%

Others 1%

4,000

5,000

6,000

7,000

8,000

9,000

0

20

40

60

80

100

120

140

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

(US$/tonne)(US$/tonne) China Copper Concentrate TC 30% CIF

LME Copper price (R)

Company Focus

Jiangxi Copper

Challenges to improving profitability

Margin contraction coupled with weak copper prices.

Since 2011, Jiangxi Copper’s profitability has fallen

significantly, with gross margins dropping to 2% in 2015

from double-digit levels during 2008-2010. Weak copper

prices was the key reason for this; LME copper prices had

trended down every year to hit US$4,863/tonne in 2016,

plummeting by 45% from US$8,811/tonne in 2011. The

company’s overall gross margins had tracked gross margins

for copper products during this period. Among copper

products, we noticed that margins for copper cathodes had

plunged more than copper rods and processed products. In

summary, the margin contraction in copper cathodes, a key

product of the company, had resulted in lower overall

margins for Jiangxi Copper.

Gross margins Gross margin breakdown for copper products


Margins diluted by expanding low-margin trading business.

Besides lower copper prices, the other reason for declining

margins in copper cathode business is due to the strong

growth of its trading business, and not because of any

structural changes in its principal business. Copper cathodes

is the major product in the trading business, which has very

minimal gross margin of below 1%. In 2017, trading

business’ gross margin was 0.5%, compared to the

manufacturing segment’s 10.4%. As revenue of copper

cathode includes sales from trading of copper cathodes,

margins in this segment were diluted by growth in the

trading business. Trading revenue has grown at 26% CAGR

during 2011 to 2016, and accordingly, its contribution is

higher at 71% in 2016 from 37% in 2011. On a slight

positive note, in 2017, revenue from the trading business

decreased for the first time since 2011, falling 14.2% y-o-y,

and fell again by 15% in 1H18, contributing 52% to revenue.

Revenue by segment Gross margins by segment and product (2017)


11.7%

9.7%10.6%

8.3%

4.7%3.7%

2.9%2.0%

3.3%4.1%

3.4% 3.4% 3.5%

0%

2%

4%

6%

8%

10%

12%

14%

08 09 10 11 12 13 14 15 16 17 18F 19F 20F

Total gross margins Gross margins in copper products

5.6%

7.7% 7.4%

5.9%

3.1%2.8%

2.0%1.3%

1.9%

4.8%

3.4% 3.4% 3.6%

6.0%

9.8%

10.8%

9.6%

7.8%7.2%

6.1%

3.1%

4.0%

2.7%3.0% 3.2% 3.2%

0%

2%

4%

6%

8%

10%

12%

08 09 10 11 12 13 14 15 16 17 18F 19F 20F

Gross margins in copper cathode Gross margins in copper rods

37%

58%55%

65%69% 71%

60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

50

100

150

200

250

11 12 13 14 15 16 17

(RMB bn) Trade Manufacturing of

non-ferrous metalscontribution of trading

10.40%

0.50%

4.3%

10.0%

6.6%

-11.9%

3.3%

10.1%

-15%

-10%

-5%

0%

5%

10%

15%

Company Focus

Jiangxi Copper

Low self-sufficiency of concentrates to cap improvement in

margins. Another hurdle for margin improvement stems from

its self-sufficiency ratio for copper concentrates. In 2017, it

produced 1.37m tonnes of copper cathodes while its copper

concentrate production volume was 210k tonnes, indicating

c.15% of self-sufficiency ratio. Accordingly, c.85% of copper

cathode production relied on purchased raw materials

including concentrates, which implies that the TC/RC should

be a key determinant of its profitability. The market is

expected to record a deficit for copper concentrates this year,

due to new smelting capacity being commissioned in China

including Aluminium Corporation of China’s (Chinalco's)

400k-tonne p.a. capacity at Ningde copper smelter. In

addition, union strikes at major mines and disruption of

production due to weather conditions will have a negative

impact on the concentrate market. We expect the TC/RC to

edge up in 2019 and 2020 following new mine

developments, however, this will likely remain at an

unfavourable level for smelters for the next few years. We do

not expect its margins for copper cathode to improve

significantly by 2020 as concentrate production will remain

flat at 210k tonnes till 2020.

