Fitch Ratings has affirmed Chinese mining company Zijin Mining Group Co., Ltd's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'.

The Outlook is Stable.

Zijin's ratings continue to be supported by its well-diversified portfolio of precious and base metals, an average cost position in the second quartile of the global cost curve and high-yielding assets with a long mine life. However, the ratings are constrained by Zijin's aggressive acquisition strategy, which increases volatility in its leverage profile.

The Stable Outlook reflects Fitch's expectation that Zijin will continue generating strong operational cash flow, which will aid its ongoing capex and acquisitive appetite.

Key Rating Drivers

Strong Profit, Higher Volume: Zijin's 2022 EBITDA rose to a record of CNY40 billion on higher gold and copper production, despite a correction in copper prices. Its mined copper rose to 877,000 tonnes (t) last year from 584,000t in 2021, with additions from the Kamoa project in the Democratic Republic of Congo, Julong in Tibet and Timok in Serbia.

Mined gold rose almost 9t to 56t on the ramp-up from Shanxi and Luoyang as well as overseas projects, including Buritica in Colombia, Timok, Aurora in Guyana and Norton in Australia. We expect Zijin's consolidated copper and gold output to increase further to 780,000t and 68t in 2023 (excluding output from equity investment in Kamoa and Zhaojin Mining Industry Company Limited (BB+/Stable)), and 890,000t and 86t by 2025, respectively, from the ramp-up of existing projects as well as newly acquired projects that enter into their production phase.

Acquisitions, Capex Drive Leverage: Net leverage, measured by net debt to EBITDA, rose to 2.8x in 2022 from 2.1x in 2021, despite strong profitability, on acquisitions that were larger than we expected, equity investments and capex. We estimate cash flow will remain strong with funds flow from operations of CNY33 billion-38 billion in 2023-2025 (2022: CNY29.5 billion) on higher gold and copper production, despite our downward mid-cycle commodity price assumptions. However, we do not expect meaningful deleveraging in the near term due to elevated capex and potential investment outflow.

We expect capex to stay high at CNY29 billion in 2023 before moderating to CNY20 billion in 2025 to bring newly acquired projects into production. We have assumed an additional CNY5 billion in investment outflow per annum until 2025 and outstanding payments for its acquisition of the Rosebel gold mine and Shapingou project in 2023, which will keep leverage at 2.8x this year before falling to 2.3x in 2025. Zijin has strong financial market access and low borrowing costs. It also has a well-spread debt maturity profile with short-term debt at 26% of total debt.

Wider Product Range: Zijin's product diversification increased due to its ventures into the new energy industry through the acquisition of lithium brine lake assets in Argentina and Tibet as well as a lithium mine in Hunan province. We expect the company to produce battery-grade lithium carbonate of over 3,000t this year before increasing to 12,000t once these projects reach full production in 2025. Zijin's recent acquisition of the Shapinggou molybdenum mine in Anhui province, the largest mine in Asia, will make it the top molybdenum producer in the world.

Greater Geographical Diversification: Zijin's recent acquisitions have improved the geographical diversification of the company's assets. Its overseas mines contributed over half of its incremental volume in mined copper and gold in 2022. The proportion of its overseas mined copper and gold increased to 57% and 59%, respectively, in 2022, from 53% and 58% in 2021.

Derivation Summary

Zijin is rated one notch lower than Canada-based Teck Resources Ltd. (BBB-/Stable). Both have similar business profiles in terms of commodity diversification and a solid cost position. However, Zijin has a weaker capital structure amid its expansion than Teck, which will have a net debt/EBITDA ratio of 1x-2x during 2023-2025.

Zijin has a smaller scale, lower margins and higher leverage than major copper miner Freeport-McMoRan Inc. (BBB-/Positive), although it has better asset diversification than Freeport.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Mined copper average selling price of CNY49,000, CNY45,000 and CNY41,500 per t in 2023, 2024 and 2025, respectively (2022: CNY49,078 per t); mined gold average selling price of CNY361, CNY343 and CNY343 per gram in 2023, 2024 and 2025, respectively (2022: CNY369 per gram)

Mined copper sales volume of 760,000, 825,000 and 890,000 t in 2023, 2024 and 2025, respectively (2022: 738,690t); mined gold sales volume of 68, 76 and 86 t in 2023, 2024 and 2025, respectively, (2022: 60.8t)

Capex of CNY29 billion, CNY20 billion and CNY20 billion in 2023, 2024 and 2025, respectively (2022: CNY24 billion)

Annual investment outflow of CNY5 billion in 2023 to 2025

Dividend payout ratio of 30% per year in 2023-2025

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Transition away from the highly acquisitive growth strategy

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Net debt/EBITDA sustained above 3.0x

Significant increase in exposure to markets with high geopolitical and operating environment risks

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: Zijin had CNY19.7 billion in unrestricted cash at end-2022, against CNY32.9 billion in short-term debt. It has a multitude of onshore and offshore funding sources, as well as ample liquidity from major banks with CNY150 billion in unused bank credit facilities as of end-2022. It is an active onshore bond issuer. Zijin had a low average borrowing cost of 3.1%-3.2% in 2020-2022.

Issuer Profile

Zijin was the world's sixth-largest copper miner, ninth-largest gold miner and fourth-largest zinc miner in 2022 by output. Overseas mines contributed 57% of its copper, 59% of gold and 48% of zinc and lead production in 2022.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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