Page 1
Please refer to the important disclosures and analyst certification on page 2 and the inside back cover of this document, or on our website www.macquarie.com/disclosures.
HONG KONG
358 HK Neutral
Price (at 08:01, 10 May 2013 GMT) HK$16.42
12-month target HK$ 15.00
Upside/Downside % -8.6
Valuation HK$ 15.00 - Sum of Parts
GICS sector Materials
Market cap HK$m 56,846
30-day avg turnover US$m 38.6
Market cap US$m 7,324
Number shares on issue m 3,462
Investment fundamentals
Year end 31 Dec 2012A 2013E 2014E 2015E
Revenue bn 158.0 167.6 170.2 175.8 EBIT bn 7.1 5.5 4.2 4.5 EBIT growth % -15.4 -21.8 -24.3 6.7 Reported profit bn 5.2 4.1 3.0 3.2 Adjusted profit bn 5.2 4.1 3.0 3.2 EPS rep Rmb 1.49 1.19 0.87 0.93 EPS rep growth % -21.5 -20.2 -27.3 7.1 EPS adj Rmb 1.49 1.19 0.87 0.93 EPS adj growth % -21.5 -20.2 -27.3 7.1 PER rep x 8.7 10.9 15.0 14.0 PER adj x 8.7 10.9 15.0 14.0 ROA % 9.7 6.8 4.8 5.0 ROE % 12.6 9.4 6.5 6.7 EV/EBITDA x 5.6 6.7 7.8 7.3 Net debt/equity % 4.6 12.0 19.4 20.4 P/BV x 1.1 1.0 1.0 0.9
Source: FactSet, Macquarie Research, May 2013
(all figures in Rmb unless noted)
Analyst(s) Matty Zhao +852 3922 1293 [email protected] Ivan Lee +852 3922 3572 [email protected] Annie Li +852 3922 3884 [email protected]
13 May 2013 Macquarie Capital Securities Limited
Jiangxi Copper Not quite copper-bottomed We transfer coverage of Jiangxi Copper (JXC) to Matty Zhao with a cautious
view (downgrade to Neutral from OP) and price target of HK$15 (from HK$22),
9% downside. We expect copper price to remain weak in 2013-14F due to a
worsen supply surplus. It will be hard for JXC to outperform the HSI given its
high EPS sensitivity to copper prices, ROE drop from 18% in 2011 to below 7%
in 2014E and potential consensus EPS cut (we are 16%/40% below consensus
in 2013/14F). It is at 15x 2014E PER, and our PT implies 13.7x 2014PER.
Our commodity team expects $6,550/t copper price in 2014
Supply surplus to worsen in 2014: Given the strong investments in copper
projects in the past few years, our commodity team forecasts 3%/8% mined
copper supply growth in 2013/14F but 3.5%/4.8% demand growth only.
Our commodity team see a worsen surplus in 2014 of 728kt (vs. 221kt in 2013)
and remain cautious on copper prices with a 6% drop in 2013E to $7,458/t
and another 12% in 2014E to $6,550/t. The strong YTD supply growth (8%y-y
from Chile mines) and high inventory level add more near term concerns.
Revenue growth not turning into earnings growth
Revenue growth mainly driven by low margin business: We expect JXC
to undertake more copper trading/smelting to boost revenue. Despite a better
TC/RC in 2013/14E, JXC‟s smelting lines may just break even and its trading
segment would deliver 1% profit margin. Thus, while trading/ smelting account
for over 80% of revenue, they only contribute 10/14% to gross profit in 13/14E.
Low cash cost but… We like JXC‟s quality assets and its low C1 cash cost
at US¢84-85/lb ($1850-1870/t vs. over US$5000/t for high cost producers).
Our calculated total cost (incl. noncash cost and before netting of by-product
credits) may amount to ~$4700/t in 13-15E, and we see limited management
incentives for cost reduction.
Mined copper GPM may drop from 45% in 2012 to 26% in 2014: we expect
mined copper production to remain stable at 209kt in 2013-15E. Amid weaker
copper prices, we see self-mined copper concentrate GPM to drop to 36%/26%
in 2013/14F along with a 20/27% EPS drop. A 1% copper price drop leads to
a 1.7% EPS decline in 2013.
DCF value of HK$15 and EV/t reserves value of HK$13-16
We value JXC‟s mined copper segment using DCF (10.8% WACC) and apply
6x 2014E PER for its trading & smelting business to derive our target price of
HK$15 (HK$14.7 from mines and HK$0.3 from trading & smelting). It is at 15x
2014PER (vs. 12x historical average, 13.8x sector average) and 1x P/B. Our
PT implies 13.7x 2014E PER and 0.9x 2014E PB.
JXC is trading at US¢32/lb EV/t of reserves. Copper M&A deals in 2005-2011
implied EV/t of reserves ranging from US¢39-75/lb. We think the copper
supply surplus in 2013/14F is more similar to 2008/09 when average EV/t of
reserves was US¢40-49/lb. We apply a 20% discount to value JXC (not a bid)
and the implied value is HK$13-16; and our PT is within the range.
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Macquarie Research Jiangxi Copper
13 May 2013 2
Inside
Not quite copper-bottomed 3
Valuation unattractive on PE, P/B,
EV/t basis 7
Earnings drivers and sensitivity 11
Supply surplus lead to weak price 13
Solid assets but limited production
growth 15
Revenue growth =/= earning growth 18
Key assumptions and financials 22
Copper industry – worse 2014 supply
surplus 24
Appendices 36
358 HK rel HSI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, May 2013
(all figures in Rmb unless noted)
Jiangxi Copper Company profile
Jiangxi Copper (358 HK, 600362 CH, “JXC”) was listed in HK in June 1997
(40% of the shares), and Shanghai in December 2001 (60%). JXC‟s parent co,
Jiangxi Copper Corporation, is its biggest shareholder, which is fully-owned by
SASAC of Jiangxi Province.
Jiangxi Copper integrates copper mining, smelting, copper trading, and by-
products (gold/silver/sulphuric acid) business. It owns 6 operating copper
mines domestically and 2 projects overseas (under development), with
combined copper reserves of 17.3mnt (China mines reserves of 10.5mnt) gold
reserves of 340t and silver reserves of 9,664t at the end of 2012. It also owns
1 smelter and 7 processing plants.
In 2012, copper accounted for 86% of revenue and 67% of gross profit; while
by-products made up 14% of revenue and 33% of gross profit.
JXC produced 1,090kt of copper cathodes in 2012, including mined copper of
211kt (19%) and the remaining ~880kt (81%) from its smelting business, of
which JXC purchased copper concentrates from third parties (25%/5% from
international/China suppliers and 50% from copper scrap & blister market).
1. Mined copper - is the major earnings driver (8% revenue and 68% gross
profit) for JXC, given its high GPM (45%)
2. Copper smelting - as JXC‟s mined copper production cannot support its
cathode capacity (1mnt), it purchased copper concentrates from third
parties and thus only earns TC/RC less smelting &refining cost for this
segment. Despite accounting for 37% of revenue in 2012 (by recording all
third-party concentrate sales as revenue), it made a loss of RMB700m in
2012 per our calculation.
3. Copper trading: JXC trades copper of 650kt/1,135kt in 2011/12 based
on our calculation accounting for 37%/41% of revenue. Yet with less than
1% margin, trading only amount to 4%/8% of total gross profit 2011/12F.
4. By-products - During the copper smelting and refining process, JXC
obtains by-products of gold/silver/sulphuric acid/rare metals etc. In 2012,
by products accounted for 14% of revenue and 33% of gross profit.
Fig 1 JXC: 2012 Revenue and gross profit mix of each segment
Source: Company data, Macquarie Research, May 2013
8%
68%37%
-9%
41%8%
14% 33%
-20%
0%
20%
40%
60%
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100%
120%
2012 Revenue mix 2012 Gross profit mix
Mined copper Copper smelting Copper trading By products
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Macquarie Research Jiangxi Copper
13 May 2013 3
Not quite copper-bottomed JXC hard to outperform during supply surplus and price decline
We expect 2014 copper price of US$6,550/t: We remain cautious on copper price
outlook, expecting a 6% drop this year and another 12% next year, leading to US$6,550/t
2014 average price and expect below US$6,200/t in 3Q14. (Please refer to our commodity
team report “Seeking shelter as the stars fall”) Our weaker copper price assumptions are
based on:
Worsening supply surplus in 2014: high copper prices in the past few years have
driven a period of strong investment into copper projects, with a resulting supply
surplus since late 2012. Our commodities team expects supply surplus in 2013 and a
deteriorating situation in 2014E. We model 3% mined production growth in 2013 and 8%
in 2014. YTD copper production growth has also been very strong, led by 8%YoY
growth from Chilean mines and 10% from large producers that release results (50% of
total copper supply), with copper supply disruptions unusually quiet.
Current price is well above cost curve: Our analysis suggests that while the 100th
percentile of the cost curve is $6,600/t, the 90th percentile – the traditional yardstick of
commodities analysts – remains sub-$5,000/t; which is well below current prices.
Surging copper inventory is a major concern with copper exchange inventory
doubling in the past 6 months, increasing to over 800kt recently.
JXC share price has high correlation with copper price- the R-squared of the past 5
years (on daily price basis) is up to 0.66. While the stock outperformed the copper price
from Sep 2012 to Jan 2013, it has underperformed copper by 14% YTD, thus over the past
12 month-period, JXC traded just in line with copper prices. With our cautious view on
copper price in the next 12months, we believe it will be difficult for Jiangxi Copper to
outperform given its high earning sensitivity to copper prices; and the ROE deterioration
during weak copper price (ROE drop from 18% in 2011 when copper price as at $8812/t to
potentially below 7% in 2014 when our estimate copper price at $6550/t)
Fig 2 Growing copper supply surplus in 2013/14F Fig 3 JXC: PB-ROE
Source: ICSG, Macquarie Research, May 2013 Source: Bloomberg, Macquarie Research, May 2013
Medium-term price support at US$6,500/t: we see both capital cost and operating cost
continuing to increase, with the majority of new projects likely at lower grades and at the
higher end of the cost curve. We see much China new supply this year having operating
cost in excess of $6,000/t. The steepening cost curve supports our long-term copper price
assumption of US$6,500/t.
3684
67337126
6952
5164
7539
8811
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Surplus
Surplus/Deficit (kt) Copper price (US$/t)
Deficit
21.8%
47.4%
13.0%
12.6%11.7%
17.9%17.9%
12.6%9.4% 6.5%
6.7%
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Macquarie Research Jiangxi Copper
13 May 2013 4
Fig 4 Copper price still well above cost curve Fig 5 Copper inventory rising very fast
Source: Bloomberg, Macquarie Research, May 2013 Source: LME, COMEX, SHFE, CRU, Macquarie Research, May 2013
Fig 6 JXC share price has 0.66 correlation to copper price in the past 5 years
Fig 7 Past 12m JXC share price vs. copper price
Source: Bloomberg, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
We like its assets& low cash cost, but we see margin squeeze and limited mined output growth
Jiangxi Copper owns 6 high quality copper mines in China, with copper reserves of
10.5mnt as at 31 December 2012 and mined copper production of 211kt.