Copper concentrate self-sufficiency ratio

Note: calculations are based on sales volume Source: Company, DBS Bank

16%

17%

15%

15% 15% 15%

14%

15%

16%

17%

18%

0

500

1,000

1,500

2,000

2,500

3,000

15 16 17 18F 19F 20F

(k tonnes)

Copper processed products+rods

Copper cathode made from purchased materials

Copper cathode made from self-produced conc

Self sufficient ratio of copper concentrate

Company Focus

Jiangxi Copper

Slow but clear growth strategy through securing copper resources

Capacity expansion in China to boost growth from 2020

onwards. The company has plans to increase capacity across

its value chain. By 2020, capacity at its mines will reach 230k

tonnes from the current 210k tonnes and refined copper will

have 1.7m tonnes p.a. capacity from the current c.1.3m

tonnes. While capacity to process products including copper

rods, wires, foil, and pipes will grow to 1.4m tonnes from the

current 1m tonnes p.a., it also has plans to expand through

M&As too.

Overseas mine investments to secure copper resources. The

company has implemented its development strategy of

“copper-based, strengthening non-ferrous, diversified

development, global layout”, adhering to the development

path of mainly focusing on extensive expansion of copper

mines overseas. In fact, it has been investing in overseas

mines since 2008 in Peru and Afghanistan. As a result, its

overseas revenue has increased to 8% in 2018 from close to

nil ten years ago.

JVs set up in 2008 to invest in foreign mines. In 2008, Jiangxi

Copper incorporated a JV, MCC-JCL, with China

Metallurgical Group Corporation (CMCC) for exploration and

exploitation of minerals in the Central and Western

mineralised zones in Aynak Mine in Afghanistan. Jiangxi

Copper and CMCC have 25% and 75% in the JV,

respectively. The total investment in MCC-JCL is US$4.39bn

with 30% contribution from shareholders and 70% loan

financing by project. On 4 August 2016, the company,

through its wholly-owned subsidiary, Jiangxi Copper (Hong

Kong) Investment Company Limited and an independent

third party, CCB International Asset Management Limited (as

promoters), established a Fund, “Valuestone Global

Resources Fund I” (Fund I). Fund I will initially raise US$150m,

of which the company has undertaken to contribute

US$100m.

Revenue breakdown by region


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

50

100

150

200

250

08 09 10 11 12 13 14 15 16 17

(RMB bn) Overseas Hong Kong ChinaOverseas contribution (R)

Company Focus

Jiangxi Copper

Valuation

Pegged to 0.65x FY19 P/BV at low. Our TP is pegged to 0.65x

FY19F P/BV which is based on a 30% discount to regional

peer average. This is justified given that its ROE of 3.8% in

2019 and 2020 is only 20-30% of its peers. Also, there is

limited visibility on the outlook of the company’s ROE over

the long term. However, we believe the downside to its share

price should be limited as it is trading at the low end of

historical band, at 0.6x P/BV.

Key Risks

Copper price volatility and hedging risk. Based on company

sensitivity analysis, every RMB1,000/tonne decrease in copper

price, the profits from self-produced concentrate will fall by

RMB0.06 EPS (before tax). Also, the company has entered

into hedging contracts for self-produced raw materials to lock

the processing fee for its outsourced raw materials. However,

it is difficult to ascertain its hedging position and estimate the

gains/losses on its hedging position which is a risk factor for

earnings.

The risk of decrease in smelting processing fees (TC/RC).

Following capacity expansion for smelting in China, copper

concentrate will experience shortage and there is risk of

further declines of TC/RC.

Upside risks. Faster growth of TC/RC spurred by strong mine

development and production growth of concentrates, and

enhancing self-sufficiency of copper concentrates by securing

more mine resources would be upside risk to our view.

Company Focus

Jiangxi Copper


Critical Factors

Gold and copper prices. As copper accounts for 84% of

revenue and 89% of gross profit, copper price is a critical

factor to determine the company’s performance.

