The current situation of the company
Recently, Huayou Cobalt and PT Vale Indonesia (Vale SA Indonesia, PTVI) signed a cooperation framework agreement, the two sides plan to cooperate with limonite ore as raw material of high-pressure acid wetting project. The specific cooperation contents include: 1) the project plans to use Huayou wet process, technology and configuration to treat limonite ore in PTVI Pomalaa mine, and the planned production capacity of the project does not exceed 120000 tons of nickel metal MHP;2) the two sides propose to establish a joint venture company and negotiate a long-term ore supply agreement between the three parties; 3) PTVI has the right to acquire up to 30% of the shares in the joint venture company. 4) Huayou plans to underwrite the MHP products of the project, and if PTVI becomes a shareholder, it will be underwritten according to the proportion of shares; 5) the two sides negotiate to study the use of green or low-carbon emission power as the project power solution.
Comment
We believe that Huayou and PTVI can reach this framework agreement for three reasons: first, the advantage of PTVI resources is obvious. So far, PTVI has nickel reserves of 112 million tons, with a grade of 1.72%, equivalent to about 1.9374 million tons of nickel metal, accounting for about 2% of the world's nickel reserves. Second, Japan's Sumitomo Metal Mine (SMM) withdrew from the Pomalaa project. On April 25, SMM announced that it had withdrawn from the feasibility study plan of the Pomalaa project in cooperation with PTVI. SMM and PTVI carried out a pre-feasibility study on the project in 2012 and in 2018, but due to the lag of the project due to the epidemic, PTVI terminated its cooperation with SMM and found a new partner. Third, Huayou shows the technical strength of wet process. Through the smooth commissioning and trial production of Huayue, Huayou has gradually accumulated its own process, technology and configuration, but also has high project implementation efficiency.
We judge that the impact of this cooperation on Huayou also has three points: first, to carry out diversified upstream cooperation, expand Indonesia's circle of friends, and reduce supply risks. At present, most of the company's projects work with Castle Peak, and the mineral sources also come from Castle Peak and its industrial park. The PTVI project can help the company expand the channels of richer nickel resources, expand the circle of friends in Indonesia, and better take root in Indonesia. Reduce supply chain risk. The second is to further increase the self-sufficiency rate of nickel. Huayou currently has 225000 tons of nickel production capacity (full equity) in Indonesia, coupled with the 120000 tons with PTVI and the 120000 tons planned with Volkswagen the day before yesterday, assuming that these two projects can achieve a capacity of 465000 tons, corresponding to the supply of about 900000 tons of precursors, the self-sufficiency rate of nickel resources will be further increased. The third is to consolidate the development model, form a demonstration effect, and realize the replicable ability of the project. We believe that Huayou's integration model is being recognized, and this cooperation with PTVI, as well as the previous agreement with Volkswagen, reflect the superiority and replicability of Huayou integration model. In the future, more upstream and downstream enterprises may refer to this model to cooperate with the company and seek common development.
Profit forecast and valuation
Keep profit forecasts for 2022 and 2023 unchanged. The current share price corresponds to a price-to-earnings ratio of 16.7 / 12.7 in 2023. Maintain an outperform industry rating and a target price of 123.36 yuan, corresponding to 26.3 times 2022 price-to-earnings ratio and 20.0 times 2023 price-to-earnings ratio, which has 57.4% upside space compared with the current stock price.
Risk
The construction of Indonesian projects is not as expected; the demand of downstream new energy industry chain is not as expected.