Thanks to its large mine size and favourable mining conditions of its flagship mine (Dexing)
its cash cost was at USc83-84/lb (US$1,830-1,850/t) in the past few years. In 2013-15F,
we expect 1-2% pa growth and cash cost to remain below US$2,000/t, which is at the
lowest end of the global copper cost curve.
We expect mined copper gross margin to drop from 45% in 2012 to 26% in 2014F:
after considering the depreciation and other costs and without netting the by-product
credits, our calculated total cost for its mined copper segment is US$4700/t in 2013-15F.
With limited room for cost reduction and a deteriorating price outlook, we expect the
copper gross margin to drop from 45% in 2012 to 26% in 2014F.
No production growth until 2017. JXC‟s 6 domestic mines have reached full capacity,
with limited production growth in the near term; meanwhile, its overseas projects are still in
the early development stage, which may not start to produce until 2016/17F (we factored in
50kt output from 2017). As such we only expect mined copper production to stay stable at
209kt in 2013-15F.
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Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
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Higher Cost Chinese Producers
Low Cost producers
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Consumer + Other LME price (RHS)
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R² = 0.6594
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In the past 12m share price traded in line with copper price
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Macquarie Research Jiangxi Copper
13 May 2013 5
Segment analysis: revenue growth may not turn into earnings growth
Jiangxi Copper emphasizes revenue growth and we expect it would boost its revenue by
adding more copper trading and smelting volume. However, given both trading and
smelting have limited earnings contribution (~1% margin for trading and merely breakeven
for smelting), while the major driver (self-mined copper) may face margin squeeze, we do
not think the revenue growth will turn into earnings growth. On the contrary, we see 20%/
27% earnings drop in 2013/14F.
Fig 8 JXC: 2013 Revenue mix and gross profit mix Fig 9 JXC segments gross profit margin in 2013
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Self-mined copper - the biggest earnings driver: Given self-mined copper has much
higher margins (36% in 2013) than its smelting (0%) and trading (1%) businesses, we
expect self-mined copper to be the major earnings driver, accounting for 56% of gross
profit in 2013, although it only accounts for 7% of revenue in 2013.
Jiangxi Copper earnings are most sensitive to copper price and mining cost. A 1% price
drop could lead to a 1.6% earnings drop, while a 1% cash cost increase could result in 0.5%
earnings decline. JXC share price has over 90% correlation with copper price.
Copper smelting / TC/RC: With enlarging smelting capacity in 2013-15 and stable mined
copper concentrate production, we expect JXC‟s smelting copper volume to grow from
880kt in 2012 to 1140kt in 2015F. With a loosening supply in 2013/14F, we see TC/RC on
an upward trend in 2013/14F and JXC‟s smelting segment to break even from 2013.
Copper trading: We believe enlarging copper trading volume will act as the biggest driver
for JXC‟s revenue. In line with management, we expect copper trading to account for over
50% of its revenue in 2013-15F (vs. 41% in 2012 and 19% 5 years ago). Yet, given the ~1%
profit margin, the trading business only contributes 10%/12% for 2013/14F gross profit.
By-products: we expect total of by-products to take up 12% of 2013 revenue and 31% of
gross profit. 1% drop in gold/ silver prices could lead to 0.2% /0.02% drop in 2013 EPS.
Fig 10 JXC: Sensitivity analysis
Sensitivity analysis 2013 EPS change
1% copper price 1.65% 1% gold price 0.21% 1% silver price 0.02% 1% cash cost -0.50% 1% mined copper vol. 1.84% 1% smelting copper vol. 0.09%
Source: Macquarie Research, May 2013
7%
56%29%
0%
52% 10%
12%34%
-20%
0%
20%
40%
60%
80%
100%
120%
2013E Revenue mix 2013E Gross profit mix
Mined copper Copper smelting Copper trading By products
36%
0%1%
15%
5%
31%
2%
-5%
0%
5%
10%
15%
20%
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30%
35%
40%
Gross margin
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Macquarie Research Jiangxi Copper
13 May 2013 6
Fig 11 JXC: Revenue growth Fig 12 JXC: Net profit growth
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Valuation: DCF value of HK$15 and EV/t reserves value of HK$13-16
We value JXC‟s mined copper segment using DCF (10.8% WACC) and apply 6x 2014E
PER for its trading & smelting business to derive our target price of HK$15 (HK$14.7 from
mines and HK$0.3 from trading & smelting). It is at 15x 2014PER (vs. 12x historical
average, 13.8x sector average) and 1x P/B. Our PT implies 13.7x 2014E PER and 0.9x
2014E PB.
JXC is trading at US¢32/lb EV/t of reserves and US$25k/t of production, which is not
attractive compared to Oz Minerals of US$8k/t, Antofagasta of US$18k/t and Freeport of
US$15k/t.
Per our deep dive study of Copper M&A deals in 2005-2011, the implied EV/t of reserves
range from US¢39-75/lb. We think the copper supply surplus in 2013/14F is more similar to
2008/09 when average EV/t of reserves was US¢40-49/lb. We apply a 20-30% discount to
value JXC (not a bid) and the implied value is HK$13-16; and our PT is within the range.
0
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Macquarie Research Jiangxi Copper
13 May 2013 7
Valuation unattractive on PE, P/B, EV/t basis HK$15 price target based on sum-of-the parts
We transfer coverage of Jiangxi Copper from Ivan Lee to Matty Zhao, with a cautious view
and a price target of HK$15, implying 9% downside. We derive our target price based on a
sum-of-the parts methodology.
We value the self-produced copper mining business (including the gold/silver etc. by-
products generated from its mines) using DCF methodology. We employ a WACC of
10.8 % and a terminal growth value of 1% and detering the copper mines are worth
HK$14.7 per share.
We apply a target P/E of 6x 2014 estimated earnings to its copper-smelting and copper-
trading business. Given the low profit margin of both smelting and trading businesses, we
value these parts of the business at only HK$0.3 per share.
Our PT implies 13.7x 2014E PER and 0.9x 2014E PB which looks fair compared to its 5-year
historical average of 12x PER and 1.5x P/BV, considering its deteriorating ROE in the near
term (from 12.6% in 2012 to 9.4% in 2013 and further to 6-7% in 2014-15F) with its long-term
ROE (post 2017F) returning to 10%.
Fig 13 JXC sum of the parts valuation: DCF for its own copper mines and 6x 2014 target PE for smelting and trading
Source: Macquarie Research, May 2013
Fig 14 JXC: 12m forward PE band Fig 15 JXC: 12m forward PB band
Source: Bloomberg, Macquarie Research, May 2013 Source: Bloomberg, Macquarie Research, May 2013
DCF methods for self-owned mines
WACC Valuation Sensitivity table
Risk Free Rate 4.0% Sum of PV of FCF 11,276 --- Terminal Growth Rate ---
Market Risk Premium 6.0% Terminal growth value 31,254 15 0.25% 0.50% 0.75% 1.0% 1.25% 1.50% 1.75%
Equity Beta 1.61 DCF 42,530 10.0% 16.2 16.6 16.9 17.2 17.6 18.0 18.4
Cost of Equity 13.7% Less: Net debt 1,891 10.2% 15.7 16.0 16.3 16.6 17.0 17.4 17.8
Cost of Debt (Pre-tax) 4.7% Less: Goodwill 10.4% 15.2 15.5 15.8 16.1 16.4 16.8 17.1
Cost of Debt (After tax) 4.0% EV (RMB mn) 40,639 10.6% 14.7 14.9 15.2 15.5 15.8 16.2 16.5
Target Debt weight 30.0% EV (HKD mn) 50,798 10.8% 14.2 14.5 14.7 15.0 15.3 15.6 15.9
Target Equity weight 70.0% No. of Ord shares (mn) 3,463 11.0% 13.7 14.0 14.2 14.5 14.8 15.1 15.4
Tax Rate 15.0% Value per share (RMB) 11.74 11.2% 13.3 13.5 13.8 14.0 14.3 14.6 14.9
WACC 10.8% Value per share (HKD) 14.67 11.4% 12.9 13.1 13.3 13.6 13.8 14.1 14.4
Termial growth rate 1.0% CNY/HKD 1.25 11.6% 12.5 12.7 12.9 13.1 13.4 13.6 13.9
Target PE method for smelting and trading business
PE Valuation 2011 2012 2013E 2014E
EPS (RMB/share) -0.1 -0.2 0.0 0.0
EPS (HK$/share) -0.1 -0.3 0.0 0.1
Target PE 6.0
Target price (HK$/share) 0.3
Sum of the parts
Value per share (HKD) 15.0
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Macquarie Research Jiangxi Copper
13 May 2013 8
Fig 16 JXC: PB- ROE Fig 17 JXC: PE- EPS growth
Source: Bloomberg, Macquarie Research, May 2013 Source: Bloomberg, Macquarie Research, May 2013
JXC worth HK$13.3-16.2 via EV/t reserves (past M&A deals) method
We did a deep dive analysis on EV/t valuation by mapping all the major transactions in the
copper industry in the past 7 years (since 2005) (Fig20). We identified that buyers tend to
pay a much higher price for copper reserves when prices were on a rising trend (from
2005-07, in 2010). For example, in 2010 the average EV/t of reserves (based on Cu value)
of M&A transactions was at 0.75 (copper price at US$7539/t) vs. $0.49 in 2009 and $0.40
in 2008 (when copper price dropped from $7126 in 2007 to $5164 in 2009). Fig 18 below.
JXC worth HK$16.6-20.3 by applying average EV/t reserves of 2008/09 M&A deals:
JXC is currently trading at USc32/lb. Our DCF valuation price target of HK$15) implies a ‟s
EV/t reserves of US$0.29/lb, which is at the low level in the range of all M&A transactions
under our monitor in the past 7 years. We believe the current supply-and-demand situation
and pricing trend are more comparable to the 2008-2009 period, during which we saw
supply surplus and price decline. If we apply the average EV per tonne of reserves for
2008 M&A deals (US$0.4/lb) and for 2009 M&A transactions (US$0.49/lb) to JXC China
reserves of 10.52mnt, JXC should be worth HK$16.6 to HK$20.3 per share.
We apply a 20% discount to the EV/t reserves and JXC worth HK$13.3–16.2: we
believe M&A would normally pay a premium compared to an existing company, and we
apply a 20% discount to the average EV/t reserves of 2008/09 M&A transactions, and
arrive at the pricing range of HK$13.3–16.2 per share. Our price target of HK$15 falls in
the mid range of this valuation.
Bear case analysis: As we expect JXC‟s 2014/15F ROE to be ~7%, half of its cost of
equity of 14%. If investors are bearish on copper sector outlook, we believe the P/B
support of 0.5x 2014 would imply a price of HK$8-9. In terms of PE, we believe the 1
standard deviation below mean (7x 2014PER) would be the bear case support. This would
imply an HK$8 price target.
