MMG announced the proposed acquisition of Khoemacau, a world- class medium to large copper mine based in Botswana. We expect the future expansion of the project to significantly open up room for long-term output growth and cost reduction, based on the solid production foundation of this brownfield project and MMG’s operational strength. We maintain the target price at HK$3.5 and reiterate the “BUY” rating.
　　MMG plans to acquire Khoemacau for US$1.875bn.
　　MMG announced the acquisition of a 100% stake in the owner of the Khoemacau copper mine from Cupric Canyon Capital for US$1.875bn (Rmb13.43bn). The Company expects the proposed deal to be financed by a shareholder loan from China Minmetals and a third party loan facility and that the transaction will be completed by 1H24.
Acquisition of a world-class mine to increase copper resource reserves and diversify asset mix.
　　The Khoemacau copper mine is a large, long-life copper mine located in north- west Botswana, boasting an area of 4,040 square kilometers and the 10th largest copper mineral resource in Africa. It is one of the world's largest copper sedimentary systems outside of the Central African Copperbelt. The project has copper mineral resources of 6.3mt at an average grade of 1.4% and mineral reserves of 0.62mt at 2.0%, with silver mineral resources of 8.1kt and mineral reserves of 620t. MMG expects its consolidated copper equivalent resources to increase from 18.1mt at the end of 2022 to 25.2mt upon the completion of the acquisition, an increase of 39.2%. We believe that the completion of the proposed transaction will significantly increase MMG's copper resources and diversify its geographical footprint, which will help reduce dependence on any single mine and dilute operational risks.
Brownfield project with high ramp-up potential and investment efficiency.
　　The project has been ramped up to a designed capacity of 50ktpa of copper concentrates, which the Company expects to further expand to 60ktpa by 2026 and 130ktpa by 2028-29. MMG has extensive historical experience in operating world-class medium to large mines. Take Las Bambas and Dugald River for example. Both projects reached first production 6-7 months after commissioning, significantly faster than the average of around 1 year indicated by McNulty's Series 1 ramp-up curve, demonstrating MMG's excellent production capabilities. The Company forecasts the growth capex for the expansion phase of the Khoemacau project to be US$700mn-800mn, corresponding to a capex intensity of around US$8,000/t, which is at a relatively low level among global copper mine expansion projects. We believe that against the backdrop of the solid production foundation of this brownfield project and MMG's operational excellence, future project ramp-up will bring into full play the benefits of the mine's high-quality resource endowment as well as the advantages of high investment efficiency.
　　Multiple projects proceeding in tandem to bolster long-term output growth and cost reduction.
　　According to the Company's announcement, the Khoemacau copper mine has an initial life of 27 years, with copper equivalent production of 50ktpa-65ktpa during 2024-26, before going through gradual expansion in 2027-28 and reaching an average of 145ktpa after 2029. Based on the exploration potential, MMG expects the project's forward production to reach 200ktpa. In terms of other on-going projects, in 3Q23, Las Bambas continued to hit a quarterly high output since 2021, demonstrating the effectiveness of communication with local communities. Additionally, MMG is committed to promoting the commencement of development of the Chalcobamba pit by the end of the year and expects the annual production of Las Bambas to reach 380ktpa-400ktpa after reaching full capacity. The Kinsevere expansion project is progressing well and may reach full production in 2025, with anticipated copper capacity at 80ktpa and cobalt capacity at 4ktpa-6ktpa. In conclusion, MMG expects its long-term copper output to grow by around 120% compared to 2022. In addition, the Company expects Khoemacau’s C1 cost to be around US$1.75-2.4/lb in 2024-28 and average US$1.55/lb after 2029, based on which it estimates the C1 cost will be lowered from US$2.06/lb in 2023 to US$1.93/lb in the future.
Undervalued copper mining leader.
　　From a static perspective, MMG's market-value-to-mineral-resources and market-value-to-copper production as of Nov 21, 2023 were Rmb2,054/t and Rmb55,000/t, significantly lower than the industry averages of Rmb3,988/t and Rmb264,900/t. From a forward perspective, the Company expects the average annual EBITDA of Khoemacau to be US$150mn in 2024-26 and US$600mn after 2029, and the long-term EV/ EBITDA multiple calculated by combining the enterprise value considering the growth capex is 4.3x, which is lower than the global average of about 7x-8x. In our view, MMG is significantly undervalued on both dimensions of resources and forward earnings, and repeated earlier disruptions will not change the high growth prospects embedded in both short-term marginal production improvements and long-term exploration of world-class mine resources. In the future, with the steady production of existing projects and active increments from new projects, MMG is well-positioned to enjoy the benefits of copper price upcyle and its active expansion and cost reduction. We are optimistic about the Company’s valuation upside.
Potential risks: Earnings fluctuations caused by sharp changes in copper or zinc prices; risks involved in the progress of acquisition, production, and further expansion of Khoemacau; lower-than-expected copper production caused by community issues in Las Bambas; tax issues involving Las Bambas; production shutdown or reduction caused by environmental issues or safety accidents.
Investment recommendation: The Company announced the proposed acquisition of the Khoemacau copper mine. We expect the future expansion of the project to significantly open up room for long-term output growth and cost reduction, based on the solid production foundation of this brownfield project and MMG’s operational strength. We maintain our 2023E/24E/25E attributable net profit (ANP) forecasts at US$60mn/199mn/463mn. 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 and maintain the target price of HK$3.5.
　　We reiterate the “BUY” rating.