Strong QoQ growth in metal outputs in 2Q23
　　With Las Bambas running at full capacity and Dugald River back online, the company’s copper and zinc output surged 35% QoQ and 63% QoQ in 2Q23, respectively. Expansion at Kinsevere is on track despite the impact of unstable power supply on production. Although we cut our earnings forecasts significantly and target price after lowering our metal price forecasts, we still reiterate our BUY call as we are looking at very strong earnings growth in the next two years.
　　Key Factors for Rating
With no more disruptions, Las Bambas ran at full capacity in 2Q23 and its copper output in the quarter surged 153% YoY and 39% QoQ to 81.2k tonnes, the highest level after 2020. Dugald River restarted production in late March after a 34-day suspension and its zinc output surged 75% QoQ to 36.5k tonnes in 2Q23. They were the key contributors for the strong quarterly performance.
The copper output at Kinsevere dropped 8% QoQ in 2Q23 due to unstable power supply from the national grid and a planned shutdown for installation of the cobalt plant. Despite this, the expansion project progressed well and is on track for first cobalt production late this year.
We cut our earnings forecasts substantially （113% for 2023, 45% for 2024 and 9% for 2025） as we reduce our copper price forecasts by 9%/9%/3% and zinc price forecasts by 18%/23%/5% for 2023/2024/2025 based on the forecasts of BOCI Global Commodities and Bloomberg consensus. The weak metal prices in 2Q23 prompted various parties to lower their forecasts.
Although we are now looking at a small loss in 2023, we expect the company to return to significant profit in 2024 followed by a 79% YoY earnings growth in 2025. The expansions at Las Bambas and Kinsevere will be the key growth drivers. Copper price is also likely to surge with inventory at major metal exchanges still hovering around the lowest level in more than a decade. The global transition to clean energies like wind, solar and EVs will drive demand for copper. Potential acceleration of economic growth of China will be an additional catalyst.
　　Key Risks for Rating
Lower-than-expected metal prices.
The smooth operations at Las Bambas cannot be maintained.
　　Valuation
We reduce our DCF-based NAV from HK$4.28 to HK$3.77 to reflect the changes in our earnings forecasts and the 0.3-0.6ppt increases in our WACCs given the higher market rates. Hence, we lower our target price from HK$3.66 to HK$3.38 as we still set our target price at a 10% discount to our estimated NAV.