21.8%
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2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2011 2012 2013E 2014E 2015E
EPS growth (%) PE (x)
[email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower
Page 9
Macquarie Research Jiangxi Copper
13 May 2013 9
Fig 18 EV/t reserves valuation (US$/lb)
Source: Company data, Macquarie Research, May 2013
Fig 19 JXC is trading at US$25k/t of production, which is not attractive compared to Oz Minerals at US$8k/t, Antofagasta at US$18k/t and Freeport at US$15k/t)
Source: Company data, Macquarie Research, May 2013
-40%
-20%
0%
20%
40%
60%
80%
100%
-0.3
-0.1
0.1
0.2
0.4
0.5
0.7
2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E
US$/lb
EV/t reserve Copper price growth y-y %
Our forecast
0
10
20
30
40
50
60
70
EV/t production (US$000/t)
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Page 10
Macquarie Research Jiangxi Copper
13 May 2013 10
Fig 20 EV/t reserves of major copper M&A range from USc39-75/lb on yearly average basis and JXC is at USc32/lb. With weak / declining copper prices in 2008-09, M&A EV/t reserves range from USc40-49/lb. We apply 20% discount to value JXC given it’s not a bid and the implied PT is HK$13-16
Source: Company data, Macquarie Research, May 2013
Fig 21 Copper peers valuation comparison
Source: Bloomberg, Macquarie Research, May 2013; Price as of 10 May.
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US$/lb Cu Jiangxi Copper EV/t reserve level
2005 2006 2007 2008 2009 2010 2011
Company Ticker Rating Mkt Cap P/E (x) P/B (x) EV/EBITDA (x) ROE (%)
Name USD $m 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E
Jiangxi Copper 358 HK Outperform 7,324 8.7 10.9 15.0 1.1 1.0 1.0 5.6 6.7 7.8 12.6 9.4 6.5
Rio Tinto RIO AU Outperform 25,471 11.6 11.7 10.0 2.3 2.1 1.8 6.7 6.2 5.1 18.7 18.5 19.2
BHP Billiton BHP AU Outperform 111,612 10.8 15.2 14.4 2.8 2.6 2.4 6.0 7.3 7.0 27.9 17.8 17.5
Glencore Xstrata GLEN LN Outperform 70,036 12.0 11.3 10.5 1.2 1.1 1.0 11.7 7.3 6.6 10.1 13.0 10.1
Anglo American AAL LN Outperform 34,046 10.8 14.9 12.9 0.8 0.8 0.8 4.7 5.0 4.6 7.4 5.5 6.2
Sumitomo Metal Mining 5713 JP Outperform 7,972 9.4 11.0 8.5 1.2 1.1 0.9 6.9 7.7 6.4 13.4 10.6 11.7
PanAust PNA AU Outperform 1,552 10.5 13.3 17.6 1.7 1.5 1.4 4.8 5.7 6.8 16.8 11.8 8.3
Oz Minerals OZL AU Neutral 1,408 9.4 nmf nmf 0.5 0.5 0.6 1.7 6.2 4.7 5.4 -2.3 -2.1
Sandfire Resources SFR AU Neutral 1,036 nmf 6.4 7.4 8.7 3.6 2.5 -44.2 4.4 4.8 -18.7 80.3 40.5
MMG Limited 1208 HK Outperform 1,718 7.2 3.5 3.0 1.0 0.8 0.6 3.2 1.8 2.0 15.3 25.8 23.5
Zijin Mining 2899 HK Underperform 6,548 7.7 10.2 15.2 1.4 1.3 1.3 4.2 5.0 5.7 19.6 13.5 8.7
Antofagasta ANTO LN Neutral 13,820 10.0 15.2 19.4 1.9 2.0 1.9 2.9 4.3 5.1 20.8 12.9 10.0
Kazakhmys KAZ LN Underperform 2,969 10.6 9.9 13.4 0.5 0.5 0.4 4.2 6.3 7.8 3.8 4.7 3.3
Freeport-McMoran Copper FCX US Neutral 30,914 10.8 10.9 10.8 1.8 1.6 1.5 4.6 4.3 4.2 17.4 15.5 14.3
Capstone Mining CS CN Outperform 939 15.0 12.2 4.9 0.7 0.6 0.5 2.8 2.7 1.5 4.5 5.2 11.8
First Quantum Minerals FM CN Neutral 11,101 16.0 13.2 8.9 1.7 1.2 1.2 nmf 5.5 4.1 12.4 10.4 13.3
HudBay Minerals HBM CN Outperform 1,444 nmf 80.4 29.3 0.8 0.7 0.7 5.7 7.1 5.3 -1.2 0.9 2.3
Lundin Mining LUN CN Outperform 2,431 19.7 11.0 13.1 0.7 0.7 0.6 11.8 8.2 10.2 3.5 14.0 0.9
Mercator Minerals ML CN Neutral 83 7.8 nmf 11.9 0.4 0.5 0.5 -2.1 241.6 5.3 -52.7 -8.9 4.9
Turquoise Hill Resources TRQ CN Outperform 7,703 nmf nmf 35.8 1.2 1.2 1.2 -38.3 56.1 12.4 -18.4 -0.6 3.3
Average 11.1 15.4 13.8 1.6 1.3 1.1 0.2 20.0 5.9 5.9 12.9 10.7
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Page 11
Macquarie Research Jiangxi Copper
13 May 2013 11
Earnings drivers and sensitivity Jiangxi Copper is both a copper miner and a smelter. It produces or purchases copper
concentrate or copper scrap and produces copper cathodes. During the process, they also
produce and sell precious metals and chemicals as by-products.
Fig 22 JXC: Revenue mix Fig 23 JXC: Gross profit mix
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
SHFE Copper price – The biggest driver for earnings
Copper is traded on both the London (LME) and Shanghai (SHFE) exchanges on a
daily basis. The SHFE and LME copper prices can move quite differently at times, as
SHFE‟s price premium/discount reflects China‟s import demand variance apart from
the tariff and VAT factors.
The SHFE copper price is the most important factor driving Jiangxi Copper‟s revenue
and earnings, given that copper and copper products account for 88% of revenue and
66% of gross profit in 2013F. Yet, for copper trading (52% of revenue), we assume a 1%
gross profit margin in our models, and the copper price fluctuation would have a less
impact to gross profit compared to self-produced/smelted copper.
Per our calculation, a 1% of copper price change equals to 1.7% of JXC‟s earnings
change in 2013. Our commodities team forecast copper prices to be US$7,459/
US$6,550 per tonne in 2013/14F (vs. US$7950/t in 2012). The price decline is one of
the major drivers for JXC‟s EPS drop.
Copper concentrate production volume
Given self-mined copper has a much higher margin compared to copper trading and
copper smelting (36% GPM vs. 0% for copper smelting and 1% for copper trading in
2013F), the production volume is also critical for the company‟s earnings.
Jiangxi Copper has been trying to increase its annual copper concentrate production
capacity through technical enhancements and further exploration, but this has been
progressing at a slow pace. According to management, its mined copper output
volume is to remain stable at 209kt from 2013-15F, given JXC mines have reached full
capacity.
1% volume growth accounts for 1.8% earnings growth.
12% 10% 8% 7% 6% 6%
53%
38%37%
29% 30% 31%
21%
37% 41%52% 53% 52%
14% 15% 14% 12% 12% 11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013E 2014E 2015E
Self-mined copper Copper smelting Copper trading By products
71%61% 68%
56%44% 45%
-8%-3%
-9%0%
2% 2%
2%
4%
8%
10%12% 12%
35%38%
33%
34%42% 40%
-20%
0%
20%
40%
60%
80%
100%
120%
2010 2011 2012 2013E 2014E 2015E
Self-mined copper Copper smelting Copper trading By products
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Page 12
Macquarie Research Jiangxi Copper
13 May 2013 12
Mining costs
Mining costs include ore mining, milling, labour, electricity, utility and resources tax.
Yet JXC does not disclose its mining cost breakdown. It generally only provides verbal
comments on total mining costs when asked during its annual Analyst Presentation.
Per our latest updates with management in April 2013, current cash cost is at
USc83/lb. We have factored in a 2%/1% cash cost hike in 2013/14F, given grade
deterioration in its Dexing mine and increasing underground operation in
Chenmengshan.
1% mining cost increase account for 0.5% earnings drop.
Gold and silver price
Jiangxi Copper produces gold and silver as by-products from its copper mines to some
extent, and extracts the rest from imported concentrate through the smelting process.
Both gold and silver prices are traded on the LME and SGE. Either way, the
company‟s margins of precious metals are higher than copper as a whole, as JXC
combines the copper trading (low margin business) into the copper segments.
In 2013, we expect combined gold and silver to account for 7% of the company‟s
revenue and 19% of gross profit.
1% gold price drop equals to 0.2% earnings drop while 1% silver price decline may
lead to 0.02% earnings drop.
TC/RC
Treatment and refining charges (TC/RC) are the smelting and refining costs that
copper concentrate suppliers pay to smelters. For copper smelting, the gross cash
margin would be the TC/RC less the processing and smelting cost. Thus, a smelter‟s
final cost of copper concentrate is purchasing cost based on Cu content minus TC/RC
plus processing cost.
For Jiangxi Copper, 90% of its external copper concentrate is bound by long-term
contracts, which are set on an annual basis, usually at the beginning of the year, and
is only 10% is linked to the spot TC/RC. The movement of spot TC/RC around year-
end is important, as it sets the tone for the following year‟s annual TC/RC.
Copper cathode, copper wire rod, gold and silver sales volume
Jiangxi Copper announces copper cathode, gold and silver production volume targets
at the beginning of the year in the previous year‟s annual report, with the copper
concentrate production volume target. Usually these targets are met without much
difficulty, as they are more related to processing than mining and produced volumes
and can be fully sold, as China is in net shortage of copper, gold and silver.
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Page 13
Macquarie Research Jiangxi Copper
13 May 2013 13
Supply surplus lead to weak price We see worsening supply surplus to drive copper price to $6,550/t
Copper has been a supply story over the past decade; underinvestment in new capacity
led to average growth rates of only ~2% annually. Yet, the last year has seen the copper
market swing into surplus.
In our view, global copper will remain in surplus in 2013 and the copper balance is set to
deteriorate further in the next 12 months due to increased supply growth driven by a period
of strong investment of copper projects expansion. We model a 3% mined copper growth
(or ~520kt) in 2013 and 8% (1398kt) in 2014. To sum up, we expect almost 1mnt additional
capacity from greenfield projects to ramp up in the next 12 months and top 10 expansion
projects will add ~2mnt annual capacity in the next 2 years.
