MMG is an international mining company with access to top global resources. We believe the Company has great growth potential in its copper sector catalyzed by the easing of community issues and the expansion of projects. We estimate MMG’s 2023E/24E/25E attributable net profit (ANP) at US$60mn/199mn/463mn and assign 20x 2024E PE to derive a target price of HK$3.5. We initiate coverage with a “BUY” rating.
An international mining company with a focus on copper and zinc mining, with short-term performance being affected by disruptions. MMG is the core base metal mining subsidiary of China Minmetals Corporation, with a high concentration on the copper and zinc mining businesses and owns two world-class mining assets: Las Bambas copper mine and Dugald River Zinc mine. In 1H23, it saw 75.5%/7.6% contribution from its copper/zinc business to the total revenue, and witnessed its peak operating revenue of US$4.255bn and ANP of US$667mn in 2021. However, the Company’s earnings have been under pressure since 2022 due to factors including community issues in Las Bambas, shutdown caused by accidents in Dugald River and increase in financial expenses. Affected by the above-mentioned factors, it posted ANP of -US$59bn, down 176% YoY in 1H23.
Benefiting from supply constraints and demand improvements, copper prices may trend upward and zinc prices may gain underside supports. The deficiency of capital expenditures and the decline in the ore grades have set rigid constraints for copper supply, while the energy transition trend is likely to ensure stable growth in copper demand. This will result in a refined copper supply-demand balance of +33kt/+63kt/-292kt globally for the year of 2023/24/25, and we believe that copper prices may trend upward benefiting from the mismatch between supply and demand. Despite facing pressure from supply growth, zinc prices may gain underside supports from demand recovery and low stock effects.
The Company boasts world-class mine resources and has potentials in resource growth. MMG reported an equity-based copper/zinc resources of 9.11mt/10.95mt as of the end of 2022, ranking the fourth/second among the listed domestic mining companies. Its Las Bambas/Dugald River mine has a consolidated copper/zinc resources of 8.96mt/7.15mt, respectively. The Company completed the acquisition of the two mines at a proper timing, which provides experience for future mergers and acquisitions (M&As). In 2022, Las Bambas recorded its first reserve increase in three years, marking the sustainable support for its organic growth. We believe that the Company has potentials in resource growth in the future.
Copper business is poised to create growth upside in annual output with relived community issues and commissioning of new projects. Historically the production and transportation in Las Bambas has been disrupted by community issues. The Company's efforts at communication with local communities have finally paid off since 1Q23, and in 2Q23, the copper output increased by 153% YoY/39% QoQ, hitting a new high since 2021. Coupled with the inventory reduction brought by the resumption of transportation, the Company expects Las Bambas to achieve copper sales of 350kt in 2023, up 58% YoY. The Company is also committed to the construction commencement of Chalcobamba in 2H23, and Las Bambas’ annual copper output may reach 380kt to 400kt upon the commissioning; meanwhile, the Kinsevere expansion project has started construction in 2Q22. At full capacity of the above projects, the Company expects its annual equivalent copper output to reach 480kt to 510kt, over 60% upside from 2022.
Zinc business has gone through a quick recovery from disruptions and is committed for stable production. MMG’s zinc production comes from Dugald River and Rosebery projects, with the former ranking among the world’s top ten zinc mines in 2022. Due to the shutdown disruption in 1Q23, its 2023 production guidance has been downgraded to 135kt to 150kt, but has resumed since Mar 2023. In face of decline in ore grades, Rosebery has initiated an accelerated exploration project. Its 2023 production guidance of 55kt to 65kt indicates an upside of over 10% from 2022. We believe that the stable production of the zinc assets is a crucial support for the Company.
Potential risks: Earnings fluctuations caused by sharp changes in copper or zinc prices; lower-than-expected copper production caused by community issues in Las Bambas; production shutdown or reduction caused by environmental issues or safety accidents; disappointing cost controls; lower-than- expected increase in reserves.
Investment strategy: MMG is an international mining company with access to top global resources. We believe the Company has great growth potential in its copper sector catalyzed by the easing of community issues and the expansion of projects. We estimate its 2023E/24E/25E ANP at US$60mn/199mn/463mn. Given that the impact of the shutdown disruptions in Dugald River in early 2023, lowers the reference value of this year, we choose 2024 as the base for valuation. We select Freeport-McMoRan (FCX.N), Southern Copper (SCCO.N), Antofagasta (ANTO.L) and First Quantum Minerals (FM.TO) as comparable companies. Taking the average comps valuation of 20x 2024E PE (per Bloomberg consensus estimates) as a reference, we assign 20x 2024E PE to derive a target price of HK$3.5. We initiate coverage with a “BUY” rating.