It is a leading private mining enterprise in Tibet. Its main products are lead antimony (including silver) concentrate and zinc concentrate. The company is mainly engaged in exploration, mining, beneficiation and trade of non-ferrous metals. Lead and antimony (including silver) concentrates accounted for 48.49% of revenue, and zinc concentrates accounted for 37.24% of revenue.
The company's 2018 performance forecast was mainly due to falling product prices and rising production costs. On January 15, 2019, the company issued the 2018 annual performance reduction announcement. The revenue for 2018 is expected to be 1.1 to 1.2 billion yuan, and the net profit of the mother is expected to reach 220 to 250 million yuan, a decrease of 18% to 28% compared with the same period last year (legally disclosed data). The company's performance declined, mainly due to falling product prices and rising production costs. First, the average price of antimony and zinc fell 5.34% and 2.17% year on year in 2018; second, the company recovered some tailings, which led to a decrease in the grade of raw ore and an increase in costs.
Based in Tibet, it is rich in resource reserves and has great potential to increase storage. By the end of 2017, the company controlled resource reserves of lead, zinc, copper, antimony and silver reached 733,500 metal tons, 1.1594 million metal tons, 25,600 metal tons, 168,800 metal tons, and 1,744.12 metal tons, respectively. Currently, the main mines are the Zaxikang and Lawu mines, which have 4 detailed prospecting projects, and the procedures for transferring 3 prospecting rights to mining rights are being processed. The company has great potential to increase storage. First, the company has a large number of mineral rights and is distributed in the Alpine-Himalayan ore forming belt, one of the largest ore forming belts in the world, with excellent mineral formation conditions; second, the degree of geological exploration and development and utilization of the mining industry in the Tibet region is low, and the company's existing deep mines still have huge resource potential; third, the company is developing related storage growth and expansion business through increased exploration efforts, shareholding, and acquisition.
Domestic production of lead, zinc, silver and antimony products is growing strongly. The production of the Zaxikang mine is stable, and the Keyue mine is scheduled to be put into operation in 2019. First, the output of the Zaxikang mine is relatively stable, and the mineral processing volume remains around 700,000 tons/year; second, according to the company's announcement, exploration and mining procedures for the Keyue project (designed to produce 400,000 tons/year) are being processed. Once completed, it is expected to be gradually put into operation in 2019-2020. According to our estimates, if Keyueda produces, the company's lead, zinc, antimony and silver production is expected to increase by 50%, 36%, 120%, and 57% respectively. Among them, silver production is expected to increase from the current 70 tons to around 110 tons.
A strong alliance with Tajik Aluminum opened a new chapter in the company's international development. In December 2017, the company acquired 50% of Talu Gold's shares held by Tajik Aluminum and joined forces with Talu. Taalu is the largest wholly state-owned enterprise in Thailand. It has rich experience in mine development. Huayu has a long history of experience in exploration, selection and production management in high-altitude mines. The high altitude and rich mineral resources are prominent features of the Central Asian region at the core of the “Belt and Road”. We believe that starting with Taalu Gold Industry, a strong alliance between the two sides will open a new chapter in the company's international development.
After cooperating with Taalu, the company is expected to become the world's main supplier of antimony ore and add gold concentrate and gold ingot business. First, according to the company's announcement, its Kangqiaoqi mine is scheduled to be put into operation at the end of 2019. After delivery, the company expects to add 16,000 tons of antimony concentrate per year. At that time, the company's annual antimony ore output will be about 21,000 tons, accounting for close to 15% of the world, and is expected to become the world's main antimony ore supplier. Second, after the company acquired Ta Aluminum Gold Industry, it is expected to produce about 2.2 tons of gold per year after production.
It is worth noting that gold and silver prices have now entered an upward channel. With the commissioning of new domestic mines and Taalu Gold, the company's silver and gold production capacity is expected to be released, and performance elasticity is expected to increase further. The increase in mineral gold mainly comes from the Kangqiao mine in Thailand, which is expected to add 2.2 tons of metal tons of gold after production; the increase in mineral silver mainly comes from the domestic Keyue mine, which is expected to add about 40 tons of metal tons of silver after production, and the company's silver production is expected to increase to around 110 tons. We believe that the price of gold and silver is expected to enter an upward channel in 2019 or beyond, and the investment of the company's gold and silver production capacity is expected to further enhance the company's performance flexibility.
Investment advice: “Buy-A” investment rating, target price of 12.93 yuan for 6 months. Considering the company's exploration, mining and gradual commissioning of mines in the Tibet region and Thailand in the last three years, as well as the systematic rise in gold and silver price centers, we expect the company's net profit to the mother in 2018-2020 to be 240 million, 350 million, and 620 million respectively.
Given the company's abundant resource reserves and storage growth potential in the Tibet region, as well as the broad development prospects of the Belt and Road region, as well as factors such as the company's healthy financial structure and the strong control of Dongheng Group, a major shareholder, the company should enjoy a certain valuation premium. We gave the company a “buy-A” investment rating. The six-month target price was 12.93 yuan, which is equivalent to a dynamic price-earnings ratio of 20x in 2019.
Risk warning: 1) The commissioning progress of major mining projects falls short of expectations; 2) the price of lead, zinc, antimony, gold and silver falls short