Procyclical trends have become a hot topic in recent market discussions. The soaring copper price has also driven up the stock prices of related listed companies. Among them, Zijin Mining (601899.SH), with gold and copper as its dual main businesses, has performed far better than other major companies in the gold and copper resources sector.

Since the beginning of this year, Zijin Mining's stock price has risen by 104%, corresponding to a market value increase of over 110 billion yuan. Its total market value of A and H shares has also reached 217 billion yuan.

The sharp rise in copper prices under the superposition of dual attributes

As one of the important raw materials for bulk industry, copper is often given dual attributes by the market, namely, its inherent commodity attributes and the derivative financial attributes related to the US dollar. From the commodity attribute perspective, the copper price will be affected by the supply and demand relationship; from the financial attribute perspective, due to its negative correlation with the US dollar, its price will also be affected by fluctuations in the US dollar. In most cases, the copper price mainly reflects its commodity attributes, but the recent sharp fluctuations in the US dollar have also played a catalytic role in the copper price.

From the demand side, since the beginning of this year, economic stimulus policies in various countries have continued to ferment, driving sustained growth in copper demand. Taking China's automobile industry as an example, the Ministry of Industry and Information Technology stated that in the first three quarters of this year, China's automobile production and sales volume reached 16.96 million and 17.12 million respectively, down 6.7% and 6.9% year-on-year; with the continuous consolidation of the effectiveness of normalized epidemic prevention and control, it is expected that China's automobile industry will maintain positive recovery growth next year.

Replenishing inventories will also boost the industry's demand for copper. This year, due to the impact of the epidemic, the industry has missed the opportunity to replenish inventories in the spring, resulting in a generally weak supply and demand situation, which led to a rapid decline in copper prices at the beginning of the year. Later, as the epidemic gradually came under control, various industries gradually resumed work, the operating rate increased, demand was gradually released, and copper prices gradually stabilized and rebounded. By the end of November this year, the global copper inventory of the three major exchanges was 285,000 tons, a further decline compared to October, and at a relatively low level in the past decade. This can also be verified by refined copper inventories. Wind data shows, As of August this year, refined copper inventories were 1.254 million tons, at the historical bottom in recent years. The low level of global copper inventories will also stimulate future copper prices.

From the supply side, there is a short-term supply shortage. According to Wood Mackenzie data, This year, the global increase in copper mine production capacity is -187,000 tons. 。 At the same time, there are many uncertain factors affecting medium- and long-term new and expansion projects in the short term. At present, large copper mines are concentrated in South America and Africa, with Chile and Peru accounting for 40% of copper mine production. Although copper mine production in the two countries has continued to rise month-on-month since June, the continued situation of the epidemic in South America has still resulted in weaker copper mine production than in the same period last year.

Under the trend of a weak US dollar, the financial attributes of copper have increased copper price volatility. Since the beginning of this year, the Federal Reserve and the European Central Bank have stimulated economic growth through balance sheet expansion and other monetary easing policies to maintain ample liquidity. In August, the Federal Reserve confirmed a shift to an average inflation target, and the ultra-long-term loose policy is expected to continue, thus supporting the prices of cyclical commodities due to the weak US dollar situation.

Under the superposition of dual attributes, copper prices have fluctuated sharply recently. Currently, the spot settlement price of LME copper has reached US$7674.5 per ton, up 24.67% from US$6156 per ton at the beginning of the year, at the mid-point of its ten-year historical level, and up 66.2% from its low point of US$4617.5 per ton in the middle of this year.

Zijin Mining mainly engages in the exploration and development of copper, gold and other mineral resources worldwide, and has a relatively complete related non-ferrous metal industry chain. Among them, the company has eight large operating mines in overseas regions such as Papua New Guinea and the Democratic Republic of Congo. The Kamoa copper mine in the Democratic Republic of Congo and the Timok copper-gold mine in Serbia, which are expected to be put into production in 2021, are both world-class, super-large, high-grade mines under construction.

