MMG’s 2022 net profit beat our forecast by 50%, but most of the contributing factors do not last. While we now look at a 22% YoY growth in 2023 on higher metal sales volume and metal prices, this is subject to change as the operations of its key mine Las Bambas are still being disrupted by social unrest in Peru. Hence, we reiterate our HOLD call despite its potentially good long-term growth prospects.
　　Key Factors for Rating
　　MMG’s net profit dropped 74% YoY to US$172m in 2022, 50% above our forecast. The discrepancy mainly came from the higher-than-expected cost of copper inventory carried over at Las Bambas, lower-than-expected profit tax rate at Las Bambas and lower-than-expected depreciation charge at Kinsevere.
　　The sharp fall in earnings was mainly due to the lower sales volume at Las Bambas, lower copper price and higher cost across all mines.
　　Looking ahead, we expect MMG to see 22% YoY earnings growth in 2023 mainly on higher sales volume at Las Bambas and higher copper price. In particular, we expect copper sales at Las Bambas to surge 55% YoY to 345k tonnes in 2023. On top of the 12% YoY increase in copper output based on the mid-point of its guidance, we also expect it to sell 60k tonnes of copper inventory out of 85k tonne piled up at the mine at end of last year in 2023. BOCI Global Commodities also estimates the average LME copper price to rise 7% YoY to US$9,450/tonne in 2023.
　　The company is working on expansion projects at both Las Bambas and Kinsevere. When both projects are completed (now expected by 2025), the company’s total copper output will surge 70% to 460k tonnes per annum. It will also add cobalt, a metal used in battery for EVs, in its product portfolio.
　　Despite this, we remain cautious towards MMG as Las Bambas is running at low utilisation on disruptions in logistics owing to social unrest in Peru. It will have to suspend production again if it runs out of critical supplies.
　　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 long time.
　　Valuation
　　We increase our DCF-based NAV from HK$3.94 to HK$4.08 as we roll over the base year from 2022 to 2023. Hence, we raise our target price slightly from HK$2.30 to HK$2.33. We still take a 30% discount off our valuation of Las Bambas given the uncertainties surrounding its operations.