Copper concentrate production volume and self-sufficiency

ratio. As margins of copper cathode using self-produced

concentrate is higher than products from third party

purchased concentrate, production growth in concentrates

from its mines should be a critical factor for its earnings. In

2017, it had produced 1.36m tonnes of copper cathode while

its copper concentrate production volume was 210k tonne

indicating 15% of self-sufficiency ratio.

TC/RC for purchased concentrates. Given its limited self-

sufficiency ratio, c.85% of copper cathode production relies

on purchased raw materials including concentrates. This

implies that TC/RC, the pricing term for concentrates, should

be a key factor to determine its profitability. Higher TC/RC is

positive for the company.

Capacity expansion including more copper mine resources.

Currently, the company is expanding the capacity at its key

production facilities. By 2020, the capacity of mines will reach

230k tonnes from 210k tonnes currently and refined copper

will have 1.7m tonnes p.a capacity from 1.3m tonnes p.a.,

while the capacity of processing products including copper

rods, wires, foils, and pipes will grow to 1.4m tonnes p.a.

from 1m tonnes currently. Hence, the completion of capacity

expansion and commencement of operations should be other

key critical factors to monitor.

Copper cathode sales volume(k ton)

Copper rods & processing products' sales volume(k ton)

LME copper prices(US$/ton)

Gold prices(US$/oz)


1203

1353 1392 1408 1424

0.0

205.4

410.9

616.3

821.8

1027.2

1232.6

1438.1

2016A 2017A 2018F 2019F 2020F

943 926

10451097 1119

0.0

228.3

456.6

684.9

913.3

1141.6

2016A 2017A 2018F 2019F 2020F

4863

61666471 6425 6562

0.00

1338.59

2677.17

4015.76

5354.35

6692.94

2016A 2017A 2018F 2019F 2020F

1248 1258 12641220 1219

0.0

255.3

510.6

765.9

1021.2

1276.5

2016A 2017A 2018F 2019F 2020F

Company Focus

Jiangxi Copper

Balance Sheet:

Following capacity expansion projects and upgrades of

facilities to meet environmental regulation, the company’s

capex increased to RMB 3.2bn in 2017 from RMB1.6bn in

2016. Accordingly, its gross gearing has increased to 0.48x in

2017 from 0.31 in 2016. However, its financial condition

remains solid as its net gearing increased only slightly to 0.03x

in 2017 from net cash in 2016.


Metal prices. The company’s share price tends to move in

tandem with the prices of copper and gold, which are set to

remain as its first and second largest earnings contributors

respectively

Key Risks:

Copper price volatility and hedging risk. Based on company

sensitivity analysis, every RMB1,000/tonne decrease in copper

prices, the profits from self-produced concentrate will fall by

RMB0.06 EPS (before tax). Also, the company has entered into

hedging contracts for self-produced raw materials to lock the

processing fee for its outsourced raw materials. However, it is

difficult to ascertain its hedging position and estimate the

gains/losses on its hedging position which is a risk factor for

earnings.

The risk of decrease in smelting processing fees (TC/RC).

Following capacity expansion for smelting in China, copper

concentrate will experience shortage and there is risk of

further declines of TC/RC.

Upside risks Faster growth of TC/RC spurred by strong mine development and production growth of concentrates, and enhancing self-sufficiency of copper concentrates by securing more mine resources would be upside risk to our view.

Company Background

Jiangxi Copper is the largest integrated copper producer and

a state-owned entity in China. It is engaged in exploration,

mining, ore dressing, smelting and processing in copper as

well as other non-ferrous metals. The company was listed on

both The Stock Exchange of Hong Kong and Shanghai Stock

Exchange in 2002.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


2.0

2.1

2.1

2.2

2.2

2.3

2.3

0.00

0.10

0.20

0.30

0.40

0.50

2016A 2017A 2018F 2019F 2020F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2016A 2017A 2018F 2019F 2020F


RMBm

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2016A 2017A 2018F 2019F 2020F

Avg: 28x

+1sd: 40.3x

+2sd: 52.6x

-1sd: 15.6x

-2sd: 3.3x2.9

12.9

22.9

32.9

42.9

52.9

62.9


(x)

Avg: 0.71x

+1sd: 0.83x

+2sd: 0.95x

-1sd: 0.59x

-2sd: 0.47x

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2


(x)

Company Focus

Jiangxi Copper


Jiangxi Copper share price vs LME copper price Remark

Copper accounts for 84% of the company’s revenue. Accordingly, its share price moves in tandem with copper price.


