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Research Report · Industry Research · Nonferrous Nonferrous Industry Monthly · May 2010 Base metals: NEUTRAL (Reiterate) Gold: OUTPERFORM (Reiterate) Industrial Metals: Confined by Uncertainties Gold: A Continual Upbeat Trend 15 Jun 10 Investment Highlights CSI Research Department Performance Relative to Indices Nonferrous 中标300 有色金属 H股指数 S&P/ H-share Metals CITIC300 Index 50 40 30 20 10 0 -10 090601 090806 091021 091228 100312 100521 Source: CSI Prices of industrial metals declined, while gold outperformed. (i) Events such as the sovereign debt crisis in Europe and Greek strike escalated market risk aversion, with the USD index rising 5.6% MoM in May 10; (ii) gold demand due to risk aversion was highlighted, with the international spot price for gold hitting a new high of US$1,249.62/ounce and posting an average MoM growth of 4.9%; (iii) in terms of industrial metals, apart from tin, the LME price index of other metals fell 10%-plus, and domestic metal prices also dropped successively, albeit at a slower pace; and (iv) prices for some minor metals rose and those for some dropped worldwide, and domestic prices for rare earths began to pull back. Benefiting from share prices for minor metals and gold counters, the nonferrous sector dropped at a slower pace than the broad market. Expectations regarding the tightening of China’s real estate policies, as well as concerns over uncertainties on rate hikes and RMB appreciation resulted in a generally weakening A-share market, as exemplified by the SSE Composite Index’ 7.54% decline (to 2,656 points). All in all, the nonferrous sector dropped at a slower pace than the broad market in May 10. During the month, (i) the top 10 in gainers were rare earth, minor metals and gold counters, with only Zhongfu Industry among the major metals; and (ii) counters of major metals such as copper, aluminium and lead-zinc were among the top 10 losers. Industrial metals: Strong demand and sufficient supply. Jan-Apr 10 statistics showed that: (i) various metals posted meaningful growth in cumulative output; (ii) as for semi-finished products, copper and aluminium output hit monthly new highs repeatedly; and (iii) although downstream automobile, electrical utility and household appliance industries retained a stable growth in output, aluminium, copper and zinc inventories at the Shanghai Futures Exchange (SHFE) increased. Inventories for the respective products rose 66.28%, 65.45% and 71.75% compared with those logged at end-09 due to continuous increases in metal output and large scale imports in previous months. Gold: A continual upbeat trend. (i) The sovereign debt crisis in European countries (such as Greece and Portugal) continued to overhang the market, leading to high uncertainties in the international monetary system and rising risk aversion; (ii) the expansionary monetary policy of countries following the economic crisis continued to lend support to inflation expectations, both of which resulted in a continual upbeat trend of gold price. Reiterate NEUTRAL rating for base metals and OUTPERFORM rating for gold. (i) Despite China’s thriving demand for metal and continually rising metal consumption in Western countries, soaring inventories and rising output constrained price hikes; and (ii) the market is still affected by uncertainties from domestic housing policies and the sovereign debt crisis in European countries. Therefore, we reiterate our NEUTRAL rating for base metals. Gold prices keep hovering high with an optimistic medium to long-term outlook. In particular, given rising safe haven demand and expectations for asset injections of domestic listed companies, we reiterate our OUTPERFORM rating for gold. Risks associated with investing in the sector. (i) Launch of additional policies in the Mainland to curb real estate prices; (ii) deterioration of sovereign debt crisis in Europe; (iii) increased inflation expectations; (iv) exit of easy monetary policy by various countries; and (v) further credit crunch. Peers’ Comparison – China Nonferrous Sector PER (x) Price Company (HK$) Hong Kong - average PEG (x) P/B (x) Yield (%) RoE (%) 09 10E 11E 09-11E 10E 10E 10E 24 16 12 0.8 1.9 3.9 14 CHALCO (02600.HK) 6.27 NA 16 12 NA 1.3 1.3 8 Zijin Mining (02899.HK) 5.72 21 14 12 0.7 3.3 2.9 28 17 Jiangxi Copper (00358.HK) 14.88 17 10 8 0.4 1.5 1.9 Hunan Non-ferrous Metals (02626.HK) 2.65 NA 32 18 NA 1.8 0.6 6 Zhaojin Mining (01818.HK) 16.72 28 21 19 1.4 4.0 2.1 21 13 CMOC (03993.HK) 4.59 40 12 10 0.4 1.5 3.2 Xinxin Mining (03833.HK) 3.70 31 15 11 0.5 1.3 2.4 9 Lingbao Gold (03330.HK) 2.77 8 7 7 1.3 0.8 16.5 14 Source: Respective companies, Bloomberg, CSI *Based on closing as of 14 Jun 2010 Please read the disclaimer at the end of the report Disclaimer This research report is for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to buy or sell any securities in any jurisdiction. 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