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<P>We like them all, but Buy Zijin &amp; HNC for 3-mth run<BR>As the largest players in their respective metal spaces, Zijin, HNC and China Moly<BR>will likely leverage their industry leader positions, strong financial muscle and full<BR>support from government to grow their market share and earnings rapidly in the<BR>next three years. We anticipate impressive performances from Zijin and HNC in<BR>the next three months, due to imminent acquisitions. And we recommend a Buy<BR>rating for all three based on long-term exposure to different metals.</P>
<P>Zijin Mining: Our top pick for both short-term and long-term<BR>We continue to rate Zijin Mining as our top pick in the Chinese nonferrous metals<BR>sector as we believe its strong management team, solid track record of earnings<BR>growth, ongoing mine acquisitions and upcoming A-share IPO all mean sustained<BR>earnings momentum in the next few years.<BR>Buy them all to play industry consolidations<BR>For the Chinese base metals sector, the most important trend in the next few<BR>years will be ongoing consolidations. The Chinese government is keen to preserve<BR>strategically important base metals, clean up the environment and better utilize<BR>resources. Therefore, the government will likely continue to introduce new policies<BR>in favor of industry leaders to improve industry concentration. Under a favorable<BR>policy environment, big players including Zijin, HNC and China Moly should be<BR>able to cherry pick the best acquisition targets at attractive prices, implying more<BR>earnings upside.<BR>The failure of imagination<BR>Investors seems to care more about the immediate earnings impact from<BR>acquisition However, we believe such benefits from acquisitions are way beyond<BR>what the market has expected. With ongoing acquisitions, industry leaders<BR>(acquirers) will increase capacity and market share, better utilize resources and<BR>realize real pricing power, which will eventually transform the fragmented Chinese<BR>base metals sector into a more concentrated and disciplined market, leading to a<BR>more sustained industry and also give it the ability to weather the commodities<BR>cycle better.<BR>DCF-based target price<BR>We use DCF model to value Zijin, HNC and China Moly. (For valuation details,<BR>please refer page 5, 7 and 9). Key risks to our valuations: 1) a sharp decline in<BR>metal prices, including gold, copper, zinc, lead, tungsten, antimony and<BR>molybdenum etc; 2) exploration and mining interruptions due to failure to renew<BR>mining rights; 3) raw materials supply interruptions.</P>
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