3Q12 earnings. Notwithstanding solid 15.6% QoQ top-linegrowth on higher output of processed gold and copper, Zijin’sbottom line was down 6.2% QoQ to RMB1.2b. Averageselling price (ASP) of gold rose 0.9% QoQ, not enough tooffset ASP declines in a slew of other metals, includingcopper, down 4.8% QoQ; zinc, down 2.4% QoQ; andiron ore, down 9.2% QoQ.

Costs rising, but still the most cost efficient miner. Minegold production cost rose 17.1% QoQ, from US$531/oz in2Q12 to about US$622/oz in 3Q12. We attribute most of thecost inflation to the recently acquired Norton Gold (NGF AU,Not Rated), which entailed a 2012 cash cost of US$1,013/oz.

Despite cost inflation, production target is on track. Yearto-date, mine gold output at Zijin is 22.8 tonnes, representingan increase of 7.6% YoY, equivalent to 76.2% of our 2012forecast for the company. Mine copper output reached75.5k tonnes, equivalent to a 12.3% YoY increase and 73.4%of our 2012 forecast.

Maintain Outperform. Despite ASP volatility and costinflation, Zijin still has the cheapest cost structure of all theother PRC gold miners, including China Gold International(2099 HK, Outperform) and Zhaojin Mining (1818 HK,Neutral). We like Zijin for its improving corporate governance,aggressive M&A strategy, relatively low EV/reverse ratio ofUS$393/oz and low implied long-term gold price ofUS$1,400/oz. We roll over our valuation to 2013F and raiseour target price from HK$3.30 to HK$3.40, which translatesto 10.3x forward P/E and 1.9x P/B.

Risks. Falling gold, copper and zinc prices, cost pressureand weaker-than-expected production growth.

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