Fig 24 Global copper supply-demand model and price expectations
'000t 2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f
Mine Production 15561 15838 16014 16006 16698 17218 18616 19404 19759 20405 20535 % Change 0.6% 1.8% 1.1% -0.1% 4.3% 3.1% 8.1% 4.2% 1.8% 3.3% 0.6% Refined Production 18140 18161 18787 19493 20099 20763 22250 23090 23496 24194 24425 % Change 1.9% 0.1% 3.4% 3.8% 3.1% 3.3% 7.2% 3.8% 1.8% 3.0% 1.0% Refined Consumption 18010 17454 18969 19901 19844 20542 21522 22469 23378 24311 25172 % Change 0.2% -3.1% 8.7% 4.9% -0.3% 3.5% 4.8% 4.4% 4.0% 4.0% 3.5% Balance 130 708 -183 -409 256 221 728 621 118 -118 -748 Reported stocks 1115 1358 1183 1174 1078 1298 2026 2647 2765 2647 1899 LME Cash Price (US$/t) 6952 5164 7539 8811 7950 7459 6550 6800 7525 7875 7875 LME Cash Price (US¢/lb) 315 234 342 400 361 338 297 308 341 357 357
Source: CRU, ICSG, Wood Mackenzie, Macquarie Research, May 2013
We expect a growing surplus will gradually see the copper “scarcity premium” fade,
bringing the copper industry‟s cost curve back into focus. As a result, we expect a 6% drop
in 2013 copper price and another 12% next year with 2014 average price to US$6,550/t
and expect a 3Q14 average price below US$6,200/t.
Fig 25 Mac: Copper price forecast Fig 26 Mac: we recently downgraded copper price
Source: CRU, ICSG, Wood Mackenzie, Macquarie Research, May 2013 Source: CRU, ICSG, Bloomberg, Macquarie Research, May 2013
7,539
8,811
8,090
7,8077,950
7,5677,350
7,459
6,550
6,800
7,525
7,875 7,875
6,504
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
2010 2011 1H12 2H12 2012 1H13E2H13E 2013E 2014E 2015E 2016E 2017E 2018E LT $2012
Copper price ($/t)
3000
4000
5000
6000
7000
8000
9000
10000
Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15
Actual/New Forecast
Old forecast
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Page 14
Macquarie Research Jiangxi Copper
13 May 2013 14
Chinese demand is not stellar: Loose monetary policy and investment acceleration have
driven a rebound in Chinese copper consumption, in line with our base case expectations.
In the near term, we expect the market is still underestimating Chinese growth; however
the likelihood of a return to double-digit copper consumption (which would be needed to
balance the market) has diminished considerably. Inflation headwinds are likely to force
tighter credit availability in the medium term; meanwhile a new leadership policy focussed
on reform from the investment-driven model is likely to see Chinese consumption growth
rates peak this year.
High inventory as major concerns: Copper exchange inventory has doubled in the past
6 months, increasing to over 800kt recently, with Asian, European and US warehouses all
seeing an increase.
Price is still well above cost curve with downside risk during supply surplus: Our
analysis suggests that while the 90th percentile – the traditional yardstick of commodities
analysts – remains sub-$5,000/t, the 100th percentile of the cost curve is nearer $6,600/t.
Moreover, this steep gradient at the top end of the curve leads to a sharp „hockey stick,‟
one which is also likely to widen given the position of new supply. Under a supply surplus
situation, copper prices themselves do have some downside risk associated until the larger
rational producers start to see losses being generated.
Jiangxi Copper ASP in line with copper price
JXC sells copper products in the form of copper cathodes, copper rods & wires or other
copper processing products, all of which could be counted as end-products. As a result, we
could use the SHFE copper price as a good reference to evaluate JXC‟s ASP. Based on
our assumptions, copper cathodes‟ ASP is the same as SHFE price, and copper rods &
wires ASP is applied a 3% discount to SHFE price.
Based on historical trends, SHFE copper cash price implied a 14–17% premium to the
LME price due to imports tariff and VAT. Going forward, we continue to apply a 16%
premium for the SHFE price to LME price.
Fig 27 JXC ASP vs. benchmark copper price
Copper price 2010 2011 2012 2013E 2014E 2015E
Benchmark price LME Copper price ($/t) 7,540 8,812 7,950 7,458 6,550 6,799 SHFE Copper price ($/t) 8,767 10,304 9,096 8,652 7,598 7,887 … SHFE premium to LME 16% 17% 14% 16% 16% 16% SHFE Copper price (RMB/t) 58,935 66,153 57,371 54,505 47,107 48,110 JXC copper price (RMB/t) Copper cathodes 58,935 66,153 57,371 54,505 47,107 48,110 … % premium to SHFE 0% 0% 0% 0% 0% 0% Copper wires&rods 52,092 56,705 54,996 52,870 45,694 46,667 … % premium to SHFE -12% -14% -4% -3% -3% -3%
Source: Company data, LME, SHFE, Macquarie Research, May 2013
[email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower
Page 15
Macquarie Research Jiangxi Copper
13 May 2013 15
Solid assets but limited production growth Rich reserves and quality assets
Jiangxi Copper is the largest copper producer in China in terms of both reserves and
production. By the end of 2012, Jiangxi Copper owned copper reserves of 17.3mnt (incl.
domestic and overseas mines) compared with 11.6mnt of Zijin, 2mnt of Tongling
Nonferrous and 1.8mnt of Yunnan Copper, all of which are leading copper players in China.
China lacks high grade copper resources. The reliance on copper raw material imports is
up to ~80% from 2003-11. As a result, copper smelters with integrated upstream copper
resources are more likely to stand out.
Fig 28 Copper reserves comparison 2012 Fig 29 Mined copper production comparison 2012
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Jiangxi Copper owns 100% of 6 copper mines (3 mining zones in Dexing Mine District) in
Jiangxi, China, and holds stakes in mines in Peru and Afghanistan.. All 6 domestic mines
are under operation, while the 2 overseas mines will not start production until 2016/17,
according to management.
The domestic mines‟ combined reserve is 10.5mnt with an average 0.4% Cu grade. The
calculated mine life is over 40 years based on current production pace.
Fig 30 JXC: Copper mines snapshot
Mines
Stake
Location
Copper Reserves (kt)
Cu grade
Production capacity (ktpa)
Cash cost (USc/lb)
Note
Domestic (6) Dexing Mine (Tongchang) 100% Dexing/Jiangxi 2830 0.43% 135 80 Acquired from
Jiangxi Copper Group in 1997
Dexing Mine (Fujiawu) 100% Dexing/Jiangxi 2470 Dexing Mine (Zhushahong) 100% Dexing/Jiangxi 1200 Yongping Mine 100% Shangrao Jiangxi 960 15 160 Acquired from
Jiangxi Copper Group in 1997
Chengmenshan Mine 100% Jiujiang/Jiangxi 1790 0.7% 18 50 Acquired from Jiangxi Copper Group in 2007
Wushan Mine 100% Shangrao Jiangxi 1090 >1% 18 Acquired from Jiangxi Copper Group in 2000
Dongxiang Mine 100% Fuzhou/Jiangxi 170 5 Yinshan Mine 100% Dexing/Jiangxi 810 10 Overseas (2) Minmetal-JXC North Peru Mine 40% Peru 3220 180 Start 2016/17 Afghanistan Aynak Mine 25% Afghanistan 2750 200 Start 2016/17
Source: Company data, Macquarie Research, May 2013
17300
11613
2000 1795
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Jiangxi Copper Zijin Tongling Nonferrous
Yunnan Copper
kt
Copper reserves
211
100
4865
0
50
100
150
200
250
Jiangxi Copper Zijin Tongling Nonferrous
Yunnan Copper
kt
Mined copper production
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Macquarie Research Jiangxi Copper
13 May 2013 16
Limited near term supply growth & overseas projects as long term driver
Domestic mines have reached capacity and limited production growth near term:
After capacity expansion projects at the Dexing (130ktpd), Chengmenshan and Yinshan
(5ktpd) mines have concluded and finished ramping up to reach full running capacity, we
do not expect any material growth for copper concentrates output in the near term. On the
contrary, we believe the output from existing mines will shrink mildly due to the mining
grade depletion. As the company has guided, 2013 copper concentrate production is
targeted at 209kt vs. 211kt in 2012.
Dexing Mine is the flagship mine, with copper concentrate production accounting for
75% (158kt) of the total. It is the largest open-pit copper mine in Asia, with production
ranking No.1 in China and No.2 globally, just following Escondida copper mine in Chile
(760kt). Average Cu content is 0.43%, depleted from 0.45% 3-5 years ago. Per
management, the deterioration of grade will be gradual and the current grade will be
maintained in the next 2-3 years. We estimate Dexing‟s mine life is above 20 years
with a stable production in the next 5 years.
Yongping mine is an underground copper mine, locating close to Dexing mine. It is
one of the oldest assets owned by JXC. The production capacity is 15ktpa with limited
upside. According to management, Yongping cash cost is relatively higher compared
to other mines due to its lack of by-products.
Chengmenshan mine located in Jiujiang, Jiangxi. The copper reserve is quite decent
with 1.8mnt and production capacity reaching 18ktpa. Chengmenshan was acquired
from JXC Group back in 2007 and we expect mine life to be above 30 years. Cash
cost is also competitive at only USc50/lb due to its rich by-products content.
Wushan mine located in the same as Yongping. It‟s also an underground mine with
relatively higher grade. It produced 12kt copper p.a as well as a significant amount of
gold, silver and sulphur.
Dongxiang is a smaller mine with 5ktpa capacity, high cash cost due to small size.
Yinshan mine produces polymetallic and lead and produces copper as co-products.
Fig 31 JXC: Copper concentrate production growth Fig 32 JXC: Copper cathode output growth
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
-5%
0%
5%
10%
15%
20%
25%
30%
-
50
100
150
200
250
300
350
400
450
2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
kt
…Dexing Mine …Other domestic mines
…Overseas mines y-y %
-
200
400
600
800
1,000
1,200
1,400
1,600
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
kt
Using self-produced concentrates Using purchased concentrates y-y %
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Macquarie Research Jiangxi Copper
13 May 2013 17
Long-term growth relies on two overseas projects which will not contribute until 2017F
Jiangxi Copper owns stakes in two overseas projects which are still under development,
the Aynak copper project in Afghanistan (25% stake) and the Galeno Project in northern
Peru (40% stake). However, the projects have been slow and encountered many delays
over the years. Management expects the projects to start production in 2016, while we
factor the output in our model from 2017 onwards.
Galeno Peru project (100ktpa, 2017 start, feasibility study): Jiangxi Copper, together with
China Minmetals Nonferrous Metals Co (an unlisted arm of China Minmetals Group),
acquired all of the outstanding shares of Northern Peru Copper Group for C$455m
(US$450m) in cash in 1Q08. The Galeno project is located 600km north of Lima.
According to a pre-feasibility study, the project could have probable copper reserves of
3.2m tonnes with annual capacity of 100ktpa.
Aynak project in Afghanistan (200ktpa, 2017 start; development on hold): A consortium
formed by Jiangxi Copper and the China Metallurgical Group (not listed) was selected as
the preferred bidder for the development of the Aynak copper mine in Afghanistan in 2008
and Jiangxi Copper took a 25% stake; at least 50% of the output will be sold to Jiangxi
Copper under international terms and conditions.
The Aynak copper mine is the second-largest known unexploited copper deposit in the
world, with total estimated copper resources of 11m tonnes, and an average ore grade of
1.6%. According to the preliminary feasibility study, the mine could produce up to 200ktpa
of copper-in-concentrate when it is up and running.
