Zijin Mining: Leading China's Next Golden Age
Prior to 2002, the gold market in China was tightly regulated, from production of the precious metal to its retail distribution. It was not until full membership of the World Trade Organisation (WTO) in December 2001 that the Chinese government began encouraging investment in the industry, resulting in the modernisation of equipment and technology and in improvements of local mining expertise. Despite this late start, today China is the world's largest gold producer and second-largest consumer. In fact, in order to cope with the past decade's growing domestic demand, China's total gold mine output has risen 84% to reach a new record of 313.98 tons in 2009. The champions of China's gold industry have risen to the challenge of increased demand, have adapted, and as a result, have expanded rapidly.
In 1992, Zijin Mining Group, formerly known as Fujian Province Shanghang County Mining Company, had 76 employees. Production was a mere 8.05 kg of gold, from a total asset base of USD 683,000. Realised sales equaled USD 307,000, which generated profits of only USD 8,800. In 2009, twenty years later, its output had risen to 75.37 tons of gold, equivalent to 12% of China's total goldmine output. Total assets expanded to USD 4.34 billion, as did sales revenues which increased to USD 3.068 billion (or 36% of all China's corporate gold revenue). Net profits achieved astounding gains-rising to USD 593 million-causing the firm's net equity to reach 3.16 billion.
Zijin is now China's largest gold producer as well as its largest owner of metal-mineral resources and its third-largest producer of copper. Zijin Mining's other accolades include ranking 243d among the Financial Times' Global Top 500 Companies, listing in the top 10 for gold producers worldwide and becoming the world's fourth-largest gold mining company by market capitalisation, behind only Barrick, Goldcorp and Newmont.
Going (not only) for gold
There are many factors, both internal and external, that have played a role in Zijin's outstanding operational and financial performance of the last decade. While the substantial increase in the price of gold, the under-exploration of the metal within China and domestic government support are all relevant, other success factors deserve greater attention.
Zijin is characterised by its large, rapidly growing production capacity along with its steady increase in diversified resources. Resources are obtained, both through acquiring reserves within China and through the expansion of asset holdings overseas.
As a result of its well-grounded investment plan in exploration-revisited annually by management-the company has been transformed into one of China's largest owners of metal-mineral resources, with new reserves acquired every year for the past decade. Zijin emphasises strategic gold and copper assets, although it maintains an assortment of mineral holdings as its geological exploration continues to produce new findings. Successful discoveries have converted Zijin into a truly diversified precious metals and nonferrous metals player (see table below).
The Group has also made a strong push to constantly increase its production capabilities and scale, both through organic expansion and via mergers and acquisitions. In 2003, Zijin moved ahead of its competitors, acquiring a number of gold/copper mines in China before the commodities boom and the resulting increase in metal prices. This enabled the company to consistently increase its output since 2004 amid the upward movement in metal values. Although the commodity boom subsequently subsided, Zijin has nonetheless been able to realise profit margins much higher than the industry average. Through growing sales volumes, the company has been able to raise its earnings despite the difficult environment for commodity producers.
Zijin has also progressively accelerated its international expansion and is constantly improving its ability to make international deals. The company spent USD 300 million over the past five years in eight overseas projects. Examples include the strategic acquisition of a 75% stake in ZGC, the largest gold producer in Tajikistan, as well as the purchase of Peru's Rio Blanco copper and molybdenum mine and a zinc and lead mine from Russia's Tuva. More recently, Zijin agreed to pay USD 501 million for Indophil Resources NL to gain a stake in Southeast Asia's largest untapped copper and gold deposit.
Despite the size of the Indophil deal, Zijin still pursues smaller projects to bolster its reserve base. In April 2010 the firm announced a USD 18.24 million investment in Inter-Citic Minerals, a junior Toronto miner. This north American acquisition demonstrates the company's increasing internationalism. Given the firm's exceptional cash flow position, further acquisitions for Zijin are anticipated in Southeast Asia, Africa and Latin America.
Digging deeper for lower costs and finances
Double-digit sales volume growth, coupled with efficient cost control methods to produce favourable unit costs have allowed Zijin to outperform the competition in terms of profitability. In 2009, Zijin's gold bullion production costs were a mere USD 271 per troy ounce, while its production costs of gold concentrate stood at USD 202 per troy ounce-both very competitive when compared to its global peers, especially since Zijin's cut-off point for low grade ores is at less than 1 gram per ton. According to analyst reports, Zijin's mineral production costs are 30% lower than those of its international gold producing peers.
The low production costs enjoyed by Zijin can be partially attributed to less expensive operational requirements for mining firms within China. Although the overall costs associated with the development of new mines-such as those imposed by input expenses and tougher safety regulations-are increasing in China, Zijin's cost differential in China remains substantial. Additionally, gold mines within China are usually open pit (for example, at Zijinshan Gold and Copper mine-Zijin's core mining operation and the largest gold mine in China). In contrast, mines in South Africa and Australia have become increasingly deep, greatly adding to production costs for the firms operating in these locations.
Access to finance has also been a key success factor for Zijin. As part of its expansion strategy domestically and internationally, Zijin listed on the Hong Kong Stock Exchange (2899) in 2003. It was the first mainland gold mining firm to list overseas. The company then decided to issue more shares, and in April 2008 had its IPO on the Shanghai Stock Exchange (601899). In Shanghai Zijin sold 1.4 billion A shares to raise a near equivalent amount of around USD 1.4 billion. These sales of equity, along with low debt holdings and a remarkable financial performance over the years have enabled the company to self-finance further investment in exploration, and to expand both abroad and at home.
Looking ahead
The rising price of gold has greatly benefited firms which mine the precious metal, both within China and internationally. In the long term, China's continued impressive economic growth and the consequent rise in individual income levels will result in the further expansion of China's gold consumption. As gold's appeal increases within China, companies such as Zijin-through its numerous competitive advantages-is set to progressively outperform its international peers in the industry. We are on the verge of China's next golden age, and Zijin will feature prominently in it.
Javier Cuñat, Manager: Sourcing Strategy & KM/Research at the BEIJING AXIS
This article was published in the most recent edition of The China Analyst, May 2010. The China Analyst is a knowledge tool produced by THE BEIJING AXIS for executives with a China agenda. To access The China Analyst, please click here.
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