HONG KONG 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. 358 HK Neutral Our commodity team expects $6,550/t copper price in 2014 . Supply surplus to worsen in 2014: Given the strong investments in copper Price (at 08:01, 10 May 2013 GMT) HK$16.42 projects in the past few years, our commodity team forecasts 3%/8% mined 12-month target HK$ 15.00 copper supply growth in 2013/14F but 3.5%/4.8% demand growth only. Upside/Downside % -8.6 Valuation HK$ 15.00 . Our commodity team see a worsen surplus in 2014 of 728kt (vs. 221kt in 2013) - Sum of Parts and remain cautious on copper prices with a 6% drop in 2013E to $7,458/t GICS sector Materials Market cap HK$m 56,846 and another 12% in 2014E to $6,550/t. The strong YTD supply growth (8%y-y 30-day avg turnover US$m 38.6 from Chile mines) and high inventory level add more near term concerns. Market cap US$m 7,324 Revenue growth not turning into earnings growth Number shares on issue m 3,462 . Revenue growth mainly driven by low margin business: We expect JXC Investment fundamentals to undertake more copper trading/smelting to boost revenue. Despite a better Year end 31 Dec 2012A 2013E 2014E 2015E TC/RC in 2013/14E, JXC‟s smelting lines may just break even and its trading Revenue bn 158.0 167.6 170.2 175.8 EBIT bn 7.1 5.5 4.2 4.5 segment would deliver 1% profit margin. Thus, while trading/ smelting account EBIT growth % -15.4 -21.8 -24.3 6.7 for over 80% of revenue, they only contribute 10/14% to gross profit in 13/14E. Reported profit bn 5.2 4.1 3.0 3.2 Adjusted profit bn 5.2 4.1 3.0 3.2 . Low cash cost but… We like JXC‟s quality assets and its low C1 cash cost EPS rep Rmb 1.49 1.19 0.87 0.93 EPS rep growth % -21.5 -20.2 -27.3 7.1 at US¢84-85/lb ($1850-1870/t vs. over US$5000/t for high cost producers). EPS adj Rmb 1.49 1.19 0.87 0.93 EPS adj growth % -21.5 -20.2 -27.3 7.1 Our calculated total cost (incl. noncash cost and before netting of by-product PER rep x 8.7 10.9 15.0 14.0 credits) may amount to ~$4700/t in 13-15E, and we see limited management PER adj x 8.7 10.9 15.0 14.0 ROA % 9.7 6.8 4.8 5.0 incentives for cost reduction. ROE % 12.6 9.4 6.5 6.7 EV/EBITDA x 5.6 6.7 7.8 7.3 . Mined copper GPM may drop from 45% in 2012 to 26% in 2014: we expect Net debt/equity % 4.6 12.0 19.4 20.4 P/BV x 1.1 1.0 1.0 0.9 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% Source: FactSet, Macquarie Research, May 2013 in 2013/14F along with a 20/27% EPS drop. A 1% copper price drop leads to (all figures in Rmb unless noted) 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 Analyst(s) 2014PER (vs. 12x historical average, 13.8x sector average) and 1x P/B. Our Matty Zhao PT implies 13.7x 2014E PER and 0.9x 2014E PB. +852 3922 1293 [email protected] Ivan Lee . JXC is trading at US¢32/lb EV/t of reserves. Copper M&A deals in 2005-2011 +852 3922 3572 [email protected] Annie Li implied EV/t of reserves ranging from US¢39-75/lb. We think the copper +852 3922 3884 [email protected] supply surplus in 2013/14F is more similar to 2008/09 when average EV/t of 13 May 2013 reserves was US¢40-49/lb. We apply a 20% discount to value JXC (not a bid) Macquarie Capital Securities Limited and the implied value is HK$13-16; and our PT is within the range.
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.
