On the expressway passing through the urban area of Longyan and heading to Shanghang, the wife sighed, “These dozens of kilometers of roads are literally run through by bridges and tunnels.” We are going to attend the 21st Annual General Meeting of Zijin Mining. In terms of economic strength, Shanghang has turned into a phoenix in this century. Shanghang, which is located in the remote mountainous area of western Fujian, now ranks first in Longyan City in terms of finance and seventh in the province in terms of economic strength. The changes of Shanghang in this century are actually a reflection of the evolution of Zijin. Zijin’s direct tax contribution to Shanghang Finance is close to 30%, and its indirect contribution may double.
At and after the shareholders meeting on May 17, I asked several people from the company’s management, including Chairman Chen Jinghe, for questions or information. We also visited the Zijinshan Mine. Although this survey cannot be said to have answered all of my questions (after all, these executives are busy with their affairs), and we are continuing to track and discuss, we can say with great certainty that our understanding of Zijin Mining has gained considerable depth. , thus further consolidating the investment positioning as our long-term heavy position.
Before sharing our findings, it is necessary to reiterate the basic logic of our investment model. These logics determine the focus of our research:
1. The industries we choose and the main business areas should have huge long-term demand increments.
2. The supply in this field cannot keep up with the demand for a long time (at best, it can only be a long-term tight balance).
3. The competitiveness of the selected target continues to improve (market share, technological innovation, cost control, nth curve).
4. The core and staying power of one’s own competitiveness come from the character quality, strategic vision and operational ability of the core management of the enterprise, as well as from the scientific and healthy management, culture and system of the enterprise.
5. Do not seek to predict performance (because one is not a professional, and secondly, it is impossible to grasp the data in a complete and timely manner).
6. The specific data and examples sought to obtain are only used as arguments to confirm our basic investment logic.
The history of Zijin is a history of growth in which adversity broke through and then came to the fore. About 40 years ago, a small exploration team in western Fujian under the leadership of Chen Jinghe overturned the negative conclusions drawn by higher-level exploration teams three times in the past. A quarter of a century ago, Zijin Mining unveiled a big blast on Zijin Mountain, and under the leadership of Chen Jinghe, began to move from exploration to mining. The grade of gold and copper processed by this venture mine is only above 0.15 g/ton, the selected grade is the lowest in the domestic industry and has reached the international advanced level. Starting from this poor family and poor mine, Zijin Mining has made an ambitious three-step approach, initially leading the domestic gold industry. Then compete for the crown of the domestic metal mining industry. As far as copper is concerned, Zijin’s output was far below that of Jiangxi Copper a few years ago. By the end of 2021, Zijin’s equity copper reserves were almost 2.5 times that of the second-ranked domestic miner, and its equity output also exceeded the second-ranked 40%. The company’s pre-increased copper output in 2022 will be higher than the total production capacity of Jiangxi Copper. The company’s third step isn’t the hardest, but it’s certainly the biggest in terms of the magnitude of the shift that needs to be made. The company’s goal is to rank among the advanced ranks of international mining groups, and its clearer positioning is to become a “green high-tech super-first-class international mining group”. In the past twenty-five years, let alone forty years, I am afraid that even Chen Jinghe himself did not expect it. From a rear-view point of view, one cannot help but sigh at the striking similarity in the development history of Zijin Mining and LONGi Green Energy.
Of course, what makes more sense as an investor is the outlook for the future. In this regard, we focus on four aspects
First, Zijin’s growth and its global mining status
Second, Zijin’s low-cost advantage
Third, the nth curve of Zijin
Fourth, Zijin’s people, culture and system
First, Zijin’s growth and its global mining status
It’s perfectly normal for Zijin to be less resilient than some other targets for months or even a year. Since our model is long-term holding, the ratio should be long-term winning odds and odds. Zijin’s long-term safety is high year-on-year, which should be no objection. Long-term odds will also be good. From the perspective of Alpha, its revenue growth is far ahead in the world’s first echelon, and the increase in reserves and capacity construction of major minerals is also among the best. Moreover, copper is a mineral with huge demand and relatively scarce global reserves.
Second, Zijin’s low-cost advantage
Zijin’s high growth is not achieved by borrowing heavily. The company’s total assets in 21 years increased by 134% compared with 17 years, while the asset-liability ratio decreased by 2.4 percentage points in the same period. (SeeHuating Chuanzi’s analysis of Zijin Mining’s balance sheet ) Let’s look at the average cost of its main product, copper. 2022Q1 does not include Kamoa is 18,305 yuan a ton. The cost is significantly lower if Kamoa is included. Even if a mine like Zijinshan has been mined for 25 years and has a very low grade, the production cost in 2022Q1 is about 18,000. The question is how did Zijin Mining achieve its comprehensive low-cost advantage?