While the company‟s initial plan was to start producing from 2013, this has been delayed
due to the discovery of archaeological ruins around the mining area at the end of 2010. It
could take 2-3 years to unearth the ruins, according to the company.
Fig 33 Jiangxi Copper mine assets
Source: Company data, Macquarie Research, May 2013
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Macquarie Research Jiangxi Copper
13 May 2013 18
Revenue growth =/= earning growth Jiangxi copper‟s revenue hiked above 35% y-y in 2012 to RMB158bn from RMB117bn in
2011 mainly due to trading volume surge (volume almost doubled and revenue contribution
from trading is up to 50% now).
However, earnings dropped by 22% in the meantime due to declining copper price. In 2013-
15F, we expect JXC will show stable top line growth. Yet, on the back of weak copper price,
limited near term production growth and very thin copper trading margin, we expect 20%
earning decline in 2013F and another 27% drop in 2014F.
Fig 34 JXC: Revenue growth Fig 35 JXC: Net profit growth
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Self produced copper has limited upsides
C1 cash production cost below US$2000/t (net of by-products): Jiangxi Copper does
not provide breakdown of its cost in the financial statements. Each year, management
provides its cash production cost (taking consideration of by-product credits) orally post its
annual results. Per our latest update with management in April 2013, JXC‟s cash
production cost (after deducting the gold/ silver by product credits) is around USc83/lb in
2012 (or US$1830/t) (vs. USc84/lb in 2011). JXC‟s cash cost is located in the lowest
quartile from the global cost curve. This is due to:
Competitive copper grade at 0.43%
Large scale and decent size of copper output of the Dexing flagship copper mine
Credits contribution from gold, silver and molybdenum etc. by-products.
Fig 36 Jiangxi Copper located at lowest quartile of cost curve
Source: Bloomberg, Macquarie Research, May 2013
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
0%
10%
20%
30%
40%
50%
60%
2011 2012 2013E 2014E 2015E
RMB mn
Revenue y-y %
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2011 2012 2013E 2014E 2015E
RMB mn
NPAT y-y %
0
1000
2000
3000
4000
5000
6000
Sandfire
Ziji
n M
inin
g
Jia
ngxi C
opper
Inm
et M
inin
g
Sum
itom
o M
M
PanA
ust
Anto
fagasta
Fre
eport
Turq
uois
e H
ill
Oz M
inera
ls
First Q
uantu
m
Xstr
ata
Capsto
ne M
inin
g
Rio
Tin
to
BH
P
Lundin
Min
ing*
Anglo
Am
erica
Min
meta
ls
Gle
ncore
Merc
ato
r M
inera
ls
Kazakhm
ys
Cash Cost per/tonne
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Macquarie Research Jiangxi Copper
13 May 2013 19
Our calculated total cost is ~US$4700/t in 2013-15F: based on the segment revenue/
operating cost provided by Jiangxi Copper, and our calculation of the copper smelting/
copper trading business profit, we calculated the total unit cost of the self-produced copper
(including depreciation and other and without taking out by-product credits) of ~4200/t in
2012 and we estimate such cost to go up to ~US$4700/t in 2013-15F.
Fig 37 JXC: C1 Cash cost Fig 38 JXC: Total production cost
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Only around 20% of JXC‟s copper cathodes production uses self-mined copper
concentrates as raw materials. The gross profit contribution of this segment, however,
represented 61% of its total gross profit in 2011 and 68% in 2012.
Given our expectation of deteriorating copper prices and limited mined copper production
growth, we forecast self-produced copper margin to drop from 53% in 2011 to 26% in
2014F. And self-mined copper may account for 56%/44% of total gross profit in 2013/14F.
Fig 39 JXC: Copper segment margin comparison Fig 40 JXC: Gross profit mix of copper segment
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
1,852
1,830
1,874
1,896
1,918
-1%
-1%
2%
1%
1%
-2%
-1%
-1%
0%
1%
1%
2%
2%
3%
3%
1,780
1,800
1,820
1,840
1,860
1,880
1,900
1,920
1,940
2011 2012 2013E 2014E 2015E
C1 Cash cost y-y %
USD/t
4,428
4,892
5,476 5,506 5,546
40%
10%12%
1% 1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
1,000
2,000
3,000
4,000
5,000
6,000
2011 2012 2013E 2014E 2015E
USD/t
Total cost y-y %
36%
0% 1%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Self-mined copper Copper smelting Copper trading
Gross profit margin
Self-mined copper
56%
Copper smelting
0%
Copper trading
10%
Others34%
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Macquarie Research Jiangxi Copper
13 May 2013 20
Smelting business may improve but margin remain thin
Jiangxi Copper has smelting capacity of 1.12mnt in 2013 and will grow to 1.5mnt in 2015-
16F; as it only mines 209kt of copper concentrates, it purchases the remaining 80-85%
from other miners. For 2013, we expect JXC to mine 19% of its copper cathodes sold,
import 30%, and buy 49% from copper scrap/blister and ~ 3% from other China miners.
JXC hedges 100% of purchased copper so that it can avoid copper price fluctuation. Thus,
theoretically the smelting business would not be affected by copper prices, while the gross
profit is actually the TC/RC less the smelting cost.
Yet, its smelting business made a loss given international copper price (after considering
17% VAT) was higher than SHEF price (only at 14% premium to LME price in 2012).
TC/RC (Treatment and Refining charges for processing copper concentrates) is the price
difference between copper concentrates and copper cathodes. TC/RC has both spot price
and contract price. Contract TC/RC is generally negotiated between copper concentrate
producers and copper smelters every October. After one of the large-scale miners and one
of the large-scale smelters reach an agreement on TC/RC of the next year, the settled
TC/RC would be applied to all the buyers and sellers.
According to the latest information, Jiangxi Copper has settled 2013 TC/RC with Freeport
and Antofagasta at USD70/t and USD7c/lb. This led to a 10% hike of TC/RC compared to
63.5/6.35 in 2012.
With a loosening mined copper supply, our commodity team expect TC/RC price to
improve to USD80/t and USD8c/lb in 2014/15F. We expect smelting business to turn
profitable in 2014/15F with the assumption of SHFE price at 16% premium to LME price.
Fig 41 Copper TC: Historical and Macq forecast Fig 42 JXC: 80% copper output depend on TC/RC
Source: CRU, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Copper trading accounts for 50% of revenue with ~1% margin
To boost revenue, Jiangxi Copper‟s copper trading volume has increased by over 600%
from 188kt in 2008 to 1,135kt in 2012. And copper trading accounted for 41% of total
revenue in 2012 (vs. 19% in 2008).
Management has high incentive to continue increase its trading volume in 2013-15F so as
to drive up the top line growth. They guide that copper trading will account for around half
of JXC‟s revenue in 2013-15F. We forecast 1.6mnt copper trading in 2013 and 1.9mnt p.a.
in 2014/15F.
However, the trading business only earned a gross profit margin of 1% in 2008-2012F.
Going forward, we have factored in 1% margin for such business. Given the low
profitability, we expect trading to account for 10%/12% of 2013/14F gross profit.
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
2009 2010 2011 2012 2013E 2014E 2015E
USD/t
Copper TC
Self-mined concentrates
19%
Import concentrates
30%
Domestically purchased
concentrates
3%
Scrap and blister
48%
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Macquarie Research Jiangxi Copper
13 May 2013 21
Fig 43 JXC: Copper trading volume growth Fig 44 JXC: Copper trading gross profit
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
By-products play an important role in gross profit
During the copper production process, some by-products like gold, silver or some chemical
products will be produced too. By-products of JXC include gold, silver, sulphuric
concentrates (acid) and rare metals (molybdenum etc).
In 2012, by-products only account for around 15% of JXC‟s revenue. However, gross profit
mix of by-products is up to 33%. We believe by-products will continue to play a very
important role in JXC‟s bottom line performance.
Yet, our commodity team also has a conservative view on gold and silver prices, which
would likely hurt the profitability of by products.
Fig 45 Mac: Gold price forecast Fig 46 Mac: Silver price forecast
Source: Macquarie Research, May 2013 Source: Macquarie Research, May 2013
329
265652
1,135
1,589
1,906 1,906
75%
-19%
146%
74%
40%
20%
0%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
0
500
1,000
1,500
2,000
2,500
2009 2010 2011 2012 2013E 2014E 2015E
kt
Copper trading volume y-y %
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
0
100
200
300
400
500
600
700
800
2009 2010 2011 2012 2013E 2014E 2015E
RMB mn
Copper trading gross profit y-y %
1,226
1,572 1,669
14671385 1383
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2010 2011 2012 2013E 2014E 2015E
Gold price (US$/oz)
20.2
35.1
31.2
25.8
21.520.3
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2010 2011 2012 2013E 2014E 2015E
Silver price (US$/oz)
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Macquarie Research Jiangxi Copper
13 May 2013 22
Key assumptions and financials
Fig 47 JXC: Key drivers and assumptions
2011 2012 2013E 2014E 2015E
Production volume Copper concentrates kt 202 211 209 209 209 Copper cathodes kt 940 1,090 1,120 1,300 1,350 Gold t 25 27 27 27 27 Silver t 526 555 555 555 555 Chemical products kt 4,070 4,561 5,119 5,643 6,389 Rare metals t 6,703 7,058 7,058 7,058 7,058 ASP Copper RMB/t 60,344 56,452 53,687 46,401 47,388 Gold RMB/g 312 342 298 277 272 Silver RMB/g 7 6 6 5 4 Chemical products RMB/t 566 483 483 483 483 Rare metals RMB/t 386,951 884,879 884,879 884,879 884,879 Unit cost Copper RMB/t 53,773 52,713 50,120 44,322 45,181 Gold RMB/g 252 292 254 236 232 Silver RMB/g 5 6 5 4 4 Chemical products RMB/t 320 333 333 333 333 Rare metals RMB/t 371,897 869,484 869,484 869,484 869,484 Unit profit Copper RMB/t 6,571 3,739 3,567 2,078 2,208 … Self-mined copper RMB/t 31,919 25,596 19,190 12,261 13,556 … Smelting copper RMB/t 0 -1 0 0 0 … Copper trading RMB/t 662 574 436 377 385 Gold RMB/g 59 50 44 41 40 Silver RMB/g 2 0 0 0 0 Chemical products RMB/t 246 151 151 151 151 Rare metals RMB/t 15,055 15,395 15,395 15,395 15,395 Gross margin Copper % 11% 7% 7% 4% 5% … Self-mined copper % 53% 45% 36% 26% 29% … Smelting copper % 0% 0% 0% 0% 0% … Copper trading % 1% 1% 1% 1% 1% Gold % 19% 15% 15% 15% 15% Silver % 27% 5% 5% 5% 5% Chemical products % 44% 31% 31% 31% 31% Rare metals % 4% 2% 2% 2% 2%
Source: Company data, Macquarie Research, May 2013
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Macquarie Research Jiangxi Copper
13 May 2013 23
Fig 48 JXC: Key financials page
Financials 2011 2012 2013E 2014E 2015E
P&L (RMB mn) Revenue 117,119 158,006 167,634 170,154 175,780 Gross profit 9,771 7,435 6,434 5,124 5,484 EBIT 8,384 7,096 5,549 4,204 4,485 Profit after tax 6,648 5,248 4,190 3,044 3,259 NPAT 6,587 5,170 4,128 2,999 3,211 EPS (RMB/share) 1.90 1.49 1.19 0.87 0.93 Balance sheet (RMB mn) Cash 11,082 16,678 17,444 14,998 15,361 Inventories 14,097 15,936 17,061 17,467 18,024 AR 12,570 14,156 15,019 15,245 15,749 PPE 18,092 19,934 24,340 29,390 31,915
Total assets 68,150 78,088 85,248 88,483 92,432
ST debt 9,809 12,417 17,000 17,999 18,997 LT debt 174 618 20 22 23 Bonds 5,422 5,681 5,947 6,224 6,510 AP 8,810 11,647 12,470 12,766 13,173
Total liabilities 28,344 34,226 39,299 40,872 42,566
Share capital 3,463 3,463 3,463 3,463 3,463 Reserves 34,109 37,581 40,461 42,456 44,591
Total equities 39,806 43,862 45,949 47,611 49,866
Cash flow (RMB mn) Net Cash in Op Activities 7,190 6,882 7,591 4,500 4,580 Net cash in investing -4,973 -3,163 -6,361 -6,840 -4,500 Net cash in financing 5,563 5,472 -464 -106 282
Net Cash/Borrowing movement 7,775 9,154 766 -2,446 363
Ratios GPM 8% 5% 4% 3% 3% EBIT margin 7% 4% 3% 2% 3% Net margin 6% 3% 2% 2% 2% ROE 18% 13% 9% 7% 7% ROA 10% 7% 5% 3% 3% Net D/E ratio -1% -4% 4% 12% 13%
Source: Company data, Macquarie Research, May 2013
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Macquarie Research Jiangxi Copper
13 May 2013 24
Copper industry – worse 2014 supply surplus Market expectations have shifted from deficit to surplus in 2013, given projected supply
growth on the back of prolonged period of strong investment in new capacity.
