Key points of investment
Incident: Zhaojin Capital, an indirect wholly owned subsidiary of Zhaojin Mining Corporation, made a conditional offer for the entire share capital of TIETTOMINERALS LIMITED at an offer price of $0.58 per share.
Comment: The pace of expansion of overseas mergers and acquisitions is accelerating. Zhaojin Capital, an indirect wholly-owned subsidiary of Zhaojin Mining, plans to make a conditional offer to acquire all shares of the Australian listed company Tietto Minerals (Tietto Minerals). The purchase price is $0.58 per share, a 36 premium over the closing price before the announcement. The bid valuation is about 680 million Australian dollars, which is equivalent to about 3.10 billion yuan, Tietuo's net debt is about 500 million yuan 1, total enterprise value is 3.6 billion yuan, acquisition consideration = enterprise value/gold reserves = 85 yuan/gram (369 US dollars/ounce), which is 20% lower than the corporate value of the secondary market valuation of Zhaojin Mining (459 US dollars/oz 2). Also, considering that the project has achieved commercial production on July 6, 2023, it already has economic benefits, and the acquisition valuation is relatively high.
The Abuja project estimates an average annual output of 5.4 tons over the next 9 years, with a comprehensive cost of about 227 yuan/gram. Tietuo's core operating mine is the Abuja project in Cote d'Ivoire, West Africa (88% of Tietuo's shares). It includes three connected exploration areas, all of which are open pit mining, with reserves of 42 tons (1.36 million ounces) 3. The mine was put into operation in January this year, and commercial production was achieved in July. It is planned to produce 2.3-2.6 tons of gold in the second half of 2023, with a full cost of 271-312 yuan/gram. The mine service life is estimated to be 10 years to 2033, and the total estimated output for the 2024-2032 period can reach 44 7.6t ( 1.53 million ounces), the annual production of gold is 5.4 tons (170,000 ounces), and the full cost is about 227 yuan/gram (982 US dollars/ounce). In the future, it is hoped that the life of the mine will be extended through peripheral exploration.
As of October 30, 2023, Zhaojin Mining held 7.02% of Tietuo's shares, making it the company's second largest shareholder; the largest shareholder was Chifeng (holding 12.49%). The total cost of this acquisition incident is as high as RMB 2.88 billion. Funding plans to pay consideration in the form of its own cash. As of September 30, the company's cash on the books reached RMB 5.4 billion, sufficient to cover the overall cost of the offer, and there are no direct financing plans.
Our view: At the end of the Palestinian-Israeli conflict and strong interest rates on US bonds, we are bullish on gold. The conflict between Palestine and Israel broke out in early October, and risk aversion sharply increased; at the same time, the US government continued to issue more treasury bonds, pushing interest rates on 10-year US Treasury bonds to exceed 5%, and the pressure on US fiscal spending to expand also raised market concerns. At the end of a strong slump in US debt interest rates, later concerns about the return of US debt to fundamentals and the decline in the US economy's resilience after excess savings have been consumed, and it is possible to play on low-probability risk events. Judging from the three dimensions of US debt, inflation, and the economy, it is bullish on gold.
1) The offshore gold mine is a “killer” project with large reserves, high quality and low cost. It is expected to be put into operation in early 2025 and reach production by the end of 2026, reaching production output of 16 tons/year. The output compared to the forecast value for 2023 increased by about 79% year over year, the predicted value of net profit from the mother to mother is about 187%, and the company's 2023-2027 net profit CAGR = 50%.
2) Zijin and Zhaojin launched equity and project alliances, empowering investment in various aspects from technology to management. We expect the company's net profit for 23/24/25 to be 7.85/9.48/1,697 million yuan, respectively, with a year-on-year difference of +95.3%/+20.7%/+79.0%, respectively, and a target price of HK$14.02, maintaining the “buy” rating.
Risk warning: risk of gold price fluctuations, mine commissioning falling short of expectations, safety accidents and environmental risks.