Uranium production is expected to rise
The uranium mine currently in operation by the company is located in Kazakhstan. The company holds 49% interest in the project, has obtained underwriting rights for the same proportion of natural uranium, and sells all products to the parent company CGN Group. The company's natural uranium production in 2023 increased 0.9% year on year to 2,620.4 tU, of which Semizbay-U (Semizbay-U) and Ortalyk (Ortalyk) were 976.8 tU and 1,643.6 tU respectively, up 1.8% and 0.3% year on year.
The production capacity of Xie Company (including two groups of uranium mines, Xie Mine and Yi Mine) is 1,200Tu, and the utilization rate reached 81.4% last year. The Austrian company includes two groups of uranium ores, medium mining and mining. The production capacity of the medium mine is 2,000 tU, and the annual utilization rate is 75.6%. The Iraqi mine is expanding its production capacity, which is expected to increase by 500 tU and 400 tU in 2025 and 2030, respectively. As production capacity expands and utilization rates increase, we expect the company's equity uranium production (calculated at 49%) to rise from 1,284 tU in 2023 to 1,800 Tu in 2025. Even so, production is still far below the parent company's annual demand of about 5,000 tU, and supply continues to be in short supply.
Newly signed uranium prices rise
The weighted average sales price of new contracts signed by the company in 4Q23 increased by 41.6% year-on-year to 72.7 US dollars/pound, mainly due to the short supply of natural uranium, which led to a rise in global uranium prices. In recent years, the number of nuclear power reactor construction starts around the world has continued to grow (see Figure 1). China has also already resumed suspending approval of new nuclear power projects due to the Fukushima nuclear accident in Japan in 2011.
Considering that the spot price in the natural uranium market has broken through the high level of 100 US dollars/pound in recent years, we expect the company's new contract sales price to rise 72.6% year on year to 89.9 US dollars/lb, and the 4Q24 price will reach 90.9 US dollars/pound, up 25.1% year over year (see chart 2 and 3) (note: in terms of self-production trade, the company signed an agreement with the buyer CGN Group, and sales price = (40% * base price) + (60% * spot index), the 2023-2025 base price will be 61.78, 63.94, 66.17 US dollars, respectively /lb).
In the long run, insufficient supply of weather uranium combined with global nuclear power expansion will drive natural uranium prices. UxC, a research institute for the nuclear energy industry, estimates that the world's new production capacity will not be sufficient to meet the demand gap around 2025, and the global uranium market will enter a peak period of production cuts and decommissioning around 2030. The International Energy Agency predicts that under the declared commitment scenario (APS), global nuclear power generation will rise from 2,682 TWh in 2022 to 3,496 TWh in 2030 and 5,301 TWh in 2050, with CAGR of 3.4% and 2.5% respectively during the period (see Figures 4, 5, and 6).
Market consensus shareholders' net profit CAGR reached 31.7% in 2022/25
The company's 1H23 revenue rose 21.6% year on year to HK$2.94 billion, but shareholders' net profit fell 49.4% year on year to HK$180 million, mainly due to (1) the company's gross margin fell 1.7 percentage points to 6.4% year on year due to one-time impairment of international trade inventory; (2) Xie Company's production increased 4.0% year on year to 443 tU in the first half of the year, but sales volume fell 8.1% year on year to 362 tU. Sales costs increased 26.3% year on year during the same period, but the price increased by only 2.0% year on year; (3) The Ministry of Energy of Kazakhstan levied fines on Austrian companies for illegal mining during the 2018-20 period (note: finally set at HK$198 million). Since CGN Mining only joined the shares in 2021, negotiations are being made with Kazakh Yuangong (Kazakh National Atomic Energy Industry Corporation), the majority shareholder of the Austrian Company, to obtain compensation. If a compensation agreement is implemented within this year, it may bring additional benefits to the company. Market consensus expects net shareholders' profit to rise 10.7% year-on-year to HK$570 million in 2023, and net shareholders' profit CAGR to reach 31.7% in 2022.
Reasonable valuation
Although CNNC International (2302 HK), a subsidiary of the central enterprise CNNC Group, is also involved in the natural uranium industry, the nature of CNNC International's main natural uranium trading business is different compared to the CGN mining industry's main natural uranium mining. For CGN Mining, mining stocks are comparable peers. According to market consensus forecasts, CGN Mining's price-earnings ratio and net price-earnings ratio in 2024 were 13.9 times and 2.96 times, respectively, higher than the average value of Hong Kong mining stocks, but the price-earnings ratio was still below the upper limit of the industry. On the other hand, there are many uranium mining companies that are listed overseas, and their price-earnings ratio is generally higher than that of companies.
Risk warning: (1) project delays, (2) increased global uranium production, (3) slowing nuclear power development, and (4) regulation/policy risks.