Jiangxi Copper share price vs China Manufacturing PMI Remark

Being the biggest copper integrated producer in China, its share price is also impacted by China’s economic conditions. This is shown through the correlation with China’s manufacturing PMI.


5

10

15

20

25

30

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


(HKD)(US$/ton)LME Copper Price(L) Jiangxi Copper share price (R)

0

5

10

15

20

25

30

48

49

50

51

52

53

54

55

56

57


(HKD)(pts) China Manufacturing PMI SA Jiangxi Copper share price (R)

Jiangxi Copper share price vs Gold spot price Remark

The company’s share price also moves closely with gold price. In 2017, gold segment accounted for 9% of total gross profit.


0

5

10

15

20

25

30

800

1,000

1,200

1,400

1,600

1,800

2,000


(HKD)(US$/oz) Gold Spot $/Oz Jiangxi Copper share price (R)

Company Focus

Jiangxi Copper

Key Assumptions

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Copper cathode sales volume(k ton)

1,275 1,203 1,353 1,392 1,408 1,424

Copper rods & processing products' sales volume(k ton)

950 943 926 1,045 1,097 1,119

LME copper prices(US$/ton)

5,495 4,863 6,166 6,471 6,425 6,562

Gold prices(US$/oz) 1,160 1,248 1,258 1,264 1,220 1,219

Segmental Breakdown

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Revenues (RMBm)

Copper cathodes 113,156 125,284 121,463 117,640 121,194 126,527 Copper rods & processing products

41,206 42,328 50,732 58,261 62,583 65,193

Gold 6,155 6,985 7,228 6,465 6,018 6,194 Silver 2,816 4,005 2,954 1,852 1,808 1,900 Others 1,348 704 1,186 1,274 1,363 1,474

Total 185,228 201,728 204,234 206,193 213,675 222,354

Gross Profit (RMBm)

Copper cathodes 1,421 2,321 5,793 3,984 4,104 4,524 Copper rods & processing products

1,223 1,800 1,671 1,919 2,061 2,147

Gold 392 1,175 724 648 603 620 Silver 112 193 194 122 119 125 Others 271 62.3 (141) 24.0 25.7 27.8

Total 3,775 6,564 8,436 7,025 7,227 7,728

Gross Profit Margins (%)

Copper cathodes 1.3 1.9 4.8 3.4 3.4 3.6 Copper rods & processing products

3.0 4.3 3.3 3.3 3.3 3.3

Gold 6.4 16.8 10.0 10.0 10.0 10.0 Silver 4.0 4.8 6.6 6.6 6.6 6.6 Others 20.1 8.8 (11.9) 1.9 1.9 1.9

Total 2.0 3.3 4.1 3.4 3.4 3.5


Company Focus

Jiangxi Copper

Income Statement (RMBm)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Revenue 185,228 201,728 204,234 206,193 213,675 222,354


Gross Profit 3,775 6,564 8,436 6,848 7,039 7,552

Other Opng (Exp)/Inc (2,850) (3,172) (4,736) (3,690) (3,823) (3,979)

Operating Profit 925 3,392 3,700 3,159 3,215 3,573

Other Non Opg (Exp)/Inc 542 (790) (537) 150 50.0 50.0

Associates & JV Inc (282) (50.8) 33.1 50.0 50.0 50.0

Net Interest (Exp)/Inc 31.7 (473) (292) (591) (514) (727)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 1,216 2,078 2,904 2,768 2,801 2,946

Tax (478) (1,089) (1,146) (830) (868) (943)

Minority Interest (49.1) (152) (109) (96.9) (96.7) (100)