Our research identified the following factors:
1. Scale effect: Growth highlights the dilution of fixed costs, which is particularly prominent in asset-heavy industries such as mining.
2. Process innovation: The company has made a lot of attempts in this regard. Take Zijinshan Mine, for example, “According to the fact that the concentrator’s geographical location is relatively low, open the patio in the open-pit mining field, and transport the ore to the patio by dump trucks nearby, slide down the patio by its own weight, and then pass through the flat tunnel from the bottom of the patio. Electric locomotives, belts, dump trucks, etc. transport the ore to the copper ore dressing plant for processing. The use of patio transportation not only shortens the transportation distance and saves transportation costs, but also the drop of the patio is as high as more than 100 to 300 meters. In the process of falling, it is a natural crushing process due to the action of gravity, and this mode of transportation can be described as killing two birds with one stone.”
3. Reasonable outsourcing: The company not only relies heavily on outsourcing in the mine development stage. In the production process, the mining links (shovel, loading, and transportation) are also outsourced. Excavation is relatively low-tech in terms of exploration, production scheduling, and mineral processing.
4. Excellent operation: Most projects are put into production ahead of schedule. About 75% of Kamoa’s budget has been implemented as planned. Although the Julong Mine has an additional budget of about 12%, the production capacity can be increased even more.
5. Smart mergers and acquisitions: According to the statistics of securities companies, the mines acquired by the company overseas and domestically are often much lower than those of friends in terms of the cost per ton of reserves. A golfer said that the executives of Hunan Gold praised Zijin and Chen Jinghe in private, saying that if we bought a mine for 2 billion yuan, “they would buy it for 200 million yuan.” And after the completion of the project acquisition, re-exploration or process improvement was carried out. And from time to time to increase reserves or production.
6. Low financial cost:
As of the end of 2021, the company’s interest-bearing debt is about 83.5 billion, with an interest-bearing debt ratio of 32.8%. As of March 31, 2022, the balance of corporate bond financing instruments totaled 22.8 billion yuan, including medium-term notes of 10 billion yuan, ultra-short-term financing of 2 billion yuan, corporate bonds of 5.5 billion yuan, carbon neutral bonds of 300 million yuan, assets 5 billion yuan in support notes. The company’s average financing rate is only 3.6% (generally based on LIBOR+40 BP), which is even lower than some large central enterprises. This is not only because the company’s financial credit is good, but also because the company has stricter requirements on underwriters in the issuance of corporate bonds, and has a better grasp of the window period.
Third, the nth curve of Zijin
Since it is looking at the long-term development potential, the second, third and even more curves are very important. The speed at which Zijin has entered the field of renewable energy in the past two years is obvious to all.
First of all, it is related to the company’s efforts to develop copper and zinc resources. We initially focused on Zijin because of its position in the copper mining industry. With 3Q acquired last year, Laguo Cuo, which was recently acquired, and Manono, which plans to become a shareholder, the company’s equity lithium resources have ranked 10th in the world and 3rd in China. If the potential of Catamba, which has excellent potential is still being explored but has not formed reserves, is included, Zijin’s position in the field of lithium mines may jump two or three places in another year or two. Salt lake development is known to be more than four times as expensive and more than three times as long as mine development. Both Manono and Catamba are high-quality hard rock lithium deposits.
The company also strategically decided to enter “lithium iron phosphate, electrolytic copper foil, high-performance alloy materials”, that is, to extend to the further downstream fields of primary smelting. The company’s current gross profit margin is somewhat abnormal. The gross profit of mineral products is comparable to that of Maotai, but the smelting is meager. On the one hand, the company’s smelting is required by the local government of the mine, and on the other hand, it is also in order not to be stuck in the neck at certain times. If it can develop a world in deeper processing, it should help to improve the overall gross profit margin, and it may even develop into another main business with strong revenue and profitability. The company hopes to achieve some production capacity of copper foil by the end of this year. Making materials is exploratory. If the market effect is good, most of them will be made by yourself, such as lithium iron phosphate or other materials, but it is impossible to convert all of them into materials.
