1H24 results miss our expectations
　　CGN Mining announced its 1H24 results: In 1H24, revenue rose 39% YoY to HK$4.07bn; net profit attributable to shareholders fell 37% YoY to HK$113mn. Its earnings missed our expectations, due to additional payment of the withholding tax on dividends, increased costs, and low sales volume of Ortalyk.
　　Overall, the average sales price of natural uranium was US$78.5/pound and the average sales cost of natural uranium was US$86.4/pound at the company. In 1H24, its equity production was 654tU and the company completed the procurement and sale of 564tU uranium. Overall production volume was slightly lower than the company's planned production volume due to insufficient supply of sulfuric acid. Rising sulfuric acid prices and higher MET taxes pushed up costs.
　　Semizbay-U: Production remained stable; costs slightly rose. In 1H24, the actual production volume of uranium was 477tU, exceeding the planned production volume. Specifically, the actual uranium extracted from the Semizbay Mine was 182tU, with the production cost at US$31.9/pound; the actual uranium extracted from the Irkol Mine was 295tU, with the production cost at US$23.8/pound. The investment income was HK$208mn.
　　Ortalyk: Actual production volume was lower than the planned production volume; lower sales volume weighed on earnings. In 1H24, the actual production volume of uranium was 858tU, lower than the planned production volume due to insufficient supply of sulfuric acid. Specifically, the actual uranium extracted from the Central Mynkuduk Deposit was 792tU, with production cost at US$22.5/pound; the actual uranium extracted from the Zhalpak Deposit was 66tU, with production cost at US$32.6/pound. The actual sales volume was lower than production volume, due to slow shipment. As a result, the investment income was only HK$234mn.
　　Additional payment of tax weighed on short-term earnings. The　company had estimated the withholding tax rate at 5% since it acquired Ortalyk in 2021. However, as the practice of Kazakhstan tax authority has been changed, the management of the company considered in 1H24 that the 15% withholding tax rate is applicable for all dividends received in prior years as well as current period. The additional payment of tax pushed up the company's income tax by 278% YoY to HK$211mn in 1H24.
　　Trends to watch
　　China's approval for nuclear power projects sent positive signals; prices of uranium may continue to increase in the long term. We think prices of natural uranium will continue to increase. First, demand for nuclear power may continue to recover globally. In August, China approved 11 nuclear power units, sending positive signals about the development of nuclear power in the country. Second, disruptions to global uranium supply persist. Kazatomprom has reduced the planned production volume of uranium to 25,000-26,500tU for 2025, due to insufficient supply of sulfuric acid. Third, Kazakhstan is facing the depletion of uranium mines. The company expects mines in operation worldwide to start reducing production and being decommissioned in 2028.
　　Financials and valuation
　　We cut our net profit forecasts 43% to HK$501mn for 2024 and 24% YoY to HK$833mn for 2025, given changes in the Kazakhstan tax policy. The stock is trading at 25.3x 2024e and 15.2x 2025e P/E. We maintain an OUTPERFORM rating and our target price of HK$1.79 as prices of natural uranium may continue to increase in the long term. Our TP implies 27.1x 2024e and 16.3x 2025e P/E, offering 7% upside.
　　Risks
　　Supply from uranium mines exceeds expectations; development of nuclear power disappoints; Kazakhstan policies are changed.