While MMG guides for 0.4%-16.2% YoY growth in copper output in 2023, it is subject to the ability of Las Bambas to resume operations in near future as the mine has suspended production owing to social chaos following the ousting of former Peruvian president in December 2022. Over the medium term, we see 44% increase in copper output after the completion of two expansion projects. We cut our 2022 and 2024 earnings forecasts by 31% and 18% respectively and reiterate our HOLD call given the added short-term risk on Las Bambas.
　　Key Factors for Rating
　　There have been widespread protests in Peru following the ousting and arrest of former president Pedro Castillo. Although the Peruvian Government has agreed to move the next election forward from 2026 to 2024, there is no sign that the protests will stop. The protests have disrupted the inbound and outbound traffic of Las Bambas and it has stopped copper production since 1 February 2023 as it has run out of critical supplies. The company is counting on the government to end the current chaos in a few weeks. While the current president has urged the government to move the election further forward to December 2023, there is no guarantee that it will be enough.
　　The development of the Chalcobamba pit of Las Bambas and expansion at Kinsevere are underway. After the completion of these two projects, we expect the company’s copper output to surge to 440k tonnes in 2024, up 44% from the level in 2022. This will be a long-term growth driver.
　　The change in COVID-control policy in China has resulted in the surge in copper price since December 2022. Copper is also an important input for green energy transition. However, the short-term uncertainty surrounding Las Bambas made the company unattractive at the moment.
　　Key Risks for Rating
　　Lower-than-expected metal prices.
　　The current social unrest in Peru lasts for a prolonged period so that Las Bambas has to suspend production for a prolonged period of time.
　　Valuation
　　Given the cuts in our earnings forecasts and the higher discount rates, we lower our DCF-based NAV from HK$4.15 to HK$3.94 despite the increases in our long- term metal price forecasts. As a result, we reduce target price slightly from HK$2.40 to HK$2.30. We still take a 30% discount off our valuation for Las Bambas given the uncertainties surrounding its operations.