Net Profit 690 837 1,650 1,841 1,836 1,903

Net Profit before Except. 690 837 1,650 1,841 1,836 1,903

EBITDA 2,835 4,412 5,001 5,286 5,368 5,850

Growth

Revenue Gth (%) (6.6) 8.9 1.2 1.0 3.6 4.1

EBITDA Gth (%) (48.2) 55.6 13.3 5.7 1.5 9.0

Opg Profit Gth (%) (61.3) 266.8 9.1 (14.6) 1.8 11.1


(76.2) 21.4 97.0 11.6 (0.2) 3.6

Margins & Ratio

Gross Margins (%) 2.0 3.3 4.1 3.3 3.3 3.4

Opg Profit Margin (%) 0.5 1.7 1.8 1.5 1.5 1.6

Net Profit Margin (%) 0.4 0.4 0.8 0.9 0.9 0.9

ROAE (%) 1.5 1.8 3.5 3.8 3.7 3.8

ROA (%) 0.7 0.9 1.8 1.9 1.8 1.9

ROCE (%) 1.0 0.6 1.9 1.7 1.8 1.6

Div Payout Ratio (%) 50.2 62.0 42.0 37.6 37.7 36.4

Net Interest Cover (x) NM 7.2 12.7 5.3 6.3 4.9


Margins Trend

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2016A 2017A 2018F 2019F 2020F


Company Focus

Jiangxi Copper

Quarterly / Interim Income Statement (RMBm)

FY Dec 2H2015 1H2016 2H2016 1H2017 2H2017 1H2018

Revenue 109,951 89,973 111,755 97,760 106,474 104,026 Cost of Goods Sold (108,285) (87,546) (107,618) (94,579) (101,218) (101,050)

Gross Profit 1,666 2,427 4,137 3,180 5,256 2,976 Other Oper. (Exp)/Inc (1,739) (1,390) (1,782) (1,654) (3,082) (966)

Operating Profit (72.8) 1,037 2,355 1,526 2,174 2,010 Other Non Opg (Exp)/Inc 42.8 153 (943) 198 (735) (9.2) Associates & JV Inc (360) (8.1) (42.7) 31.5 1.63 (1.9) Net Interest (Exp)/Inc 161 (157) (316) (94.1) (198) (262) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit (229) 1,025 1,053 1,661 1,243 1,737 Tax (88.3) (287) (802) (699) (447) (432) Minority Interest (27.8) (95.0) (57.0) 11.2 (120) 22.6

Net Profit (345) 643 194 974 676 1,327 Net profit bef Except. (345) 643 194 974 676 1,327 EBITDA 461 2,041 2,371 2,619 2,382 2,860 Growth Revenue Gth (%) 46.1 (18.2) 24.2 (12.5) 8.9 (2.3) EBITDA Gth (%) (80.6) 342.8 16.2 10.5 (9.1) 20.1 Opg Profit Gth (%) (107.3) (1,523.5) 127.2 (35.2) 42.5 (7.6) Net Profit Gth (%) (133.3) (286.4) (69.8) 400.8 (30.6) 96.3 Margins Gross Margins (%) 1.5 2.7 3.7 3.3 4.9 2.9 Opg Profit Margins (%) (0.1) 1.2 2.1 1.6 2.0 1.9 Net Profit Margins (%) (0.3) 0.7 0.2 1.0 0.6 1.3

Revenue Trend


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0

20,000

40,000

60,000

80,000

100,000

120,000

2H

20

13

1H

20

14

2H

20

14

1H

20

15

2H

20

15

1H

20

16

2H

20

16

1H

20

17

2H

20

17

1H

20

18

Revenue Revenue Growth % (YoY)

Company Focus

Jiangxi Copper

Balance Sheet (RMBm)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 21,447 20,936 21,980 22,933 23,761 24,465

