"Copper market dynamics and opportunities for Zijin Mining Group (02899): Latest insights from Bank of America and Goldman Sachs"

Recently, the fluctuations in the copper market have attracted widespread attention in the market. Two major institutions, Bank of America (BofA) and Goldman Sachs, have issued reports analyzing the trends in copper prices, the impact of tariffs, and the dynamics of related companies in depth. At the same time, BofA also provided the latest research insights on Zijin Mining Group. Copper Market: Evolution of the Post-Tariff Situation (1) Impact of Trump's Tariff Policy On July 30, the Trump administration announced a 50% tariff on semi-finished copper products and copper-intensive derivative products imported into the United States, based on Section 232 investigations, effective from August 1. However, refined copper and copper concentrates are excluded from the tariffs and will not face equivalent tariffs. This exemption is significant as 50% of the domestic refined copper demand in the US relies on imports, while net imports of semi-finished products (wires, tubes, sheets, etc.) only account for 7% of the demand. Goldman Sachs pointed out that it had previously warned that transactions related to "mineral diplomacy" could bring downward risks to the COMEX - LME price spread arbitrage and had closed its recommendation to long COMEX - LME trades. Although it was surprising that the proposal to impose copper tariffs was almost completely withdrawn, this indicates that the Trump administration is still concerned about copper supply security. The US may now focus on reaching mineral agreements with overseas countries and gradually introducing tariffs. (2) Copper Price Trends and Spread Changes After the tariff announcement, the COMEX copper futures prices dropped by 20% to about $4.46 per pound ($9830 per ton), and the COMEX - LME arbitrage spread dropped to about $150, implying a tariff of about 2%, significantly down from over 30% earlier in the week. BofA mentioned that on July 8, after the Trump administration announced a 50% tariff on copper, US CME copper futures surged by over 13% to a historical high of $5.70 per pound. The arbitrage spread between CME and LME copper contracts widened to a new record high of 30% of London Metal Exchange prices. However, when the government announced that copper cathodes would be excluded from tariffs on July 30, this spread collapsed, with a 22% price drop on that day reaching 13 standard deviations. (3) Future Outlook Goldman Sachs maintained its LME copper price forecast, predicting a low of $9550 per ton in August, steadily rising to $9700 per ton by December, believing that this announcement did not change the market fundamentals. In addition, Goldman Sachs believes that there is at least a 25% probability that the Trump administration will impose a 15% tariff by 2027, or even earlier, which could at least equalize COMEX prices with LME prices and reduce the possibility of large-scale re-exports of US cathode copper. Given the high level of US cathode copper inventories, it is expected that copper will flow into US LME warehouses. Furthermore, Goldman Sachs believes that the impact of the 50% tariff on semi-finished product imports on exchange prices is minimal. The US also ordered that 25% of high-grade scrap copper and concentrates must stay in the country, which has not changed compared to the current situation. BofA stated that the current surplus of copper inventories in the US could put downward pressure on prices, but the continued growth in demand for copper from new technologies and data centers will continue to provide support, especially when tariffs impact semi-finished copper products and other imported products. As trade flows normalize, the LME - CME spread is expected to return to historical average levels, with metal flowing between CME and LME whenever the spread exceeds $100-$200 per ton. BofA sees potential for systematic mean-reversion trading value in copper, even with surplus CME inventories, as these metals can transfer to US LME warehouses to prevent significant discounts against LME prices and to support mean reversion. However, BofA also warned that the possibility of additional tariffs being levied in 2027 has not been completely ruled out, posing a risk to this trade. The announcement from Trump indicated that by June 30, 2026, a report on the latest situation of the US domestic copper market, including refining capacity and the situation of the US refined copper market, will be provided by the Secretary. At that time, the President may decide whether to impose a phased 15% import tax on refined copper from January 1, 2027, and a 30% import tax from January 1, 2028. Therefore, tariffs have not been completely eliminated, and there is a turning point in the term structure between the two markets at the end of 2026. Zijin Mining Group: Benefiting from Strong Trends in Copper and Gold Prices (1) Favorable Trends in Copper and Gold Prices According to BofA's report, after Trump announced a 50% tariff on imported copper, the copper price fell slightly but then continued to rise. The average copper price so far this year is $9469 per ton, up 4% year-on-year. The global commodity team at BofA predicts a copper price of $9557 per ton for the 2025 fiscal year, up 4% year-on-year, leading to a copper price of $9634 per ton in the second half of 2025, up 2% quarter-on-quarter. This is due to expectations of continued strong demand in the second half, with factors such as Chinese grid investment, the suspension of the Cadia mine, refinery fires in Indonesia's Freeport, and declining ore grades major mines in Chile leading to supply shortages. In terms of gold, the price so far this year is $3111 per ounce, up 39% year-on-year. The global commodity team at BofA predicts a gold price of $3356 per ounce for the 2025 fiscal year, up 41% year-on-year, resulting in a gold price of $3625 per ounce in the second half of 2025, up 17% quarter-on-quarter. This is primarily driven by rising US budget deficits, increased interest rate volatility, and a weaker US dollar. (2) Production and Financial Expectations During a materials inspection in early July, the management of Zijin Mining Group stated that copper and gold costs would rise in 2025, mainly due to the increase in royalties caused by the surge in gold prices. Despite this, the company remains confident in achieving better profit margins through higher copper and gold prices. Regarding the suspension of production at the Cadia mine, the company expects copper production to be between 1.07 - 1.08 million tons in 2025 (previously 1.15 million tons), roughly in line with the 2024 level. The company is uncertain whether the mine can achieve its production guidance of 600 thousand tons in 2026. Despite short-term production disturbances, Zijin Mining Group remains optimistic about the long-term potential of the Kamoa-Kakula mine, due to its significant copper resource scale. Due to updated forex estimates, BofA has lowered net profit for the 2025 fiscal year by 2%, but due to cost controls in gold (driven by economies of scale), net profit for the 2026/27 fiscal years has been raised by 1%/5%. As a result, BofA has raised its target price for H/A shares from 23 Hong Kong dollars / 23 RMB by 13% to 26 Hong Kong dollars / 26 RMB, using discounted cash flow valuation with a weighted average cost of capital of 8% (unchanged) but rolled forward six months. BofA reaffirmed its buy rating for the following reasons: 1) Strong gold/copper prices; 2) Growth prospects in gold production; 3) Solid cost control; 4) Reasonable valuation compared to global peers. (3) Zijin Gold International Spin-off Plan Zijin Mining Group (601899.SH, 02899) announced in early May that it plans to spin off Zijin Gold International for a separate initial public offering in Hong Kong, with trading currently ongoing. According to Zijin Mining Group's plan, all eight key overseas gold mines, including Buritica in Colombia, Aurora in Guyana, Norton in Australia, Jilau and Taror in Tajikistan, Taldybulak Levoberezhny in Kyrgyzstan, Rosebel in Suriname, Porgera in Papua New Guinea, and Akyem in Ghana, will be included in the entity being spun off. The recently announced Raygorodok gold mine in Kazakhstan will also be included in Zijin Gold International after the acquisition is completed. These eight mines produced approximately 40 tons of gold in 2024 and are expected to produce about 44 tons in 2025 (accounting for 50% or more of the company's guided gold production for 2025). BofA estimates that gold in the 2025 fiscal year will account for 48% of gross profit. Management stated that overseas gold mines accounted for about 50% of gold production in 2024, but due to higher costs (i.e., lower profitability per ton), only accounted for 1/3 of profits in the gold division. BofA expects that the net profit contributed by Zijin Gold International's overseas gold assets in 2025 will account for 15% - 20% of Zijin Mining Group's net profit. BofA believes that Zijin Gold International is likely to become a platform for Zijin Mining Group to acquire overseas gold mines, as the existing mines may not meet the 2028 production guidance. This could also serve as a platform to attract global strategic investors and help Zijin Mining Group engage with local governments in South America and Africa. Regarding valuation, the spin-off could help realize the value of gold assets. Since 2025, influenced by trade war uncertainties, the gold price has risen by 39% year-on-year, averaging $3111 per ounce. Pure gold stocks such as Shandong Gold Mining H-shares / Zhaojin Mining have risen by 84 - 96% year-to-date, with a price-earnings ratio of 20 times, while Zijin H-shares have risen by 59%, with a price-earnings ratio of 12 times for the 2025 fiscal year. This suggests that there may be potential upside in Zijin Mining Group's valuation if Zijin Gold International is valued as a gold asset. Additionally, Zijin Mining Group has a competitive advantage in cost control: ranked third globally in gold full costs as of 2024. Management is confident in controlling costs by transitioning from outsourced mining to self-operation, improving recovery rates, and renegotiating procurement costs. Therefore, BofA believes that Zijin Mining Group will benefit from the spin-off.