[email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Inside Jiangxi Copper
Not quite copper-bottomed 3 Company profile Valuation unattractive on PE, P/B, . 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, EV/t basis 7 Jiangxi Copper Corporation, is its biggest shareholder, which is fully-owned by Earnings drivers and sensitivity 11 SASAC of Jiangxi Province. Supply surplus lead to weak price 13 . Jiangxi Copper integrates copper mining, smelting, copper trading, and by- Solid assets but limited production products (gold/silver/sulphuric acid) business. It owns 6 operating copper growth 15 mines domestically and 2 projects overseas (under development), with combined copper reserves of 17.3mnt (China mines reserves of 10.5mnt) gold Revenue growth =/= earning growth 18 reserves of 340t and silver reserves of 9,664t at the end of 2012. It also owns Key assumptions and financials 22 1 smelter and 7 processing plants. Copper industry – worse 2014 supply . In 2012, copper accounted for 86% of revenue and 67% of gross profit; while surplus 24 by-products made up 14% of revenue and 33% of gross profit. Appendices 36 . 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 358 HK rel HSI performance, & rec history 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. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. 3. Copper trading: JXC trades copper of 650kt/1,135kt in 2011/12 based Source: FactSet, Macquarie Research, May 2013 (all figures in Rmb unless noted) 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
120%
100% 14% 33% 80% 8% 41% 60%
40% 68% 37% 20% 8% 0% -9% -20% 2012 Revenue mix 2012 Gross profit mix
Mined copper Copper smelting Copper trading By products
Source: Company data, Macquarie Research, May 2013
13 May 2013 2
[email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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 $6550/t)
Fig 2 Growing copper supply surplus in 2013/14F Fig 3 JXC: PB-ROE
kt Copper price US$/t 47.4% 1000 Surplus 10000 4.5 50% 800 8811 9000 4.0 45% 7875 600 7459 7525 8000 3.5 4.2x 40% 7126 6952 7950 7875 2.9x 35% 400 6733 7539 7000 3.0 6800 30% 200 6550 6000 2.5 21.8% 1.9x 1.8x 25% 0 5000 2.0 17.9%17.9% 5164 1.7x 20% -200 4000 1.5 1.2x 12.6% 6.7% 3684 12.6% 6.5% 15% -400 3000 9.4% 1.0 11.7% 10% 13.0% 1.1x -600 2000 1.0x 0.5 1.0x 0.9x 0.9x 5% -800 1000 Deficit 0.0 0% -1000 0
Surplus/Deficit (kt) Copper price (US$/t) ROE (%) PB (x)
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$6,500/t.
13 May 2013 3 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 4 Copper price still well above cost curve Fig 5 Copper inventory rising very fast
10000 US$/t Kt Usc/lb 1400 500 9000 450 1200 8000 400 7000 1000 350 6000 Higher Cost Chinese Producers 800 300 5000 250 Mid-cost Producers 600 4000 200 400 3000 Low Cost producers 150 2000 200 100 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
0 50
09 09 10 11 12 13 10 11 12
10 11 12 09
- - - - -
- - - -
- - - -
Jan Jan Jan Jan Jan
Sep Sep Sep Sep
May May May May
Exchange stocks (mostly LME) Producer stocks Consumer + Other LME price (RHS) 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
% JXC share price In the past 12m share price 350 performance 25 traded in line with copper price R² = 0.6594 300 20 15 250 10 200 5 150 0
100 -5 -10 50 -15 0 -20 -50 Copper price performance -25
-100 -80 -60 -40 -20 0 20 40 60 80
Jiangxi Copper 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.
13 May 2013 4 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
40% 120% 36% 35% 31% 100% 12% 30% 80% 34% 25% 20% 60% 52% 10% 15% 15% 40% 10% 5% 56% 29% 5% 1% 2% 20% 0% 0% 0% 7% 0% -5% -20% 2013E Revenue mix 2013E Gross profit mix
Mined copper Copper smelting Copper trading By products
Gross margin
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
13 May 2013 5 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 11 JXC: Revenue growth Fig 12 JXC: Net profit growth
RMB mn RMB mn 60% 200,000 7,000 40%
180,000 30% 50% 6,000 160,000 20% 140,000 5,000 40% 10% 120,000 4,000 30% 100,000 0% 3,000 80,000 -10% 20% 60,000 2,000 -20% 40,000 10% 1,000 -30% 20,000 0% 0 0 -40% 2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015E
Revenue y-y % NPAT y-y %
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.
13 May 2013 6 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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$0.3 per share. Our PT implies 13.7x 2014E PER and 0.9x 2014E PB which looks fair compared to its 5-year historical average of 12x PER and 1.5x P/BV, considering its deteriorating ROE in the near term (from 12.6% in 2012 to 9.4% in 2013 and further to 6-7% in 2014-15F) with its long-term ROE (post 2017F) returning to 10%.
