Zijin mulls base metals spin-off
Zijin Mining Group, one of the mainland's largest gold miners, might spin off its growing base metals business to give a more appropriate valuation for its gold and base metals operations, chairman Chen Jinghe said.
Zijin, which last week reported a 142 per cent jump in full-year profit to 1.7 billion yuan, was also looking to tap into other precious metals, especially platinum and palladium, Mr Chen said.
The Fujian-based company transformed from a pure gold producer when it went public in late 2003 into a metals conglomerate, a move that has helped to drive rapid earnings growth amid soaring metals prices.
Profit contribution from base metals, including copper, zinc and iron concentrates, accounted for almost 30 per cent of Zijin's turnover last year and almost 50 per cent of its net profit, a sharp difference from 2003 when more than 90 per cent of turnover and profit came from gold.
The diversification into base metals has raised questions as to whether the company still deserves a high valuation as base metals producers historically trade at much lower multiples than those of pure gold companies.
Zijin is trading at 23 times this year forecast earnings, based on Friday's closing price, while Jiangxi Copper, the mainland's largest copper producer, is trading at only five times earnings. Hunan Nonferrous Metals, the mainland's largest tungsten producer, is trading at 15 times earnings.
'A spin-off of the base metals business is possible, although there is no concrete plan at present,' Mr Chen said, adding that Zijin would strive to keep gold as its main business.
'We'll try to keep gold or precious metals as our major profit contributor and maintain it at a level of more than 50 per cent. If not, gold should be kept as the largest single business compared with other metals,' Mr Chen said.
After aggressive expansion in the mainland and overseas through acquisitions and exploration of new projects, Zijin has 455 tonnes of gold reserves, 151 tonnes of platinum and palladium and 6.7 million tonnes of copper.
Mr Chen said the company would continue looking for attractive growth opportunities in China and overseas in both base and precious metals.
Some analysts have warned that Zijin's diversification into base metals will mean its earnings will become more volatile.
'We believe that while metal prices are high, Zijin's strategy of aggressive overseas growth and expansion into base metals will continue to drive earnings and cash flows,' said Merrill Lynch analyst Alexander Latzer. 'However, this is a bull market strategy. When metal prices ease over the next few years, as we forecast, earnings will become more volatile.'
