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

The Outlook on the IDR is Stable.

The ratings on Zijin are supported by a well-diversified product portfolio of precious and base metals and diversified operations, an average cost position in the second quartile of the global cost curve and high-yielding assets with a long mine life. However, Zijin's rating headroom is limited due to its aggressive acquisition appetite and accompanying large capex, which, if not managed properly, can result in prolonged high leverage.

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

Key Rating Drivers

Strong EBITDA on Higher Output: Fitch expects Zijin's EBITDA will remain strong at CNY47 billion-55 billion in 2024-2026, on higher gold and copper output, despite our lower mid-cycle price assumptions. The production output additions would be mainly contributed by expansion of existing projects such as Julong in Tibet and Timok in Serbia, and newly acquired projects that enter the production phase. Zijin's 2023 EBITDA rose to CNY42 billion in 2023, from CNY40 billion in 2022, on higher gold and copper production and a favourable gold price, despite a modest correction in copper prices.

Higher Leverage; Limited Rating Headroom: Fitch expects Zijin's net leverage to remain high at 2.5x-3.0x in 2024-2026 due to hefty capex and potential investments, thus limiting its rating headroom. Net leverage, measured by net debt to EBITDA, rose to 3.1x in 2023, from 2.7x in 2022, mainly driven by large capex, acquisitions and equity investment outflow, despite a strong profit.

Fitch expects Zijin to stick to its acquisitive strategy to fulfill its long-term goal of becoming a top miner globally by 2030. Zijin spent a hefty CNY12 billion in 2020 and CNY26.3 billion in 2022 on acquisitions, resulting in a spike in leverage to 3.5x by end-2020 and 2.7x by end-2022. We expect an annual CNY5 billion for potential acquisitions during 2024-2026 in our rating case; however, any larger-than-expected acquisitive outflow would put pressure on Zijin's ratings.

Diversified Low-Cost Producer: Zijin has a diversified production portfolio across precious and base metals, as well as geographically. We expect its product diversification to further enhance with the ramp-up of its newly acquired lithium assets from 2025 and onwards. In addition, its copper and gold cost position is fairly low, ranking in the second quartile on the global cost curve. The company also has an average mine life of 20 years and above for major copper mines, and 10 years for gold mines.

Limited Country Risk: We do not consider the location of some of Zijin's assets in higher risk countries, such as the Democratic Republic of Congo and Argentina, to be a rating constraint at the current level, as half of its profits and assets are contributed from China. Meanwhile, a majority of Zijin's overseas exposure comes from Australia (AAA/Stable), Serbia (BB+/Stable) and Colombia (BB+/Stable).

Zijin's acquisitions during 2020-2023 have increased its asset base, along with its geographical diversification. The proportion of its overseas mined copper and gold stayed high at 56% and 64%, respectively, of Zijin's total mined output in 2023 (2022: 57% and 59%).

Derivation Summary

Zijin has smaller operational scale and lower profitability compared with one of the top-three global copper producers, Freeport-McMoRan Inc. (FCX, BBB/Stable), which owns world-class mines with competitive costs. Zijin also has weaker financial structure despite better asset diversification than FCX.

Zijin's ratings are higher than the Standalone Credit Profile of 'bb' of Corporacion Nacional del Cobre de Chile (CODELCO, BBB+/Stable). The one-notch difference reflects Zijin's better cost position and a more diversified operation, even though CODELCO has a stronger market position as the world's top copper producer by production.

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 solid cost positions. However, Zijin's fast expansion means it has a weaker capital structure than Teck, which will have a net debt/EBITDA ratio of 1.5x-2.5x during 2024-2025.

Key Assumptions

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

Mined copper average selling price of CNY50,600, CNY48,000 and CNY45,500 per t in 2024, 2025 and 2026, respectively (2023: CNY51,156 per t); mined gold average selling price of CNY398, CNY378 and CNY336 per gram in 2024, 2025 and 2026, respectively (2023: CNY406 per gram);

Mined copper sales volume of 870,000t in 2024, 930,000t in 2025 and 1.04mt in 2026 (2023: 810,737t); mined gold sales volume of 73t in 2024, 78t in 2025 and 83t in 2026 (2023: 66.7t);

Capex of CNY23 billion in 2024, CNY29 billion in 2025 and CNY27 billion in 2026 (2023: CNY30 billion);

Annual investment outflow of CNY5 billion in 2024-2026;

Dividend payout ratio of 30% a year in 2024-2026.

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 above 3.0x for a sustained period.

Liquidity and Debt Structure

Adequate Liquidity: Zijin had CNY19.2 billion in readily available cash at end-2023, against CNY38.6 billion in short-term debt. It has a multitude of onshore and offshore funding sources, as well as ample liquidity from major banks, with CNY160 billion in unused bank credit facilities at end-2023. It is an active onshore bond issuer.

Issuer Profile

Zijin in 2023 was one of the world's top-ten copper and gold miners, and fourth-largest zinc miner, by consolidated output. Zijin has more than 30 operating assets covering copper, gold, zinc, lead, iron ore, silver and lithium in 16 countries across Asia, Europe, Africa, Australia and South America.

Summary of Financial Adjustments

Time deposits and government bond reverse repurchases, totalling CNY1.5 billion at end-2023, are treated as readily available cash.

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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