Fig 13 JXC sum of the parts valuation: DCF for its own copper mines and 6x 2014 target PE for smelting and trading
DCF methods for self-owned mines WACC Valuation Sensitivity table Risk Free Rate 4.0% Sum of PV of FCF 11,276 --- Terminal Growth Rate --- Market Risk Premium 6.0% Terminal growth value 31,254 15 0.25% 0.50% 0.75% 1.0% 1.25% 1.50% 1.75% Equity Beta 1.61 DCF 42,530 10.0% 16.2 16.6 16.9 17.2 17.6 18.0 18.4 Cost of Equity 13.7% Less: Net debt 1,891 10.2% 15.7 16.0 16.3 16.6 17.0 17.4 17.8
Cost of Debt (Pre-tax) 4.7% Less: Goodwill --- 10.4% 15.2 15.5 15.8 16.1 16.4 16.8 17.1 Cost of Debt (After tax) 4.0% EV (RMB mn) 40,639 10.6% 14.7 14.9 15.2 15.5 15.8 16.2 16.5
Target Debt weight 30.0% EV (HKD mn) 50,798 10.8% 14.2 14.5 14.7 15.0 15.3 15.6 15.9 WACC
Target Equity weight 70.0% No. of Ord shares (mn) 3,463 --- 11.0% 13.7 14.0 14.2 14.5 14.8 15.1 15.4 Tax Rate 15.0% Value per share (RMB) 11.74 11.2% 13.3 13.5 13.8 14.0 14.3 14.6 14.9 WACC 10.8% Value per share (HKD) 14.67 11.4% 12.9 13.1 13.3 13.6 13.8 14.1 14.4 Termial growth rate 1.0% CNY/HKD 1.25 11.6% 12.5 12.7 12.9 13.1 13.4 13.6 13.9
Target PE method for smelting and trading business PE Valuation 2011 2012 2013E 2014E EPS (RMB/share) -0.1 -0.2 0.0 0.0 EPS (HK$/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
Source: Macquarie Research, May 2013
Fig 14 JXC: 12m forward PE band Fig 15 JXC: 12m forward PB band
50 Historical avg PE: 12x 40 Historical avg PB: 1.5x
45 35 2.0x 40 30 35 1.5x 25 30 20x 25 20
20 15x 15 1.0x 15 10x 10 10 0.5x 5x 5 5
0 0
Source: Bloomberg, Macquarie Research, May 2013 Source: Bloomberg, Macquarie Research, May 2013
13 May 2013 7 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 16 JXC: PB- ROE Fig 17 JXC: PE- EPS growth
47.4% 4.5 50% 20.0% 16.9% 14.8x 16.0 45% 13.8x 4.0 15.0% 14.0 4.2x 3.5 40% 10.0% 7.1% 2.9x 12.0 3.0 35% 5.0% 30% 10.8x 2.5 0.0% 10.0 21.8% 1.9x 1.8x 25% 8.6x 2.0 17.9%17.9% -5.0% 8.0 1.7x 20% 1.5 1.2x 12.6% 6.7% -10.0% 6.7x 12.6% 9.4% 6.5% 15% 6.0 1.0 11.7% 10% -15.0% 13.0% 1.1x 4.0 1.0x 0.5 1.0x 0.9x 0.9x 5% -20.0% -20.2% 2.0 0.0 0% -25.0% -21.5% -27.3% -30.0% 0.0 2011 2012 2013E 2014E 2015E
ROE (%) PB (x) EPS growth (%) PE (x)
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$8 price target.
