We maintain "Buy" rating and maintain the TP at HK$12.06. Our TP represents 33.6x, 26.0x and 22.2x 2024-2026 PER. We forecast net profit of Zhaojin Mining (the "Company") to grow largely in 2024-2026 and will be driven by higher gold price, more mining output and descending mined gold production costs.
The 2023 annual results of the Company was generally in line with market consensus. Total shareholders' net profit increased 70.8% yoy to RMB686.4 million. Total revenue increased 6.8% yoy to RMB8.42 million. Total mined gold output of the Company increased 5.8% yoy to 0.437 million oz and total gold output decreased 9.75% yoy to 0.793 million oz. The decrease in total gold output was mainly attributable to less refined gold output. The average production costs of mined gold increased 1.47% yoy to US$969.88/oz, mainly due to higher labor costs and safety costs.
We forecast gold price to rise in 2024 as the US Federal Reserve may cut interest rates. Gold assets are of high value during the period of US Federal Reserve interest rate cuts. If we review the performance of the gold price during the cycle from interest rate hike to interest rate cut, we may find out that gold assets are of high value in the period when there are significant changes in the US Federal Reserve's monetary policy. When the market was affirmed that the US Federal Reserve would start to cut interest rates, the gold price experienced another round of increases. It's widely expected that the Federal Reserve will cut interest rates in 2024 and the only debate is the timing and the number of cuts, but these two factors will not impact the gold price trend.
Haiyu Gold Mine will be the main profit driver of the Company from 2025. The Company plans to complete the construction of Haiyu Gold Mine in 2024 and to commence production from 2025. Total designed production capacity of Haiyu Gold Mine is about 16-20 tons and is expected to reach design capacity in about 3 years. The average ore grade of Haiyu Gold Mine is 4.2g/t, which is two time higher than the average ore grade of current gold mines. The estimated production costs of Haiyu Gold Mine is much lower than current level. Hence, the commissioning of Haiyu Gold Mine is expected to significantly improve the profitability of the Company. We forecast net profit of Zhaojin Mining to grow largely in 2024-2026 due to higher gold price, more mined gold output and descending mined gold production costs.
Catalysts: Gold price rise; the US Fed to cut interest rate early; financial market turbulence.
Risks: Decline in gold price; gold mine production impacted by external factors.