The high copper prices in the past few years have driven a period of strong investment of
expansion in copper projects. Chile, China and Peru are three largest producers in the
world in terms of mined copper production. Aggregate production of the three in 2012
accounted for nearly 50% of the world‟s total. However, looking forward, we expect major
supply growth drivers on country side are Indonesia (+57%, 225kt), Congo DR (+21%,
136kt) and the US (+7%, 85kt) in 2013.
Fig 49 High copper prices have driven a period of strong investment in expansion projects
Fig 50 2012 Top 10 mined copper producing countries
Source: LME, Wood Mackenzie, Macquarie Research, May 2013 Source: Wood Mackenzie, Macquarie Research, May 2013
We expect 3% supply growth in 2013 and 8% in 2014F
Our commodity team models 3% mine copper growth (or ~520kt) in 2013 and 8% (1398kt)
in 2014. To sum up, we expect almost 1mnt additional capacity from Greenfield projects to
ramp up in the next 12 months and the top 10 expansion projects will add ~2mnt annual
capacity in the next 2 years. (Please refer to our commodity team report “Seeking shelter
as the stars fall”)
The major drivers for 2013 production growth are PT Freeport in Indonesia (+232kt),
Antapaccay in Peru (+95kt) and Candelaria in Chile (+82kt).The major drivers for 2014
output growth are Collahuasi in Chile (+195kt), Oyu Tolgoi in Mongolia (+116kt),
Toromocho in Peru (+105kt) and Caserones in Chile (+100kt).
Fig 51 Global copper supply and demand model
'000t 2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f
Mine Production 15561 15838 16014 16006 16698 17218 18616 19404 19759 20405 20535 % Change 0.6% 1.8% 1.1% -0.1% 4.3% 3.1% 8.1% 4.2% 1.8% 3.3% 0.6% Refined Production 18140 18161 18787 19493 20099 20763 22250 23090 23496 24194 24425 % Change 1.9% 0.1% 3.4% 3.8% 3.1% 3.3% 7.2% 3.8% 1.8% 3.0% 1.0% Refined Consumption 18010 17454 18969 19901 19844 20542 21522 22469 23378 24311 25172 % Change 0.2% -3.1% 8.7% 4.9% -0.3% 3.5% 4.8% 4.4% 4.0% 4.0% 3.5% Balance 130 708 -183 -409 256 221 728 621 118 -118 -748 Reported stocks 1115 1358 1183 1174 1078 1298 2026 2647 2765 2647 1899 LME Cash Price (c/lb) 6952 5164 7539 8811 7950 7459 6550 6800 7525 7875 7875 LME Cash Price ($/t) 315 234 342 400 361 338 297 308 341 357 357
Source: CRU, Macquarie Research, May 2013
0
5
10
15
20
25
30
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
US$bln Total capital investment in commited copper projects
Expansion Capex Sustaining Capex
Chile
32%
Russia
4%Australia
6%
Zambia
5%
Canada
3%
Congo DR
4%
Mexico
3%
Others
21%
USA
7%
Peru
7%
China
8%
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Macquarie Research Jiangxi Copper
13 May 2013 25
Fig 52 2013 copper production growth profile
Source: Wood Mackenzie, Macquarie Research, May 2013
Fig 53 Top 10 expansion projects in the next two years will add ~2mnt of annual copper production capacity
Fig 54 Top growth drivers by country for 2013 copper mine production- Indonesia and Congo play the key
Source: Wood Mackenzie, Macquarie Research, January 2013 Source: Wood Mackenzie, Macquarie Research, May 2013
Top 16 companies account for 60% of copper supply: Our commodity team expects
the production mix from top 16 big giants to maintain at similar level in the next 3 years at
~60%, as the production growth from new acquired mines of these companies will be partly
offset by reducing output from grade depletion.
16698
232
9582
7067 63
5753
36 33 32
521 18040 -822
17218
16500
16700
16900
17100
17300
17500
17700
17900
18100Major growth drivers by mines for
2013 copper production
('000t copper contained) Total Change Total Change
Country Mine 2010-2013 Country Mine 2012-2015
Chile Los Bronces 175 Indonesia PT Freeport Indonesia 456
Chile Esperanza 175 Peru Toromocho 225
Mexico Buenavista (Cananea) 140 Chile MMH 205
Peru Antamina 118 Chile Collahuasi 200
Peru Antapaccay 100 Mongolia Oyu Tolgoi 190
Congo DR Tenke Fungurume 75 Indonesia Batu Hijau 179
Australia DeGrussa (Sandfire) 75 Brazil Salobo 162
Congo DR Mutanda 73 Mexico Buenavista (Cananea) 160
Mongolia Oyu Tolgoi 70 Chile Caserones 160
Brazil Salobo 70 Peru Antapaccay 155
Total 1,072 Total 2,092
After 10% disruption 1,883
('000t) Cu 2011 2012 2013f
YoY
('000t)
YoY %
Change
Indonesia 543 398 623 225 57%
Congo DR 526 658 794 136 21%
USA 1,136 1,165 1,250 85 7%
Zambia 697 711 788 77 11%
Mongolia 124 120 180 60 50%
Australia 936 920 978 57 6%
China 1,375 1,545 1,589 44 3%
Other 10,667 11,180 11,016 164- -1%
Total 16,006 16,698 17,218 520 3%
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Macquarie Research Jiangxi Copper
13 May 2013 26
Fig 55 Mined copper production from international top players
Mined copper production (kt) 2011 2012 2013 2014 2015
1 Codelco 1830 1705 1758 1888 1924 2 Freeport McMoran Copper & Gold 1231 1187 1493 1526 1850 3 BHP Billiton 982 1182 1271 1302 1322 4 Xstrata 920 740 834 960 1074 5 Anglo American 673 676 748 789 766 6 Southern Copper 600 650 707 781 896 7 Rio Tinto 553 585 687 740 822 8 KGHM Polska Miedz 434 423 408 408 403 9 Antofagasta 407 460 452 430 432 10 Rao Norilsk 359 374 374 383 390 11 Teck 296 339 357 348 334 12 Kazakhmys 355 367 378 396 397 13 Barrick Gold Corp 123 153 145 177 205 14 Glencore 198 195 247 281 333 15 Vale 276 267 297 292 279 16 First Quantum 353 362 394 460 628 Sub-total 9591 9665 10548 11161 12054 % of total 59% 58% 61% 60% 61% Others 6536 6899 6883 7495 7712 Total mined production 16127 16564 17430 18656 19765
Source: Macquarie Research, May 2013
But we are aware of potential risk of failure…
Underperforming mine supply has been the persistent feature of the copper market.
Record high prices were only rewarded by ~1% CAGR mine growth per annum during
2004-2011; while 2012‟s 4% is an above-trend supply growth. In our view, the key reasons
for disappointing mine output growth include:
Grade decline in existing mines: According to Brook Hunt, copper mining grade in the
past 25 years has been declining by average 1% p.a. Currently global average mining
grade is 1.02%, which is 32% worse compared with the 1.48% as of 1992. With continuing
exploration of existing mines and lack of grade advantage of new mines vs. old copper
mines, average mining grade may be at further downside risk. The top 10 mines produced
5mnt copper in 2005 and only less than 4mnt in 2012.
Delays and interruptions of new copper mines: Based on our observation, quite a few
new copper projects have been experiencing delays or interruptions. Many new mines find
it hard to compete with existing mines given inferior copper reserves and grade, tougher
mining conditions, more difficult ore processing, labour cost/energy cost inflation; and
water resources/labour forces shortage, etc. Significant disruptions from plan are also the
norm for copper supply, such as strikes, technical issues, weather etc.
Fig 56 Significant disruptions from plan are the norm for copper supply, driven by a plethora of reasons
Fig 57 The top 10 mines in the world produced 5mt in 2005, but only less than 4mnt in 2012
Source: Company reports, Wood Mackenzie, Macquarie Research, May 2013 Source: Company reports, Wood Mackenzie, Macquarie Research, May 2013
Copper mine supply disruptions from plan
0
200
400
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1200
1400
1600
2005 2006 2007 2008 2009 2010 2011 2012
'00
0t
cu
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
los
s a
s %
of
init
ial o
utp
ut
Pit Walls Strikes TechnicalRamp Up Weather GradesOther as % of production
5%
-4%-4%
-9%
4%
-4%
-12%
0%
-14%
-12%
-10%
-8%
-6%
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4%
6%
8%
3500
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3900
4100
4300
4500
4700
4900
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5300
2005 2006 2007 2008 2009 2010 2011 2012
000't Cu
Output volume YoY change
Evolution of production from world's top 10 mines
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Macquarie Research Jiangxi Copper
13 May 2013 27
Copper production growth has been strong YTD
Chile's National Statistics institute released data this week showing mined copper
production increased by 8.4% YoY in March, totalling 484kt of copper contained. March
production confirms a strong quarter for Chile's mines, with output up 8% YoY vs a ten
year average of 1.5% YoY.
Outside of Chile quarterly production reports from the major miners have also been beating
analyst expectations. So far producers responsible for ~50% of global mined copper output
have published Q1 results, showing output increased by 10% YoY (200kt) in Q1 2013.