13 May 2013 8 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 18 EV/t reserves valuation (US$/lb)
US$/lb 0.7 100%
80% 0.5 Our forecast 60% 0.4 40% 0.2 20% 0.1 0%
-0.1 -20%
-0.3 -40% 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E
EV/t reserve Copper price growth y-y %
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)
EV/t production (US$000/t) 70
60
50
40
30
20
10
0
Source: Company data, Macquarie Research, May 2013
13 May 2013 9 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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$13-16
US$/lb Cu Jiangxi Copper EV/t reserve level 5.0 4.5 2005 2006 2007 2008 2009 2010 2011 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5
0.0
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PTT Mining (Straits Metals)Mining (Straits PTT Glencore (Mina Justa (CST Justa (MinaGlencore
First PacificMining)(Philex First TrafiguraMinerals)(Iberian
Stillwater Mining(MarathonStillwater
MitsubishiAmerican(Anglo
Sojitz ConsortiumSojitz(Gibraltar
Catala Global (Anvil Mining)CatalaGlobal(Anvil Two Rivers PacificHoldings Rivers Two Minmetals(AnvilResources
Gold Fields (FSE (FSE Fields(Lepanto))Gold
Atlas ConsolidatedAtlas (Carmen
Quadra Mining (FNX Mining)MiningQuadra(FNX
CapstoneMining(Sherwood
KGHM Polska (Quadra FNX) Polska(Quadra KGHM
China Gold (SkylandMining)ChinaGold
Jinchuan Group (ContinentalJinchuanGroup
ENRC (CamroseResources) ENRC
AKA Forsakring (BolidenForsakringAB) AKA
LundinMiningMining)(Inmet
First Quantum(Scandinavian First
New Gold (El Morro(El(Xstrata)) GoldNew
KORES Consortium BoleoKORES (El
HudBayMinerals(Norsemont
Antofagasta (Tethyan Copper)Antofagasta(Tethyan
State Grid InternationalGrid (Sierra State
Mitsui (CaseronesPacificMitsui(Pan
Citadel Resource Group (JabalGroupCitadel Resource
Minmetals Resources (EquinoxMinmetalsResources
Pukuafu(NewmontIndahNusa
Antofagasta(EquatorialMining) Antofagasta(EquatorialMining)
KORES Consortium (RosemontKORES Barrick Gold (EquinoxMinerals)Gold Barrick GMP Securities (LundinSecurities Mining)GMP Source: Company data, Macquarie Research, May 2013
Fig 21 Copper peers valuation comparison
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
Source: Bloomberg, Macquarie Research, May 2013; Price as of 10 May.
13 May 2013 10 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
100% 120% 14% 14% 12% 12% 11% 90% 15% 100% 80% 35% 33% 21% 38% 34% 70% 80% 42% 40% 37% 41% 2% 8% 60% 52% 53% 52% 60% 4% 10% 50% 12% 12% 40% 2% 2% 40% 53% 71% 68% 61% 56% 30% 38% 44% 45% 37% 20% 20% 29% 30% 31% 0% 10% -3% 12% 0% 10% 8% 7% 6% -8% -9% 0% 6% -20% 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E
Self-mined copper Copper smelting Copper trading By products Self-mined copper Copper smelting Copper trading By products
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.
13 May 2013 11 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
. 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.
13 May 2013 12 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
10000
9,500 9000
9,000 8,811 8000
8,500 7000 8,090 7,950 7,875 7,875 8,000 7,807 7,567 6000 7,539 7,459 7,525 7,500 7,350 5000 Actual/New Forecast 7,000 6,800 Old forecast 6,550 6,504 4000 6,500 3000 6,000 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15
5,500
5,000 2010 2011 1H12 2H12 2012 1H13E2H13E 2013E 2014E 2015E 2016E 2017E 2018E LT $2012
Copper price ($/t)
Source: CRU, ICSG, Wood Mackenzie, Macquarie Research, May 2013 Source: CRU, ICSG, Bloomberg, Macquarie Research, May 2013
13 May 2013 13 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
. 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
13 May 2013 14 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
kt kt 20000 250 17300 18000 211 16000 200 14000 11613 12000 150
10000 100 8000 100 65 6000 48 4000 50 2000 1795 2000 0 0 Jiangxi Copper Zijin Tongling Yunnan Copper Jiangxi Copper Zijin Tongling Yunnan Copper Nonferrous Nonferrous
Copper reserves Mined copper production
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 Copper Production Cash cost Mines Stake Location Reserves (kt) Cu grade capacity (ktpa) (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
13 May 2013 15 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
kt kt 18% 1,600 450 30% 16% 400 1,400 25% 14% 350 1,200 20% 300 12% 1,000 250 15% 10% 800 200 10% 8% 150 600 5% 6% 100 400 4% 0% 50 2% 200 - -5% 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 0% - 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
…Dexing Mine …Other domestic mines Using self-produced concentrates Using purchased concentrates y-y %
…Overseas mines y-y %
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
13 May 2013 16 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
13 May 2013 17 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