The gold business is one of the main profit contributors of Zijin Mining. As of the first half of this year, the company's gold reserves have exceeded 2,000 tons, making it the listed company with the largest gold reserves in China. According to the "2019 China Mineral Resources Report", the national gold reserves in 2019 were 13,600 tons, while the company's gold reserves were about 1,887 tons, about 13.83% of the national total. According to the China Gold Association, the national output of mineral gold in 2019 was 314.37 tons, while the company's output was 40.8 tons, about 12.98% of the national total. Similar to gold and copper, gold also has financial attributes. Affected by factors such as the US dollar and inflation, gold prices have continued to rise this year. The current London spot gold price has reached US$1762.55 per ounce, although it has fallen from its previous high, it has still increased by 15.73% this year.

The copper business is the main focus of Zijin Mining's future. As of the first half of this year, the company's copper metal reserves exceeded 60 million tons, making it one of the largest copper reserves and producers in China. According to the "2019 China Mineral Resources Report", the national copper reserves in 2019 were 114 million tons, and the company's copper reserves were about 57 million tons, about 50.03% of the national total. According to the China Nonferrous Metals Industry Association, the national output of mineral copper in 2019 was 1.6278 million tons, and the company's output was 369,900 tons, about 22.73% of the national total.

Counter-cyclical investment has helped Zijin Mining secure its leading position among domestic copper mining companies. Since 2014, Zijin Mining has continuously invested in and acquired high-quality copper resources at home and abroad at the low point of copper prices, increasing its copper mine equity resources by 35.21 million tons, enabling it to obtain substantial returns during the current procyclical period of copper and gold mines. This can also be seen from the growth rate of its related equity resources. From 2015 to 2019, Zijin Mining's copper mine equity resources increased from 2,346.4 tons to 57.254 million tons, with a compound annual growth rate of 24.98%; gold mine equity resources increased from 1,261.28 tons to 1,886.87 tons, with a compound annual growth rate of 10.59%, and the company's equity resource reserves continued to grow.

Zijin Mining's previous low-price bottom-fishing equity resources have yielded results in the current procyclical period.

In the first three quarters of this year, Zijin Mining's operating revenue was 130.4 billion yuan, an increase of 28.34% year-on-year; its net profit attributable to shareholders was 4.572 billion yuan, an increase of 52.12% year-on-year. It is worth mentioning that the company's net profit in the third quarter of this year was 2.151 billion yuan, an increase of 86.65% year-on-year, setting a new historical record for the company.

An important reason for the significant improvement in Zijin Mining's performance is its ability to achieve high-volume output. Because most of the company's equity resources were acquired before 2018, the development work of the related mines has been completed. At the current high point of cyclical commodity prices, especially copper prices, the company is expected to achieve rapid volume increase at the mine end, while ensuring the continued explosive growth of its performance in the future procyclical period. Taking the first half of this year as an example, Zijin Mining's mineral copper production was 230,700 tons, an increase of 34.85% year-on-year; mineral gold production was 2.02 tons, an increase of 5.93% year-on-year. For 2021, the company also stated that it is accelerating the rapid realization of its resource advantages, and a number of world-class super-large copper mines will be completed and put into production in the future, including the Xizang Julong Copper Mine, the Kamoa Copper Mine in the Democratic Republic of Congo, and the Timok Copper-Gold Mine in Serbia, all of which are expected to achieve initial completion and commissioning.

From a valuation perspective, Zijin Mining's current trailing price-to-earnings ratio is 40 times, and its price-to-book ratio is 4.8 times, both at historical highs. However, looking at future performance, based on an estimated 600,000 tons of mined copper in 2021 (year-on-year growth of about 30%, similar to this year's growth) and 4.45 tons of mined gold (year-on-year growth of about 10%, slightly higher than this year's growth), and using the current LME copper spot settlement price of $7675/ton and London spot gold price of $1762/ounce, combined with the company's net profit of 2.151 billion yuan in the third quarter of this year, Zijin Mining's net profit in 2021 is estimated to be around 10 billion yuan. This corresponds to a current P/E ratio of 21 times, which is a mid-to-low level in the past three years. It should be noted that this profit is still estimated based on current copper and gold prices. If copper and gold prices continue to fluctuate significantly in the future, Zijin Mining's performance will see greater changes.