Invts in Associates & JVs 2,903 3,006 3,178 3,418 3,468 3,518

Other LT Assets 5,420 6,730 6,440 7,359 8,279 9,198

Cash & ST Invts 24,308 16,483 22,090 24,005 21,451 18,975

Inventory 13,369 15,412 19,997 17,281 17,913 18,621

Debtors 14,206 16,562 15,032 15,949 16,528 17,199

Other Current Assets 8,212 8,365 8,765 8,765 9,028 9,299

Total Assets 89,852 87,481 97,469 99,696 100,413 101,260

ST Debt

16,705 14,956 23,739 20,739 19,739 18,739

Creditor 8,575 11,817 7,881 10,372 10,749 11,185

Other Current Liab 15,224 10,308 14,310 14,310 14,310 14,310

LT Debt 348 228 509 2,000 2,100 2,200

Other LT Liabilities 1,070 994 1,046 1,046 1,046 1,046

Shareholder’s Equity 45,969 46,834 47,532 48,681 49,824 51,035


Total Cap. & Liab. 89,852 87,481 97,469 99,696 100,413 101,260

Non-Cash Wkg. Capital 11,988 18,214 21,603 17,313 18,410 19,624

Net Cash/(Debt) 7,255 1,299 (2,158) 1,266 (388) (1,965)




Asset Turnover (x) 2.0 2.3 2.2 2.1 2.1 2.2

Current Ratio (x) 1.5 1.5 1.4 1.5 1.4 1.4

Quick Ratio (x) 1.0 0.9 0.8 0.9 0.8 0.8

Net Debt/Equity (X) CASH CASH 0.0 CASH 0.0 0.0

Net Debt/Equity ex MI (X) CASH CASH 0.0 CASH 0.0 0.0

Capex to Debt (%) 8.3 10.6 13.4 12.3 12.8 13.4


Asset Breakdown


Assocs'/JVs -4.8%


Assets -17.1%

Inventory -24.0%

Debtors -22.2%

Company Focus

Jiangxi Copper

Cash Flow Statement (RMBm)

FY Dec 2015A 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 1,216 2,078 2,904 2,768 2,801 2,946

Dep. & Amort. 1,651 1,862 1,805 1,928 2,052 2,177

Tax Paid (1,148) (675) (938) (830) (868) (943)

Assoc. & JV Inc/(loss) 282 50.8 (33.1) (50.0) (50.0) (50.0)

Chg in Wkg.Cap. 8,623 (6,681) (3,356) 4,291 (1,097) (1,214)

Other Operating CF (8,356) 7,111 2,110 0.0 0.0 0.0

Net Operating CF 2,268 3,746 2,492 8,106 2,838 2,916

Capital Exp.(net) (1,419) (1,611) (3,243) (2,800) (2,800) (2,800)

Other Invts.(net) 2,535 (1,668) (2,424) 0.0 0.0 0.0

Invts in Assoc. & JV (101) (137) (290) (200) 0.0 0.0

Div from Assoc & JV 3.00 29.8 13.9 10.0 0.0 0.0

Other Investing CF 672 (169) 21.3 (1,000) (1,000) (1,000)

Net Investing CF 1,690 (3,555) (5,921) (3,990) (3,800) (3,800)

Div Paid (693) (346) (519) (693) (693) (693)

Chg in Gross Debt (4,520) 763 4,829 (1,509) (900) (900)

Capital Issues 0.0 0.0 0.0 0.0 0.0 0.0

Other Financing CF (1,577) (9,419) 1,796 0.0 0.0 0.0

Net Financing CF (6,789) (9,002) 6,106 (2,201) (1,593) (1,593)

Currency Adjustments 172 351 (589) 0.0 0.0 0.0

Chg in Cash (2,658) (8,460) 2,088 1,915 (2,555) (2,476)

Opg CFPS (HK cts) (209) 343 193 126 130 136

Free CFPS (HK cts) 28.0 70.3 (24.7) 175 1.25 3.83


Capital Expenditure

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2016A 2017A 2018F 2019F 2020F


RMBm



ASIAN INSIGHTS Page 45

DBS Bank Ltd recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 4 Oct 2018 07:58:54 (SGT)

Dissemination Date: 4 Oct 2018 12:00:28 (SGT)

Sources for all charts and tables are DBS Bank unless otherwise specified

GENERAL DISCLOSURE/DISCLAIMER

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corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)

redistributed without the prior written consent of DBS Bank.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to

DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents

(collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into

account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any

representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are

subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not

have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the

information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate

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(including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in

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Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in

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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there

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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

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which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from

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The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

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of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of

the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or their subsidiaries and/or other affiliates have a proprietary

position in Jiangxi Copper, recommended in this report as of 31 Aug 2018.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:

3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.




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