Event

The company announced the progress of acquisition on February 20th, 2013: the company received the pre-survey report of Niobium-Tantalum-uranium Ore in the Mining areas of 23702, 23324, 28668 and 28608 in the Republic of Madagascar submitted by Central African Resources (BVI) on February 9, 2013, issued by Guangdong material Experimental testing Center and the 704 Geological Brigade of Guangdong Geological Bureau. The predicted resource of niobium-tantalum-uranium ore is 34.75 million tons, including 76440 tons of Nb2O5 (niobium pentoxide), 12508 tons of Ta2O5 (tantalum pentoxide) and 17373 tons of U (uranium).

Comment

We believe that the quality of the proposed acquisition target is excellent:

1. In addition to Tantalum, there is a surprise for uranium, with reserves worth 52 billion: the pre-survey report shows that compared with the previously announced acquisition intention, apart from tantalum and niobium ore, an additional 17373 tons of uranium has been added, exceeding market expectations. According to the current market price, the domestic price of tantalum ore Ta2O530%CIF is 1.65 million yuan / ton, niobium ore Nb2O550%min,Ta2O55%min is 260000 yuan / ton, and the price of uranium metal is 48 US dollars / ounce. According to the calculation, the value of resource reserves is as follows: tantalum 12508mm 165max 10000 = 20.638 billion yuan, niobium ore 76440mm 26max 10000 = 19.874 billion yuan, uranium metal 48,2204mm 6.2417373max 10000 = 11.464 billion yuan. The value of total mineral reserves is 206.38 yuan, 198.74 yuan, 114.64 = 51.976 billion yuan.

2. Tantalum and niobium is a scarce strategic metal and uranium is a nuclear metal: tantalum is widely used in the electronic circuits of national defense, aviation, aerospace, electronic computers, high-grade civil electrical appliances and all kinds of electronic instruments. In the metallurgical industry, tantalum and niobium is mainly used as an additive in the production of high strength alloy steel, improving the properties of various alloys and making superhard tools. Uranium is the most basic raw material of the nuclear industry, an indispensable strategic metal for the development of the nuclear industry, and plays a vital role in the development of China's nuclear power industry and national defense industry. We believe that the resources acquired by the company are all domestic scarce strategic metals, and the downstream demand is very considerable.

3. The ore grade is similar to that in China. According to our understanding of the ore grade in Africa, there is room for further increase in the future: according to the announcement, the ore grade is 0.036% of tantalum ore, 0.22% of niobium ore and 0.05% of uranium ore, which is equivalent to that of similar ores in China. According to our understanding of African tantalum-niobium ore, the grade of tantalum-niobium ore is much higher than that in China, which is higher than that in the announcement. We think that with the further exploration work in the future, the resource reserves are still likely to rise.

The remaining risks of the acquisition:

1. There is some uncertainty in the follow-up work: as mineral project exploration is divided into four stages: geological pre-survey, general survey, detailed survey and exploration, it is still in the first step, with the progress of follow-up exploration work, there are still some uncertainties in resource reserves, technical and economic evaluation of ore deposits and the feasibility of mine construction.

2. The transaction price has yet to be determined

3. Political risks brought about by Malaysia's general election in May: as mentioned in our previous report "taking the first step in mineral development", as Malaysia is currently an interim government, the extension of the company's exploration rights and the subsequent approval of mining rights still have to wait until after the May general election, there are certain political risks.

Investment suggestion

In the previous report, we only valued the company's titanium concentrate sales business and existing hotel business. We estimate that the company will achieve a net profit of 51 million yuan, 188 million yuan and 419 million yuan from 2012 to 2014: the EPS in 2012 and 2014 is 0.22,0.67 and 1.49 yuan, respectively, corresponding to 64.96,23.89,10.73 times of PE from 2013 to 2014.

As the company's acquisition process progresses, the uncertainty of the deal will gradually diminish, and we assume a valuation of the company's segment upon completion: we value the company's titanium concentrate sales and hotel business at 25 times PE over 13 years, with a market capitalization of 1.88 to 25 = 4.7 billion. For the value of 52 billion reserves of tantalum, niobium and uranium, we think that the reasonable market value should be more than 2.5 billion, so we think the total market value of the company should be more than 7.2 billion, and the theoretical stock price should be more than 31.3 yuan.

We maintain the company's overweight rating for the time being, taking into account the pending completion of the deal and the political risks we will face in May.