RMB mn RMB mn 60% 200,000 7,000 40%
180,000 30% 50% 6,000 160,000 20% 140,000 5,000 40% 10% 120,000 4,000 30% 100,000 0% 3,000 80,000 -10% 20% 60,000 2,000 -20% 40,000 10% 1,000 -30% 20,000 0% 0 0 -40% 2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015E
Revenue y-y % NPAT y-y %
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
6000 Cash Cost per/tonne
5000
4000
3000
2000
1000
0
BHP
Xstrata
Sandfire
Freeport
PanAust
Rio Tinto Rio
Glencore
Minmetals
Zijin Mining Zijin
Kazakhmys
Oz Minerals Oz
Antofagasta
Inmet Mining Inmet
First Quantum First
Turquoise Hill Turquoise
Sumitomo MM Sumitomo
Anglo America Anglo
Lundin Mining* Lundin
Jiangxi Copper Jiangxi
Capstone Mining Capstone Mercator Minerals Mercator
Source: Bloomberg, Macquarie Research, May 2013
13 May 2013 18 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
. 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
USD/t USD/t 1,940 3% 6,000 5,476 5,506 5,546 45% 1,918 1,920 3% 2% 40% 4,892 40% 1,896 2% 5,000 1,900 4,428 35% 1% 2% 1,880 1,874 4,000 30% 1% 1% 1,860 1,852 25% 1% 3,000 20% 1,840 1,830 0% 2,000 15% 1,820 -1% 12% 10% 10% 1,800 -1% -1% 1,000 -1% 1% 5% 1,780 -2% 1% 2011 2012 2013E 2014E 2015E 0 0% 2011 2012 2013E 2014E 2015E
C1 Cash cost y-y % Total cost y-y %
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
40% 36% 35% 30% 25% Others 20% 34% 15% Self-mined 10% copper 5% 0% 1% 56% 0% Copper -5% trading Self-mined copper Copper smelting Copper trading 10% Copper Gross profit margin smelting 0% Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
13 May 2013 19 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
USD/t 85.0
80.0 Self-mined concentrates 75.0 19% 70.0
65.0 Scrap and blister 60.0 48% Import concentrates 55.0 30% 50.0
45.0
40.0 2009 2010 2011 2012 2013E 2014E 2015E Domestically purchased Copper TC concentrates 3% 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.
13 May 2013 20 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 43 JXC: Copper trading volume growth Fig 44 JXC: Copper trading gross profit
kt RMB mn 2,500 160% 800 200% 146% 140% 700 180% 1,906 1,906 2,000 120% 160% 600 1,589 100% 140% 1,500 80% 500 120% 75% 74% 1,135 60% 400 100%
1,000 40% 40% 300 80% 652 20% 20% 60% 265 200 500 329 0% 0% 40% -19% -20% 100 20% 0 -40% 0 0% 2009 2010 2011 2012 2013E 2014E 2015E 2009 2010 2011 2012 2013E 2014E 2015E
Copper trading volume y-y % Copper trading gross profit y-y %
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
1,800 1,669 40.0 1,572 35.1 1,600 1467 35.0 1385 1383 31.2 1,400 1,226 30.0 25.8 1,200 25.0 21.5 1,000 20.2 20.3 20.0 800 15.0 600 10.0 400
200 5.0
- 0.0 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E
Gold price (US$/oz) Silver price (US$/oz)
Source: Macquarie Research, May 2013 Source: Macquarie Research, May 2013
13 May 2013 21 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
13 May 2013 22 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
13 May 2013 23 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
US$bln Total capital investment in commited copper projects Others 30 21% 25 Mexico 3% Chile 20 32% 15 10 Congo DR 4% 5 Canada 0 3%
Zambia China
2006 1994 1996 1998 2000 2002 2004 2008 2010 2012 2014 1992 Russia 5% 8% 4% Expansion Capex Sustaining Capex Australia USA Peru 6% 7% 7%
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
13 May 2013 24 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 52 2013 copper production growth profile
Major growth drivers by mines for 18100 521 18040 -822 2013 copper production 17900
17700 33 32 17500 53 36 57 67 63 17300 70 17218 82 17100 95 232 16900
16700 16698
16500
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 Fig 54 Top growth drivers by country for 2013 copper capacity mine production- Indonesia and Congo play the key
('000t copper contained) Total Change Total Change 2010-2013 2012-2015 Country Mine Country Mine YoY YoY % Chile Los Bronces 175 Indonesia PT Freeport Indonesia 456 ('000t) Cu 2011 2012 2013f ('000t) Change Chile Esperanza 175 Peru Toromocho 225 Mexico Buenavista (Cananea) 140 Chile MMH 205 Indonesia 543 398 623 225 57% Peru Antamina 118 Chile Collahuasi 200 Congo DR 526 658 794 136 21% Peru Antapaccay 100 Mongolia Oyu Tolgoi 190 USA 1,136 1,165 1,250 85 7% Congo DR Tenke Fungurume 75 Indonesia Batu Hijau 179 Zambia 697 711 788 77 11% Australia DeGrussa (Sandfire) 75 Brazil Salobo 162 Mongolia 124 120 180 60 50% Congo DR Mutanda 73 Mexico Buenavista (Cananea) 160 Australia 936 920 978 57 6% Mongolia Oyu Tolgoi 70 Chile Caserones 160 China 1,375 1,545 1,589 44 3% Brazil Salobo 70 Peru Antapaccay 155 Other 10,667 11,180 11,016 - 164 -1% Total 1,072 Total 2,092 Total 16,006 16,698 17,218 520 3% After 10% disruption 1,883 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.
