MMG Limited’s US$21.1m net profit in 1H24 represented a significant turnaround from a net loss of US$58.8m in 1H23. Higher copper price and big jump in amount of zinc sold were the key growth drivers. We expect the company’s earnings to jump about 2.3x HoH in 2H24 mainly on the ramp up of Las Bambas and Khoemacau. While we cut our 2024- 26 earnings forecasts by 48-49% mainly on lower copper price and cobalt price assumptions and higher depreciation and amoritsation, we reiterate our BUY call as further downside for copper price should be limited after the recent pullback.
　　Key Factors for Rating
　　In 1H24, the average LME copper spot price rose 5% YoY whereas the average gold price and silver price gained 14% YoY and 12% YoY respectively. The discount of the company’s realised metal prices to the benchmark market prices also narrowed. In addition, the total amount of zinc sold surged 36% YoY as the operations of Dugald River suspended for 36 days after a fatal accident in 1H23 while its operations were undisrupted in 1H24.
　　While its earnings of US$21.1m in 1H24 looked low compared to US$67.8m in 2H23, the latter was boosted by a deferred tax credit of US$61m. In addition, the company booked total of US$20.2m one-off expenses arising from the acquisition and integration of Khoemacau in 1H24.
　　We now expect the company’s earnings to jump about 2.3x HoH in 2H24 as we expect its total copper sales volume to surge 53% HoH given the ramp up of output at Las Bambas and Khoemacau. In addition, we should no longer see interest expense at Khoemacau level after CNIC converted its loan to a 45% stake in the mine. There should also be no more acquisition related cost in 2H24.
　　LME spot copper price dropped from about US$11,000/tonne in mid-May to currently about US$8,800/tonne as the net long position of speculators in Commodity Exchange fell 90% over the same period. The speculators should not be able to drive further significant downside in copper price.
　　Key Risks for Rating
　　Sharp fall in metal prices.
　　Lack of progress in the sales of cobalt produced at Kinsevere.
　　Valuation
　　We reduce our DCF-based target price from HK$3.64 to HK$3.59. While the cuts in earnings forecasts appears to be drastic, the changes in cashflow are much smaller as part of the cuts coming from 16-19% increases in depreciation and amortisation charge which is a non-cash item. We also slightly lower our long- term copper price assumption from US$8,800/tonne to US$8,600/tonne.