During an economic slowdown, investors look for stocks that are stable and can maintain their value. During the good times, they want stocks with growth potential. Zijin Mining Group (2899.HK, 601899.SH), China’s largest gold producer, may be able to provide both.
Zijin applied a "multi-metals" strategy to its business in 2008 by investing in copper and zinc production – the company took control of its joint venture copper mine in Fujian province – a strategy that earned it an estimated US$439.03 million profit, up 17% year-on-year.
The aim was to help harness the growth potential of other metals while staying heavily invested in the stability of gold, said Jay Zhou, an analyst with SinoPac Securities in Shanghai. He rates Zijin as performing in-line with its peers in the market.
"It failed because the other metals performed worse than gold [in the last quarter]," he said.
In the short term, that means Zijin, which derives 60-70% of its revenues from gold, will underperform gold pure-plays such as Zhaojing Mining (1818.HK). For Zijin as a whole, revenue may drop about by 27% in 2009 said Andrew Lee, resources analyst with CLSA in Shanghai.
However, gold will bring Zijin the stability it needs to ride out the global economic slowdown.
"Earnings this year are going to stay flat or go down a bit, but the earnings are still pretty good compared to Rio Tinto (NYSE: RTP) or Chalco (2600.HK)," said Felix Lam, associate director for equity research at CCB International in Hong Kong.
While Lam takes added positives from the fact that gold production costs are likely to stay flat or come down, CLSA’s Lee highlights Zijin’s prudent approach. The firm didn’t over-expand its production volume during the boom years and this makes it easier to keep a healthy balance sheet in lean times.
As for Zijin’s diversification strategy, it should pay off in the long run.
"When the economy bottoms and starts to recover, the other commodities such as copper and zinc will rebound faster than [gold]," Zhou said.
By then, Zijin should have the capacity to meet demand. If the firm invested in new smelting plants now it would take two years for them to come online – just in time to benefit from the boom.
Meanwhile, Cherry Chen, an analyst with Core Pacific Yamaichi, refuses to rule out a possible short-term rebound. Beijing may be building zinc and copper reserves, which would help boost metals prices, said Chen, who has a "Buy" rating on the stock.