13 May 2013 25 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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 Fig 57 The top 10 mines in the world produced 5mt in for copper supply, driven by a plethora of reasons 2005, but only less than 4mnt in 2012
Copper mine supply disruptions from plan 000't Cu 1600 9% 5300 Evolution of production from world's top 10 mines 8% 6% 1400 8% 5100 5% 4% 4% 7% 4900 1200 2% 6% 4700 0% 1000 0% 5% 4500 -2% 800 -4% -4% -4% -4%
'000tcu 4% 4300 600 -6% 3% 4100
400 output initial asof % loss -8% 2% 3900 -9% -10% 200 1% 3700 -12% -12% 0 0% 3500 -14% 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Pit Walls Strikes Technical Ramp Up Weather Grades Other as % of production Output volume YoY change
Source: Company reports, Wood Mackenzie, Macquarie Research, May 2013 Source: Company reports, Wood Mackenzie, Macquarie Research, May 2013
13 May 2013 26 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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.
13 May 2013 27 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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).
13 May 2013 28 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
20000 kt
16000
12000
8000
4000
0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
North America Japan Europe India Asia others Other China
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.
13 May 2013 29 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 62 World copper consumption Fig 63 China Copper consumption
kt kt 24000 10.0 12000 30 22469 8.7 21522 9919 22000 8.0 26 20542 10000 9358 25 19901 8828 8103 8289 20000 18969 19844 6.0 4.8 8000 7300 20 1797418010 4.9 17 17435 17454 6550 18000 16920 4.0 3.5 5180 3.0 3.1 4.4 6000 15 16000 2.0 4600 13 11 3780 3930 11 4000 10 14000 0.2 0.0 -0.4 -0.3 6 6 6 6 2000 5 12000 -2.0 4 -3.1 2 10000 -4.0 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f
World copper consumption y-y % China copper consumption y-y %
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
30% 26%
25%
20% 17%
15% 13% 11% 11% 10% 6% 6% 6% 6% 6% 5% 5% 2%
0%
% growth in Chinese copper demand
Source: NBS, Macquarie Research, May 2013
13 May 2013 30 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 65 2001: World refined copper consumption map Fig 66 2012: China became biggest copper consumer
Other North America Other North Asia (Excluding 8% 19% 7% Japan and Asia America China and (Excluding 10% India) Japan and 17% China and Japan Japan India) 5% 8% 16%
India Europe 2% India 18% 3%
China China 41% 15% Europe 31% 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
Others Transport Industrial 6% equipment 7% 8%
Construction General 21% consumer 19%
Infrastructure 39%
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.
13 May 2013 31 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 68 The major listed plays cash costs are still well below the current copper price
6000 Cash Cost per/tonne
5000
4000
3000
2000
1000
0
BHP
Xstrata
Sandfire
Freeport
PanAust
Rio Tinto Rio
Glencore
Minmetals
Zijin Mining Zijin
Kazakhmys
Oz Minerals Oz
Antofagasta
Inmet Mining Inmet
First Quantum First
Turquoise Hill Turquoise
Sumitomo MM Sumitomo
Anglo America Anglo
Lundin Mining* Lundin
Jiangxi Copper Jiangxi
Capstone Mining Capstone Mercator Minerals Mercator
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
12,000 $/t
10,000 Price Lower Quartile
8,000 Median Upper
6,000 Ninth Decile 100th Percentile
4,000
2,000
0 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: Bloomberg, Macquarie Research, May 2013
13 May 2013 32 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 70 Rapid copper cost inflation in recent years Fig 71 … but this has been matched by price hikes
Copper costs 240 Index of copper operating and capital costs
220 600 Ninth Decile Capital costs Operating costs LME price 200 Upper Quartile 550
180 Median 500 Lower Quartile 160 450
140 400
120 350 $/lb 100 300
80 = 2003 Index: 100 250
60 200
40 150 20 100
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F
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.