It is important to note the base effect from a weak Q1 2012 has exaggerated supply
performance, particularly at Escondida and Grasberg, and as a result we expect
production supply growth rates over the next six months to slow from Q1. However the
recent data has given the market a taste of what to expect in 2014. A spate of new mine
projects, ramping up over the next twelve months, are expected to see copper supply
growth rates almost double next year, driving an increase in the market S&D surplus.
Copper supply disruptions unusually quiet in Q1…Other than persistent issues at
Collahuasi‟s SAG ball mill, which worsened in April, disruptions in the first three months of
the year were below our modelled expectations of 70kt per month. Disruptions have
increased in Q2, most notably a dramatic pit wall failure at Bingham Canyon (~20kt per
month of disruption), a protracted outage of Collahuasi‟s SAG mill for repairs (~30kt per
month of disruption) and a force majeure declared at Codelco‟s Radomiro Tomic.
Fig 58 Major copper producing regions have provided a protracted period of supply growth in the past twelve months
Source: ICSG, Macquarie Research, May 2013
The world‟s two largest copper mines have both played a role in driving copper supply
growth so far this year. BHP‟s Escondida has been boosted by improving ore grades, while
Freeport‟s Grasberg mine has recovered after strikes dented production this time last year.
The two mines combined have contributed an additional 80kt of copper in Q1 2013,
accounting for almost half of the increase in output reported in results so far.
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Macquarie Research Jiangxi Copper
13 May 2013 28
Fig 59 The world’s largest copper producers have contributed to strong YoY growth in Q1
Source: Company data, Macquarie Research, May 2013
China is playing a vital role in copper supply
Global copper production structure is quite concentrated, with top-10 mined copper
producing countries accounting for ~80% of total output. Chile, China and Peru are three
biggest mined copper producing countries with aggregate production of 8,089kt in 2012,
accounting for 49% of total output. China has taken over from Peru and become the 2nd
largest mined copper producing country since 2010. For refining copper, top 3 producers -
China, Chile and Japan represent 50% of total output. China is the biggest copper
importing country. In 2011/ 2012, it produced 1.4/1.5mnt mined copper but consumed
8.1/8.3mnt, with imports of 6-7mnt p.a.
China is the largest refined copper producer and the second largest mined copper
producer in the world. Jiangxi ranks No.1 in terms of copper production, with refined
copper production representing 21% of total China‟s. Top 10 aggregate output accounted
for 90% of total China‟s output.
Mine supply growth and the impact on the Chinese market…For the most part the
increase in copper mine supply has been exported to China as concentrates, in order to be
converted into metal by Chinese smelters. As shown in Figure 59 Chinese copper
concentrates have increased by an average of 30% YoY in the previous six months,
allowing Chinese copper smelters to increase domestic refined supply by 11% YoY.
Domestic smelter production above 6Mt on an annualised basis has cushioned the impact
improving Chinese demand has had on inventory levels, and reduced the need for higher
refined copper imports (allowing LME stocks to rise).
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Macquarie Research Jiangxi Copper
13 May 2013 29
Fig 60 Chinese smelters have absorbed the increase in ex-China’s supply growth, while ramping up refined copper production
Source: NBS, CNIA, Macquarie Research, May 2013
Copper demand – eye for China
Copper demand growth is not the major driver for copper price surge in the past. Over the
past decades, global copper consumption has only seen a CAGR of 3%, well below other
metals. Refined copper consumption reached 20mnt in 2012, slightly dropping by 0.2% y-y.
Yet, China is leading the global copper consumption pace with 12% growth CAGR in the
past 10 years while in the world ex-China, the growth CAGR is -1% in 2002-2012. China is
now the biggest copper consumption country, accounting for 41% of global copper demand
(vs. 15% in 2001)
Fig 61 China keeps driving copper demand growth and grabbing market share
Source: Wood Mackenzie, Macquarie Research, May 2013
China continues to be important market to focus on in 2013-14F
While China has been 88% of the total global copper demand growth in the past 10 years,
we believe it is set to remain the dominant force for growth over the next 5 years. In
contrast, developed world demand remains well below peaks of the middle of last decades.
Yet, China‟s copper demand growth slowed down from 2012 to only 2%. We have long
made the case that growth rates must slow down as the China model matures. Our
commodity team modelled 6% CAGR over the next 5 years for China copper demand, vs.
13% CAGR in the past 5 years.
0
4000
8000
12000
16000
20000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
kt
North America Japan Europe India Asia others Other China
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Macquarie Research Jiangxi Copper
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Fig 62 World copper consumption Fig 63 China Copper consumption
Source: MGS, CRU, Macquarie Research, May 2013 Source: MGS, CRU, Macquarie Research, May 2013
Chinese demand has been robust, but not stellar…
Loose monetary policy and acceleration in investment has driven a rebound in Chinese
copper consumption, in line with our base case expectations. In the near term, we expect
the market is still underestimating Chinese growth; however, the likelihood of a return to
double-digit copper consumption growth (which would be needed to balance the market)
has diminished considerably.
Inflation headwinds are likely to force tighter credit availability in the medium term;
meanwhile a new leadership policy focussed on reform from the investment driven-model
is likely to see Chinese consumption growth rates peak this year.
Fig 64 China copper demand: infrastructure and construction demand expected to contribute in 2013
Source: NBS, Macquarie Research, May 2013
1692017435
179741801017454
18969
1990119844
20542
21522
22469
-0.4
3.0 3.1
0.2
-3.1
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2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f
kt
World copper consumption y-y %
3780 39304600
5180
6550
7300
8103 82898828
93589919
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kt
China copper consumption y-y %
17%
13%
26%
11% 11%
2%
6% 6% 6% 6% 6%5%
0%
5%
10%
15%
20%
25%
30%
% growth in Chinese copper demand
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Macquarie Research Jiangxi Copper
13 May 2013 31
Fig 65 2001: World refined copper consumption map Fig 66 2012: China became biggest copper consumer
Source: ICSG, Macquarie Research, May 2013 Source: ICSG, Macquarie Research, May 2013
Global copper drivers vs. China copper demand drivers
From a global perspective, copper usage is concentrated in the electrical& electronic and
construction industries, while for China, copper demand is highly leveraged to
infrastructure spend (it represents 39% of total copper demand in China); power cable
plays the biggest part by accounting for 18%, making it the biggest copper demand driver,
followed by building wire (13%) in construction use and air conditioners (8%) in general
consumer.
Fig 67 China copper demand breakdown
Source: ICSG, Macquarie Research, May 2013
Steepening cost curve supports long term price
Price is still well above cost curve: Copper is still the one commodity where the price is
well-above the cash cost of production. Our analysis suggests that while the 90th
percentile – the traditional yardstick of commodities analysts – remains sub-$5,000/t, the
100th percentile of the cost curve is nearer $6,600/t. Moreover, this steep gradient at the
top end of the curve leads to a sharp „hockey stick,‟ one which is also likely to widen given
the position of new supply.
Under a supply surplus situation, copper prices themselves have some downside risk
associated until the larger rational producers start to see losses being generated.
Japan
8%
Other
8%
North America
19%Asia (Excluding
Japan and
China and
India)
17%
India
2%
China
15% Europe
31%
China
41%
Other
7%North
America
10%
Japan
5%
Europe
18%India
3%
Asia
(Excluding
Japan and
China and
India)
16%
Transport7%
Construction21%
Infrastructure39%
General consumer
19%
Industrial equipment
8%
Others6%
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Macquarie Research Jiangxi Copper
13 May 2013 32
Fig 68 The major listed plays cash costs are still well below the current copper price
Source: Bloomberg, Macquarie Research, May 2013
Both capital cost and operating costs continue to increase
On a medium-to-longer-term basis, one factor which limits severe downside to the copper
price is cost inflation. Compared to aluminium, where average industry costs have risen
just 5% over the 2006-2011 period, for copper average costs rose 16%.
Indeed, compared to 2003, average copper production costs were 3.5 times higher, driven
by plethora of reasons. These include quasi-cyclical factors such as escalation of
equipment cost and oil prices, but also some structural elements like falling run of mine
grades, water shortages (a need to desalinate) and increased environmental costs.
However, price gains have matched this, such that copper continues to trade well above
the 90th percentile of the cost curve.
Fig 69 Global Cost Curve - Chinese dominate the higher end and costs keep increasing
Source: Bloomberg, Macquarie Research, May 2013
0
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Sandfire
Ziji
n M
inin
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ngxi C
opper
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et M
inin
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itom
o M
M
PanA
ust
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fagasta
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eport
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uois
e H
ill
Oz M
inera
ls
First Q
uantu
m
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ata
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psto
ne M
inin
g
Rio
Tin
to
BH
P
Lundin
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ing*
Anglo
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erica
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ls
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ncore
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ato
r M
inera
ls
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ys
Cash Cost per/tonne
0
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1980 1984 1988 1992 1996 2000 2004 2008 2012
$/t
Price Lower Quartile
Median Upper
Ninth Decile 100th Percentile
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Macquarie Research Jiangxi Copper
13 May 2013 33
Fig 70 Rapid copper cost inflation in recent years Fig 71 … but this has been matched by price hikes
Source: Wood Mackenzie, Macquarie Research, May 2013 Source: LME, Wood Mackenzie, Macquarie Research, May 2013
New mines are likely at lower grade and at the higher end of the cost curve
With degradation in volumes of existing major copper mines, a constant stream of new
organic growth projects would be required. The top 10 mines in the world in 2005 produced
over 5 million tonnes copper ,while the same mines are expected to produce just under 4
million tonnes in 2012.
Yet, compared with peer commodities, where new projects tend to enter at the middle of
the cost curve (in particular iron ore and aluminium), newer copper projects are much more
likely to enter towards the top end.
Chinese copper mine output continues to grow, rising 20% YoY over the 2012. We believe
the majority of new supply this year has operating cost in excess of $6,000/t – right at the
very top of the curve. Many of the new projects in areas such as Shandong and Xinjiang
province have open pit grades below 0.3% copper or underground grades well below 1%,
necessitating high opex. Also, while existing Chinese projects have benefitted from large
by-product credits – particularly from gold – this is not the case in many new operations.
International projects are facing a similar scenario in terms of average grades. We expect
the average head grade of new copper projects in the 2012-2017 period to be 0.51%Cu,
compared with 0.73%Cu in 2006-2011 and 1.10%Cu in 2000-2005. In particular, a
number of large projects in Africa (Frontier ([restart], Konkola Deep and North) are set to
see costs above $5,000/t, while others in Latin America may enter in the $6-7,000/t range.
With incentive prices for a decent proportion of new copper projects coming in above
$6,500/t, and average LOM head grades trending below 0.5%Cu, we expect a further
above-inflation rises in the long-run price expectations into the middle of the decade.
