Fitch Ratings has downgraded China-based Zijin Mining Group Co., Ltd's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB+' from 'BBB-'.

The Outlook is Stable.

The downgrade reflects Zijin's aggressive acquisition growth appetite, which will result in volatility in its leverage profile and is no longer commensurate with a 'BBB' category rating. We expect Zijin's leverage to be sustained above 2.2x between 2022 and 2024, the level above which we would consider negative rating action.

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

Key Rating Drivers

Acquisition Strategy Credit Negative: We regard Zijin's aggressive acquisition strategy as credit negative as it increases volatility in the leverage profile. Zijin announced three major acquisitions in October 2022 after it completed the acquisition of three lithium assets in 9M22. Zijin is also in the process of acquiring a 20% stake in Hong Kong-listed Zhaojin Mining Industry Company Limited (BB+/Stable). The announced acquisitions and investment year to date would cost CNY33 billion, more than double our earlier expectation. The visibility of future acquisitions also remains low.

We expect limited near-term economic benefits from its recent acquisitions and equity investments, even though they will result in a higher reserve base and better diversification, as most of the projects acquired this year are not expected to start operations until 2024 or later, according to management. Its equity investments are also not likely to yield material cash dividend inflows for the time being.

Debt-Funded Acquisitions Increase Leverage: Fitch forecasts Zijin's larger-than-expected acquisitions, equity investments and associated capex will raise its net leverage, measured by net debt to EBITDA, to above 2.2x between 2022 and 2024 based on our commodity price assumptions. We expect Zijin to fund part of its CNY33 billion announced acquisitions in 2022 with debt, including the issuance of optional convertible bonds of CNY10 billion, which Fitch will consider as debt given the uncertainty of the timing or amount to be converted into equity.

Strong Operational Cash Flow: Fitch estimates Zijin's funds from operation will remain strong at CNY29 billion-31 billion during 2022-2024 (2021: CNY24 billion, 9M22: CNY21 billion) on higher gold and copper production, despite our downward mid-cycle commodity price assumptions. However, we do not expect this to be sufficient to fully fund its elevated capex and potential acquisitions. Fitch expects Zijin's capex to stay high at CNY18 billion-21 billion during 2023-2024 (2021: CNY20 billion) to bring newly acquired projects into production stage.

Higher Production on Project Execution: Management expects the successful execution of the company's newly added projects to add significant output from 2024-2025. Planned annual output of gold will increase by 14 tonnes by 2025, with an addition of 50,000-70,000 tonnes of lithium carbonate.

Zijin has a record of strong execution of previously acquired projects, with its copper production more than doubling in 2017-2021 after production from acquired copper mines was ramped up rapidly. Its mined copper production further rose by 55% yoy in 9M22, driven by production in three mines acquired in Tibet, China, the Democratic Republic of Congo and Serbia during 2015-2020.

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 2022-2024.

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

Key Assumptions

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

Mined copper mid-cycle average selling price of CNY50,000, CNY46,000 and CNY43,000 per tonne in 2022, 2023 and 2024, respectively (2021: CNY54,000 per tonne); mined gold mid-cycle average selling price of CNY350, CNY311 and CNY272 per gram in 2022, 2023 and 2024, respectively (2021: CNY350 per gram)

Mined copper sales volume of 773,000, 934,000 and 997,000 tonnes in 2022, 2023 and 2024, respectively (2021: 530,000 tonnes); mined gold sales volume of 58, 73 and 78 tonnes in 2022, 2023 and 2024, respectively (2021: 46 tonnes)

Capex of CNY19 billion, CNY21 billion and CNY18 billion in 2022, 2023 and 2024, respectively

Annual investment outflow of CNY26 billion in 2022, CNY12 billion in 2023 and CNY5 billion in 2024

Dividend payout ratio of 34% per year in 2022-2024

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 CNY20 billion in unrestricted cash at end-September 2022, against CNY28.6 billion in short-term debt. It has a multitude of onshore and offshore funding sources, as well as ample liquidity from major banks with CNY127 billion in unused bank credit facilities as of end-September 2022. It is an active onshore bond issuer. Zijin had a low average borrowing cost of 3.1%-3.2% in 2020-2021.

Issuer Profile

Zijin was one of the world's 10 largest copper producers, a top-15 gold miner and a top-five zinc producer in 2021 by output. Overseas mines contributed 53% of its copper, 60% of gold and 45% of zinc and lead production in 2021.

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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