The metal outputs of its two bigger mines reached or exceeded the high end of its guidance in 2023. For 2024, the guided output for its two copper mines with expansion underway is below our forecasts and this overwhelms the expected increase in output at its two zinc mines. While lowering our earnings forecasts for 2023-25, we still expect the company’s profitability to improve over time. We reiterate our BUY call with target price increased to HK$3.57.
　　Key Factors for Rating
　　The copper output of Las Bambas grew 19% YoY to 302k tonnes in 2023 as its operations were mostly uninterrupted. It is close to the high end of its guidance (305k tonnes). While the zinc output of Dugald River dropped 12% YoY to 152k tonnes in 2023 due to the suspension in 1Q23, it exceeded the high end of its guidance (150k tonnes).
　　The company has started to work on the development of Chalcobamba pit at Las Bambas with five contracts granted to local communities. However, the company only expects the copper output of Las Bambas to reach 280-320k tonnes in 2024, basically flat at the middle of range. This may be due to the delay of the work. In addition, it guides for C1 cost of US$1.6-1.8/lb, likely to be higher than the US$1.6/lb recorded in 2024.
　　At Kinsevere, the mine has started to produce cobalt in the form of cobalt hydroxide. While it targets to complete the transition from copper oxide ore to sulphide ore in 2H24, the guided copper output is only 39-44k tonnes for 2024, at best matching the 44k tonnes produced in 2023.
　　The zinc mines will fare better. At the middle of the guidance output range, the zinc output of Dugald River and Rosebery is expected to grow 20% YoY and 7% YoY respectively, with the former no longer suffered from suspension.
　　We increase our forecast loss for 2023 by 20%, expect a small loss for 2024 and reduce our 2025 earnings forecast by 28% after updating our output and metal price forecasts. Despite this, we still expect the company to show improving profitability over the coming two years.
　　Key Risks for Rating
　　Lower-than-expected metal prices.
　　Disruptions in operations and logistics of its mines.
　　Valuation
　　We increase our DCF valuation and hence target price from HK$3.19 to HK$3.57 after lowering our WACCs by 0.6-1.4ppt to reflect the decline in risk free rate (10-year US treasury bond yield from about 5% to 4%).