The company is a leading private mining enterprise in Tibet. Currently, it relies on major mines such as Zaxikang and Rawu in Tibet. Its main products are lead antimony (including silver) concentrates and zinc concentrates. The company is mainly engaged in exploration, mining, beneficiation and trade of non-ferrous metals. By the end of 2018, the company's domestic controlled reserves of lead, zinc, copper, antimony and silver reached 712,300 metal tons, 25,400 metal tons, 153,900 metal tons, and 1,656.78 metal tons, respectively. In 2018, the company's lead and antimony (including silver) concentrate and zinc concentrate revenue accounted for 48.5% and 37.2%, and gross profit accounted for 60.3% and 39.4% respectively.

Domestic production of lead, zinc, silver and antimony products is growing strongly, and production at the Zaxikang mine is stable. The Keyue mine is scheduled to be put into operation in mid-2020, and production of the main products will increase dramatically. 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, the Keyue project (with a design beneficiation capacity of 400,000 tons/year) is expected to be put into operation in mid-2020. According to our estimates, if Keyue is produced, the company's lead, zinc, antimony, and silver production is expected to increase by 49%, 36%, 122%, and 57% respectively. Among them, silver production is expected to increase from the current 65 tons to about 102 tons.

Since the end of 2017, the company has made continuous efforts to acquire domestic and foreign gold assets, demonstrating the company's determination to shift its strategic focus to precious metal mines. First, in December 2017, in response to the country's “Belt and Road” call, the company acquired 50% of Tal Gold's interest and began laying out antimony and gold assets in Tajikistan. After the acquisition, 24.95 metal tons of gold equity reserves were added, and gold concentrate and gold ingot businesses were added, reaching an estimated annual production of about 1.1 tons of gold equity after production. Second, in June 2019, the company landed in Africa, which is rich in gold resources, and acquired 70% of the shares of Tigray Resources Private Limited in Ethiopia. The company's controllable resources were 9.5 tons of gold. Third, in November 2019, the company plans to acquire 40% of the shares of Guizhou Asia Pacific Mining Co., Ltd. to obtain mining rights and two prospecting rights in the Mud Fort Gold Mine; after the acquisition is completed, the company plans to control 113 tons of gold resources and more than 50 tons of equity resources. We believe that with the incubation and commissioning of the above gold mining projects, the company's main business metal varieties are gradually shifting from lead and zinc to gold and silver, and there is still potential for further merit mergers and acquisitions of domestic and foreign precious metal assets in the future.

Talu Gold is scheduled to be put into operation in mid-2020. The company is expected to become the world's main supplier of antimony ore and add gold concentrate and gold ingot business. In December 2017, the company joined forces with Tajik Aluminum to acquire 50% of Tal Gold's shares, adding 132,300 tons of antimony resources and 24.95 tons of gold. Tal 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 characteristics of the Central Asian region at the core of the “Belt and Road”. We believe that starting with Tal Aluminum Gold Industry, a strong alliance between the two sides will take the first step in the company's international development. According to the company's announcement, its Kangqiaoqi mine plans to be put into operation in mid-2020. First, 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 nearly 15% of the world, and is expected to become the world's main antimony ore supplier; second, after delivery, it is expected to produce about 2.2 tons of gold and 1.1 tons of equity output per year.

It landed on the African continent through the Tigray project in Ethiopia, opening up a new space for international mining development.

Tigray Resources Private Limited has two mining licenses, Da Tambuk and Mato Bula. It controls about 9.5 tons of gold resources, a grade of about 4.2 g/ton, and a sampling volume of 300,000 tons of ore per year. It is expected to be put into operation by the end of 2021, reaching an annual gold production of 0.7 to 0.8 tons/year after production. The company took the Tigray project as a starting point, laying a solid foundation for expanding the African region.

The Guizhou Nibao Gold Mine Project has great resource reserves and performance potential, which is an important step in establishing the company's position in the gold mine development industry. First, through Talu Gold, the company has accumulated rich experience in gold resource development. It is relatively mature in engineering technology, talent management, etc., and has the foundation for transforming gold resource development. Second, the majority shareholders have extensive experience in geological exploration. After detailed verification before the acquisition, the project success rate is high. Third, the Mud Fort Gold Deposit is an important part of the “Golden Triangle” mining complex in Gui, Yunnan and Gui. It also has two types of stratified and fractured gold ore bodies. It is one of the major breakthroughs in gold prospecting in recent years, with huge potential to increase production. Fourth, the Mud Fort project is being built steadily, and future performance will be gradually released. According to the company's announcement, the gold control resource volume of the Mud Fort Gold Mine Project is 54 tons, the grade is 4.5 g/ton, and the mining volume is 1 million tons of ore per year. It is expected to be officially put into operation in 2022. After delivery, the estimated gold production is 3-4 tons/year. The estimated cost of gram gold is 100-120 yuan/gram. After production, the Mud Fort Gold Mine is a large single gold mine in China, with strong economic benefits, which is expected to establish the company's position in the precious metals industry.

The three major gold mining projects will gradually reach production in 2020-2024. In addition to the fact that gold and silver prices have entered an upward channel, the company's precious metals performance and valuation flexibility will be greatly strengthened. According to our estimates, the company's gold equity production from 2020 to 2021 was 0.55 tons and 1.18 tons respectively, mainly benefiting from the gradual production of the Tarkin project; starting in 2022, the Tigre and Guizhou Mud Fort projects are expected to be put into operation one after another. After the company's three major gold projects are fully produced in 2024, gold production is expected to reach 6.6 tons, and equity production is expected to reach about 3.2 tons. Considering that the current price of gold and silver has now entered an upward channel, the investment of the company's gold and silver production capacity will further enhance the flexibility of the company's performance, and the company's overall valuation center is expected to rise systematically.

Investment advice: Maintain the “Buy-A” investment rating. The target price for 6 months is 11.81 yuan/share. Considering the gradual production of the Keyue Project and the Tajin Project in 2020-2021, the prices of lead, zinc and gold from 2019 to 2021 were 16,500 million/ton, 15,000/ton, 15,000/ton; 18,000/ton, 16,000/ton, 16,000/ton; under the assumptions of 315 yuan/gram, 360 yuan/gram, and 396 yuan/gram, we expect the company's net profit to be 138 million, 311 million, and 501 million yuan respectively. If no convertible debt-for-equity conversion is taken into account, EPS is respectively $0.26, $0.59, and $0.95; if we consider that convertible bonds added 63 million yuan in share capital after full stock conversion in 2020, the diluted EPS was $0.26, $0.53, and $0.85 respectively. In view of the fact that the company's Tigray Gold Mine in Ethiopia and the Mud Fort Gold Mine in Guizhou gradually reached production after 2022, and that the company's Mud Fort project has great potential to increase gold storage, combined with a systematic shift in the price centers of gold and silver, the company's main business will gradually switch from lead, zinc, and antimony to precious metals, and the company's valuation center will also increase systematically. We maintain the “Buy-A” investment rating. The target price for 6 months is 11.81 yuan/share, which is equivalent to a dynamic price-earnings ratio of 20.0x in 2020.

Risk warning: 1) the commissioning progress of major mining projects fell short of expectations; 2) the price of lead, zinc, antimony, gold and silver fell short of expectations; 3) asset acquisitions fell short of expectations.