The company will vigorously develop renewable energy in its own mines. In China, this type of development should have certain economic advantages, at least not having to pay land rent, and possibly lower grid connection costs. Some regional power grids are less meaningful than possible. The company’s current priority is to achieve green mines, that is, carbon reduction. Low-carbon minerals will increasingly become a hot commodity in the world and a key consideration for ESG ratings. In fact, it will be very helpful for the company to further strengthen its low-cost advantage in the future. After all, the current average cost of energy consumption (electricity plus diesel) at the company’s mines accounts for a dozen percent of direct costs.
This time, I also learned that the research on synthetic ammonia is the trump card of the company’s partner Fuzhou University, which can be used for hydrogen storage and as a fuel for heavy trucks, and can also be used as a protective agent and reducing agent in mine processing. Once the technical feasibility is confirmed, the company’s industrial transformation is a strengths.
Fourth, Zijin’s people, culture and system
The mountain is high and the people are the peak: why LONGi Green Energy can stand out from the crowd of photovoltaic companies is also the fundamental reason why Zijin Mining can emerge in many mining companies, including a large number of powerful central enterprises.
We repeatedly examine the quality of the company’s core management (anti-corruption, anti-bureaucratic, hard-working and pragmatic, not arrogant or impetuous, and kind to stakeholders), vision (a few years beyond the present), and Trends, do not deviate from the main business because of the “opportunity” in front of you, do not be distracted by market fluctuations), culture (make the core management’s concept, quality and work style permeate and precipitate in the whole company), system.
After reading Chairman Chen Jinghe’s 22-year congratulations, I once talked about the following thoughts: “It can be observed that Zijin’s philosophy and culture, in addition to internationalization, also focus on the main business without distractions, and gather wealth and people together (“Let more people Zijin Mining ’s existence”), both ambitious and down-to-earth (“high fit” is a phrase Zijin likes to use), neither arrogant nor arrogant (despite challenging the “super-first-class” international corporate goal, despite the “The company with the fastest growth and the largest increment among the leading companies in the global copper mining industry”, Chairman Chen still publicly admitted that Zijin “still has a big gap” with the international leading companies), emphasizing hard work and fully caring for the interests of employees (for Key projects in difficult areas, such as the “construction team” of Julong Mine, will give a portion of the three-year profit as their special reward after reaching production). Zijin is also very likely to be the best ESG company among Chinese mining companies.”
Zijin’s shared culture is commendable:
In addition to the example of the giant dragon above, let me give another example: the mining contract of the Zijinshan Mine was given to Xinhuadu, and it should have been contracted for more than 20 years. Zijin pays the bill every month, and often urges Xinhua to settle the bill for payment. Chen Jinghe said: “We have the concept of common development, which is also the organizational culture of the company. Many of our projects are outsourced, but we treat these workers as our employees and treat them as the main force of production. We have overseas Many enterprises, companies and the local community government have a good relationship, and we don’t need our dominant position to cheat others.”
Zijin’s fighting culture is also outstanding:
“We are very motivated and very hard. The project in Tibet has been suspended for two years and has a series of problems. The highest altitude is 5,300 meters, and the air is exhausted. We have completed and put into operation in one and a half years. People are very admired, very hardworking, and very energetic. An angry team.”
Zijin also advocates “high adaptability”:
“We all come from technology. Technology does not mean that the more difficult the better, but practical and effective issues must be considered. Zijin was originally a county-owned enterprise. Under the background of no capital, no talents and no technology, the enterprise has achieved the current status. The scale of this company is very grounded. The future is a globalized world. We must follow international standards in everything we do, but we can’t copy the Western set. If we are catching up, we will never be able to catch up with others. Great, so we have our own style of play and we are very grounded.”
Zijin attaches great importance to the construction of a scientific management system:
“Zijin has been relatively successful in both joint ventures and mergers and acquisitions. The company has a complete system of research, audit, implementation and management. For example, when acquiring a project, it has thoroughly researched the project before, and has a plan at the time of acquisition. How large is the development? What technical route? The acquisition is successful, there are design institutes and construction personnel, and once it is achieved, it can be implemented very quickly. Like Western mining giants, it takes 5 years for the preliminary research of large projects, and they entrust internationally renowned institutions to do a lot of work Research, of course, their preparation work is higher than our level, but we have our own style of play, our efficiency is very high, every mine will encounter various situations in the architectural design, we do it quickly , After the completion, we adjusted and improved very well, because it is our own research and design, we will solve any problems immediately, without arguing, such bureaucratic problems, the final project is completed, and the level is also very high. Serbia Bol The project, we made all profits within a year after entering. We have technical, management, and institutional aspects. We have a very strong backstage, a backstage for research, design and support, and a strong backstage for services. Zijin’s team Our ability as a collective is very strong, our management model is a concept of systems engineering. Our innovation model is not the same, the basic system of our enterprise is very good, we have realized the separation of ownership and management rights, and it is completely market-oriented. “. If you look at the individual quality of employees, there is no obvious advantage compared to peers, but Zijin’s entire team is very capable.