0
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$/lb
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Median
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Copper costs Index of copper operating and capital costs
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ind
ex:
2003 =
100
Capital costs Operating costs LME price
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Macquarie Research Jiangxi Copper
13 May 2013 34
Fig 72 Looking at mine costs in 2012, it is clear to see those commissioned recently come in at the top end
Fig 73 Chinese copper mine output has risen steeply this year – this is expensive supply
Source: Wood Mackenzie, Macquarie Research, May 2013 Source: NBS, China Metals, Macquarie Research, May 2013
Fig 74 Many new ex-China project operating costs are also expensive compared to current incumbents
Fig 75 New copper project supply growth has been lower grades and higher costs, both capex and opex
Source: Company reports, Wood Mackenzie, Macquarie Research, May 2013
Source: Company reports, Wood Mackenzie, Macquarie Research, May 2013
Average mine cash cost in 2012 by year of
commissioning
2000
2500
3000
3500
4000
4500
5000
All mines 1996-2002 2003-2006 2007-2010 2011-12
$/t
on
ne
Monthly Chinese copper mine output
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
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Ja
n-0
3
Ja
n-0
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n-0
5
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n-0
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n-0
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n-0
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n-1
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n-1
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n-1
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ton
ne
s
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0
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6000
7000
8000
Boseto
Konkola
Deep
Konkola
Nort
h
Mih
eevskoye
Antu
coya
Tsagaan
Suvra
ga
Akto
gay
Fro
ntie
r
Kapulo
Sentin
el
$/t
on
ne C
u
Weighted average copper project by year of delivery
0
0.2
0.4
0.6
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1
1.2
1.4
1.6
1.8
0 5000 10000 15000 20000 25000 30000 35000 40000
Life of mine capital intensity
Avera
ge h
ead
gra
de
2000-2011
2012-2018f
2000
2001
2002
2004
2005
2006
2007
2008 2009
2010
2011
2012f
2013f
2014f
2015f
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Macquarie Research Jiangxi Copper
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High inventory as major concerns
Surging copper inventory reflects a market surplus and expected to be worsen
Copper exchange inventory has doubled in the past 7 months (three major exchanges
LME, COMEX and SHFE aggregate inventory surged from 430kt in Aug-2012 to 854kt by
the end of Mar-2013).
We believe the copper inventory increase reflects a market that has been in surplus for
much of the past 12 months. Seasonality coupled with improving Chinese demand should
see copper inventory fall in Q2, but without stronger than expected Chinese consumption,
the market surplus is expected to worsen through year-end. We estimate the global market
balance swung from a 300kt deficit in 2011 to a 200kt surplus in 2012, set to remain this
year.
Fig 76 Exchange inventory has doubled in the past 7 months
Fig 77 All major copper-consuming regions have seen inventory increasing
Source: LME, COMEX, SHFE, Macquarie Research, May 2013 Source: LME, COMEX, SHFE, Macquarie Research, May 2013
50
100
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0
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n-0
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n-1
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y-1
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p-1
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p-1
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Ma
y-1
2
Se
p-1
2
Ja
n-1
3
Exchange stocks (mostly LME) Producer stocks
Consumer + Other LME price (RHS)
Usc/lbKt
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Macquarie Research Jiangxi Copper
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Appendices Business models
Jiangxi Copper is both a miner and a smelter. The main copper product is copper cathodes,
which could be further processed or fabricated into copper wire& rods or other copper end-
products; the remaining part of copper cathodes could be directly sold to the market. By
products including gold, silver and sulphuric acid would be generated during smelting and
refining.
Copper concentrate is the raw material to produce copper cathodes. However, due to the
lack of copper resources in China, copper smelting plants in China generally do not have
ability to self-supply copper concentrates. Most of concentrates are imported from rich-
copper countries like Chile, Peru or South Africa.
Jiangxi Copper has highest self-sufficient ratio of copper concentrates in China. 20% of
copper concentrates are produced from their 6 domestic mines and 2 foreign mines, which
would not be producing at least until 2016/17F
Fig 78 Jiangxi Copper: Copper production value chain
Source: Company data, Macquarie Research, May 2013
Fig 79 Jiangxi Copper: SWOT analysis
Strength Weakness
Biggest copper producer with highest copper reserves in China
High self-sufficient ratio
Low cash cost
Large smelting capacity benefit from TC/RC hike
High gold and silver content
Domestic mining capacity has reached bottleneck
Two foreign mines continue to be delayed
Opportunity Threat
Grid investment accelerated
Potential oversupply globally implies TC/RC upward trend
Tightening liquidity from global perspective
Mining cost increase
Source: Macquarie Research, May 2013
20% 30% 10% 40%
End-products
Raw materials
By-products
Copper wire& rodsOther copper end products
(copper foil, belt, etc)
Copper cathodes Gold Silver Sulfuric acid
Self-produced
copper
concentrates
Imported copper
concentrates
Domestically
purchased copper
concentrates
Purchased copper
scrap and copper
blister
Smelting and refining
Processing and
fabricating
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Macquarie Research Jiangxi Copper
13 May 2013 37
Jiangxi Copper (358 HK, Neutral, Target Price: HK$15.00) Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E
Revenue m 75,843 87,170 80,464 88,480 Revenue m 158,006 167,634 170,154 175,780 Gross Profit m 3,569 3,346 3,088 2,664 Gross Profit m 7,435 6,434 5,124 5,484 Cost of Goods Sold m 72,274 83,824 77,376 85,816 Cost of Goods Sold m 150,570 161,199 165,031 170,297 EBITDA m 4,006 3,671 3,389 3,117 EBITDA m 8,345 7,060 5,994 6,460 Depreciation m 600 785 725 931 Depreciation m 1,249 1,510 1,790 1,975 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 3,406 2,886 2,664 2,186 EBIT m 7,096 5,549 4,204 4,485 Net Interest Income m -399 -281 -259 -293 Net Interest Income m -832 -540 -564 -588 Associates m 5 0 0 0 Associates m 9 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m 3,011 2,605 2,404 1,892 Pre-Tax Profit m 6,273 5,009 3,639 3,897 Tax Expense m -492 -426 -393 -309 Tax Expense m -1,026 -819 -595 -637 Net Profit m 2,519 2,179 2,011 1,583 Net Profit m 5,248 4,190 3,044 3,259 Minority Interests m -37 -32 -30 -23 Minority Interests m -78 -62 -45 -48
Reported Earnings m 2,481 2,147 1,981 1,560 Reported Earnings m 5,170 4,128 2,999 3,211 Adjusted Earnings m 2,481 2,147 1,981 1,560 Adjusted Earnings m 5,170 4,128 2,999 3,211
EPS (rep) 0.72 0.62 0.57 0.45 EPS (rep) 1.49 1.19 0.87 0.93 EPS (adj) 0.72 0.62 0.57 0.45 EPS (adj) 1.49 1.19 0.87 0.93 EPS Growth yoy (adj) % -21.5 -20.2 -20.2 -27.3 EPS Growth (adj) % -21.5 -20.2 -27.3 7.1
PE (rep) x 8.7 10.9 15.0 14.0 PE (adj) x 8.7 10.9 15.0 14.0
EBITDA Margin % 5.3 4.2 4.2 3.5 Total DPS 0.50 0.40 0.29 0.31 EBIT Margin % 4.5 3.3 3.3 2.5 Total Div Yield % 3.8 3.1 2.2 2.4 Earnings Split % 48.0 52.0 48.0 52.0 Weighted Average Shares m 3,463 3,463 3,463 3,463 Revenue Growth % 34.9 6.1 6.1 1.5 Period End Shares m 3,463 3,463 3,463 3,463 EBIT Growth % -15.4 -21.8 -21.8 -24.3
Profit and Loss Ratios 2012A 2013E 2014E 2015E Cashflow Analysis 2012A 2013E 2014E 2015E
Revenue Growth % 34.9 6.1 1.5 3.3 EBITDA m 8,345 7,060 5,994 6,460 EBITDA Growth % -12.4 -15.4 -15.1 7.8 Tax Paid m -1,026 -819 -595 -637 EBIT Growth % -15.4 -21.8 -24.3 6.7 Chgs in Working Cap m 625 -1,165 -335 -654 Gross Profit Margin % 4.7 3.8 3.0 3.1 Net Interest Paid m -832 -540 -564 -588 EBITDA Margin % 5.3 4.2 3.5 3.7 Other m -231 3,056 0 0 EBIT Margin % 4.5 3.3 2.5 2.6 Operating Cashflow m 6,882 7,591 4,500 4,580 Net Profit Margin % 3.3 2.5 1.8 1.9 Acquisitions m 0 0 0 0 Payout Ratio % 33.5 33.5 33.5 33.5 Capex m -2,647 -6,361 -6,840 -4,500 EV/EBITDA x 5.6 6.7 7.8 7.3 Asset Sales m 0 0 0 0 EV/EBIT x 6.6 8.5 11.2 10.5 Other m -516 0 0 0
Investing Cashflow m -3,163 -6,361 -6,840 -4,500 Balance Sheet Ratios Dividend (Ordinary) m -1,731 -1,731 -1,382 -1,004 ROE % 12.6 9.4 6.5 6.7 Equity Raised m 0 0 0 0 ROA % 9.7 6.8 4.8 5.0 Debt Movements m 6,295 1,267 1,277 1,287 ROIC % 13.5 10.1 6.8 6.6 Other m 908 0 0 0 Net Debt/Equity % 4.6 12.0 19.4 20.4 Financing Cashflow m 5,472 -464 -106 282 Interest Cover x 8.5 10.3 7.4 7.6 Price/Book x 1.1 1.0 1.0 0.9 Net Chg in Cash/Debt m 9,154 766 -2,446 363 Book Value per Share 12.4 13.1 13.6 14.2
Free Cashflow m 4,235 1,230 -2,340 80
Balance Sheet 2012A 2013E 2014E 2015E Cash m 16,678 17,444 14,998 15,361 Receivables m 9,444 10,019 10,170 10,506 Inventories m 15,936 17,061 17,467 18,024 Investments m 3,069 3,069 3,069 3,069 Fixed Assets m 21,228 25,635 30,684 33,209 Intangibles m 0 0 0 0 Other Assets m 11,733 12,020 12,095 12,263 Total Assets m 78,088 85,248 88,483 92,432 Payables m 11,647 12,470 12,766 13,173 Short Term Debt m 12,417 17,000 17,999 18,997 Long Term Debt m 618 20 22 23 Provisions m 139 139 139 139 Other Liabilities m 9,404 9,670 9,947 10,234 Total Liabilities m 34,226 39,299 40,872 42,566 Shareholders' Funds m 41,043 43,924 45,918 48,054 Minority Interests m 1,088 643 688 737 Other m 1,731 1,382 1,004 1,075 Total S/H Equity m 43,862 45,949 47,611 49,866 Total Liab & S/H Funds m 78,088 85,248 88,483 92,432
All figures in Rmb unless noted. Source: Company data, Macquarie Research, May 2013
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13 May 2013 38
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 March 2013
AU/NZ Asia RSA USA CA EUR Outperform 45.12% 53.24% 50.00% 40.70% 62.98% 43.30% (for US coverage by MCUSA, 10.55% of stocks followed are investment banking clients)
Neutral 41.52% 28.01% 41.43% 55.01% 32.60% 34.10% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients)
Underperform 13.36% 18.74% 8.57% 4.29% 4.42% 22.60% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)
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