MMG Limited reported a net loss of US$58.8m in 1H23, in line with its earnings warning. Despite the loss, the company recorded a positive free cashflow of US$124m in 1H23, a significant turnaround YoY. The uncertainties on the cost side have also been removed. We expect the company to see similar loss in 2H23 with lower metal prices offsetting higher output and lower cost. Although we significantly reduce our earnings forecasts, we reiterate our BUY call with target price reduced to HK$3.16 as it should see significant positive earnings again when its expansion projects start to deliver next year.
　　Key Factors for Rating
　　MMG Limited posted a net loss of US$58.8m in 1H23, a significant deterioration from a net profit of US$79.5m in 1H22. The company was hit by lower metal prices, with average LME price of copper and zinc down 11% YoY and 26% YoY respectively. Its realised prices dropped even more on bigger discounts to benchmark prices. Its total zinc sold dropped 23% YoY mainly due to 34-day suspension of Dugald River. The disruptions of operations at Las Bambas, Kinsevere and Dugald River also resulted in sharp rises in C1 costs in 1H23.
Looking ahead, assuming no further disruptions in operations, we expect the company’s total copper and zinc output to increase by 3% HoH and 162% HoH based on its guidance. The increase in output and reduction in outsourced ore will result in lower C1 costs of Dugald River and Kinsevere in 2H23. However, all these should be offset by lower metal prices with average LME price of copper and zinc expected to drop 6% HoH and 20% HoH. Hence, we estimate the company to see similar loss in 2H23 compared to 1H23.
Despite this, the company should post significant profit again from 2024 onwards as the expansion projects at Kinsevere and Las Bambas start to deliver. We also expect strong growth in free cashflow ahead (21% YoY in 2024E and 41% YoY in 2025E).
　　Key Risks for Rating
　　Lower-than-expected metal prices.
Further disruptions in operations, especially at Las Bambas.
　　Valuation
　　We reduce our DCF valuation from HK$3.76 to HK$3.16 to reflect the cuts in our earnings forecasts and the 0.1-0.3ppt increase in the WACCs following the recent increase in US interest rate. Hence, we reduce our target price from HK$3.38 to HK$3.16 as we now set our target price at par instead of a 10% discount to our DCF valuations as the uncertainty surrounding the cost of operations in 1H23 given the disruptions are now removed.