“The company has developed rapidly and is not chaotic. Our supervision system is very powerful. The supervision system is relatively independent. The directors make decisions at the grassroots level and supervise mutual trust is very important. The board of directors actively accepts the supervision of the board of supervisors. The system is relatively independent, and part of the supervision office is under the supervision of the board of supervisors. Otherwise, what can several members of the board of supervisors do? The board of supervisors is its own work organization, so we emphasize the relative independence, effectiveness, and supervision responsibility of supervision. Supervision system, the company’s overseas development has been relatively successful overall.”
It is true that the supervisory board of a company is not like the common one. It’s impossible for any organization to be free of problems; for a giant enterprise with tens of thousands of people operating on several continents, it’s all too normal for problems to occur, no problem – it’s not normal to fail to detect or cover up problems. A healthy organization must have a scientific, rigorous, flexible and effective internal control mechanism. Attached is an excerpt from the work report of the company’s board of supervisors: “In 2021, organize and complete inspections of three ownership companies, carry out 28 projects such as internal control audits and inspections, and urge and guide 41 ownership companies to submit a total of 275 internal control test reports for various businesses. 1,609 internal control deficiencies have been proposed, 1,459 of which have been rectified and closed, and rectification suggestions have been put forward in response to the risks and management problems found to promote management standardization and improvement. A total of 84 reports were transferred and supervised, 8 cases were investigated and handled, and 7 documents were issued. 1 letter of supervision suggestion was issued, 25 people were given administrative sanctions, and 16 people were admonished. At the same time, it strengthened the guidance and evaluation of the internal control evaluation work of the ownership enterprises, and earnestly completed the daily routine such as bidding, business negotiation, contract review and project acceptance. Supervision work.”
in conclusion:
1. The first core judgment of our investment logic is that Zijin Mining has begun to get rid of the cyclical curse of being a traditional mining company. The ups and downs once in a few years, and the ups and downs are bound to be replaced by long-term (decades) uptrends.
2. In the next 5 to 10 years, a new energy enterprise that can truly become a sustainable competitive energy enterprise must be a global multinational enterprise. Markets must be sought globally, resources must be allocated globally, and of course, competition must be faced globally. This competition will be much more complex than it was in the previous 20 years. Because “globalization” is no longer a veritable globalization, but will become a block-based globalization. How to invest in such an environment, how to manage in such an environment, and how to coordinate the overall situation in such an environment will face unprecedented challenges. Zijin is responding to this challenge well.
3. In addition to the relative certainty of long-term alpha, the valuation of Zijin becoming an energy metal stock and becoming a global ESG qualified white horse stock is bound to increase and stabilize at a level significantly higher than the current valuation (PE and PB combined).
It’s full of praise, but we’re doing investment research rather than writing lyrical prose, so we’re also keeping our eyes open for any major possible downsides. For example, the company’s interest-bearing liabilities and financing rate data are not provided by the company, but requested by me. There are two disadvantages that can be found so far, or relatively inability to add points:
1. Although Zijin’s direct + indirect interests in Kamoa exceed Ivanhoe’s, the latter is based on a dominant position in production and operation. Kamoa’s high productivity, despite its taste, is clearly inseparable from Ivanhoe’s good management.
2. At present, compared with international non-ferrous mining giants, whether they are multi-mineral or mainly copper and lithium mines, Zijin’s gross profit margin and net profit margin are quite different. Zijin obviously still has many aspects to catch up. Fortunately, I don’t need to say, Chairman Chen Jinghe has already taken the initiative to admit, and the company is already doing things systematically.
The logic of our research has been stated at the beginning, so it is likely that the information some people are looking for is not provided here. However, for us, this is the first time to participate in Zijin’s annual general meeting, and we should have a fifth and sixth time.
By the way: As of May 6, 2022, the number of institutional shareholders of Zijin has increased significantly year-on-year, while the number of individual shareholders has decreased significantly.
(Because I went to Longyan for the first time, I traveled for two days after attending the meeting, and then I participated in Longjing’s shareholders meeting. I only returned on Friday night. After that, I still need to confirm some data with the company, so it is late until now.)
#2022 General Meeting of Shareholders Research News#
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