13 May 2013 33 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
Fig 72 Looking at mine costs in 2012, it is clear to see Fig 73 Chinese copper mine output has risen steeply those commissioned recently come in at the top end this year – this is expensive supply
Average mine cash cost in 2012 by year of Monthly Chinese copper mine output commissioning 180,000 5000 160,000
4500 140,000 120,000 4000 100,000 80,000
3500 tonnes
$/tonne 60,000 3000 40,000
2500 20,000 - 2000
All mines 1996-2002 2003-2006 2007-2010 2011-12
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: Wood Mackenzie, Macquarie Research, May 2013 Source: NBS, China Metals, Macquarie Research, May 2013
Fig 74 Many new ex-China project operating costs Fig 75 New copper project supply growth has been are also expensive compared to current incumbents lower grades and higher costs, both capex and opex
New copper project operating cost estimates Weighted average copper project by year of delivery
8000 1.8 2002 2000-2011 7000 1.6 2007 2012-2018f 6000 1.4 2005
5000 1.2 2001
4000 1 2012f 3000 0.8 2000 2011 $/tonneCu 2013f 2000 2006 2008 2009 Average head head grade Average 0.6 2016f 2017f 1000 0.4 2004 0 2010 2014f 2018f 0.2 2015f 0
0 5000 10000 15000 20000 25000 30000 35000 40000
Deep
North
Kapulo
Boseto
Frontier
Konkola Konkola Sentinel
Aktogay Suvraga
Tsagaan Life of mine capital intensity Antucoya
Source: Company reports, Wood MackenzieMiheevskoye , Macquarie Research, May Source: Company reports, Wood Mackenzie, Macquarie Research, May 2013 2013
13 May 2013 34 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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 Fig 77 All major copper-consuming regions have seen months inventory increasing
Kt Usc/lb 1400 500
450 1200 400 1000 350
800 300
600 250 200 400 150 200 100
0 50
09 09 10 11 12 13 10 11 12
10 11 12 09
- - - - -
- - - -
- - - -
Jan Jan Jan Jan Jan
Sep Sep Sep Sep
May May May May
Exchange stocks (mostly LME) Producer stocks Consumer + Other LME price (RHS)
Source: LME, COMEX, SHFE, Macquarie Research, May 2013 Source: LME, COMEX, SHFE, Macquarie Research, May 2013
13 May 2013 35 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
Raw materials
Self-produced Domestically Purchased copper Imported copper copper purchased copper scrap and copper concentrates concentrates concentrates blister 20% 30% 10% 40%
Smelting and refining
Copper cathodes Gold Silver Sulfuric acid
Processing and fabricating By-products
Other copper end products Copper wire& rods (copper foil, belt, etc)
End-products
Source: Company data, Macquarie Research, May 2013
Fig 79 Jiangxi Copper: SWOT analysis
Strength Weakness
Biggest copper producer with highest copper reserves in China Domestic mining capacity has reached bottleneck High self-sufficient ratio Two foreign mines continue to be delayed Low cash cost Large smelting capacity benefit from TC/RC hike High gold and silver content
Opportunity Threat Grid investment accelerated Tightening liquidity from global perspective Potential oversupply globally implies TC/RC upward trend Mining cost increase
Source: Macquarie Research, May 2013
13 May 2013 36 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper
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
13 May 2013 37 [email protected] FIRST LAST 05/14/13 01:21:44 PM Hong Kong Highpower Macquarie Research Jiangxi Copper Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Australian/NZ/Canada stocks only Reporting Standards).
Macquarie - USA Recommendations – 12 months Outperform (Buy) – return >5% in excess of Russell Note: Quant recommendations may differ from 3000 index return Fundamental Analyst recommendations Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
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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