Hebei State-owned Assets Administration Commission Holdings, the right time to develop copper and iron resources
Strategic transformation, transformation from machinery manufacturing to South African mineral development and operation. The company's predecessor was Xuanhua Construction Machinery Factory, founded in 1950. Through the wholly-owned acquisition of Quadlian Hong Kong in 2017, the company officially transformed from machinery manufacturing to mineral development and began developing, operating and selling parabola copper ore, magnetite and vermiculite ore in South Africa. The State Assets Administration Commission holds Hegang Group as the largest shareholder and enjoys the collaborative advantage of mineral development. As of the end of the third quarter of 2023, Hegang Group held 34.59% of the company's shares and was the company's largest shareholder.
Iron ore mining and sales in South Africa are the main source of profit, and the potential for copper ore can be expected ① By the end of 2022, the company still had about 140 million tons of magnetite on the ground, with an average grade of 58%. PC requires only simple magnetic separation of magnetite to raise the magnetite grade to 62.5% to 64.5%. Apart from being supplied in small quantities to South African manufacturers, most of the magnetite is sold to Chinese steel companies. Iron ore revenue in the first half of 2023 accounted for 66%, down 4.6pct from 2022, gross margin was 79.61%, down 6.76pct from 2022.
② Copper sector. The company's current operating project is copper phase I, with a raw mineral production capacity of 10 million tons/year, but resources have gradually been exhausted. According to questions and answers from the company's investors, the copper phase II project is expected to be put into operation by the end of 2024. The average grade of raw ore in the copper phase II project is 0.8%, and the design production capacity is 11 million tons. The copper phase II production and operation period can continue for 15 years. Meanwhile, in terms of smelting capacity, according to the company's announcement, the company has upgraded its smelting and processing equipment. The copper smelting design capacity is 80,000 tons, and the added value of the product will be further increased. In the first half of 2023, the copper sector accounted for 21.8% of revenue, an increase of 2.5 pct over 2022. The gross margin was -1.54%, down 3.62 pcts from 2022.
③ Vermiculite sector. As the main vermiculite mining area in South Africa, PC vermiculite ore is the world's top three vermiculite ore. Vermiculite production accounts for about 1/3 of the global share. Due to the high grade and quality of PC vermiculite ore, PC and downstream vermiculite customers have established strong supply relationships, and have been exporting and supplying vermiculite to European and Asian customers for a long time. The vermiculite sector accounted for 9.7% of revenue in the first half of 2023, an increase of 1.8 pct over 2022.
The weakening of macroeconomic suppression is compounded by the tightening of the supply and demand pattern. Copper prices tend to rise and fall, and the Fed's interest rate hike cycle has basically come to an end. Higher interest rates have weakened, and domestic macroeconomic policy support continues. Domestic and foreign inventory cycles are expected to resonate upward. Strong performance in copper prices can be expected during the stock replenishment cycle. In terms of fundamentals, supply-side capital expenditure is low. Subsequent supply growth is weak, and investment in copper projects is narrowing year by year. We have sorted out the production volume of key global copper mines in 2023, which is expected to increase by about 721,000 tons year on year, about 546,000 tons year on year in 2024, and about 328,000 tons year on year in 2025.
The domestic iron ore gap continues to exist. Both supply and demand increase iron ore prices, and iron ore prices are expected to stabilize. China's iron ore resource reserves are sufficient, but poor minerals account for the majority of composite minerals. According to the Ministry of Natural Resources, by the end of 2022, China's iron ore reserves were 16.246 billion tons, accounting for 11% of global reserves, ranking fourth in the world, but the average iron content of China's iron ore was 34.5%, which is lower than the world average. Domestic iron ore supply is still difficult to meet the needs of economic growth. The domestic economy continued to recover moderately in 2023, and demand for iron ore grew strongly. According to customs import data, in 2023, China's iron ore imports were 1.18 billion tons, up 6.6% year on year, and domestic iron ore raw ore production was 991 million tons, up 7.1% year on year. In 2024, with the expansion of production capacity in mainstream mines, shipments are expected to increase year-on-year, supply and demand will both increase as demand continues to recover on the demand side, and iron ore prices are expected to remain stable.
Investment advice:
We expect that in 2023/2024/2025, the company will achieve operating income of 5.387 billion yuan, 6.268 billion yuan, and 6.781 billion yuan respectively, and realized net profit of 950 million yuan, 1,145 billion yuan, and 1,344 billion yuan respectively. The corresponding EPS is 1.46, 1.75, and 2.06 yuan/share, respectively. Currently, the corresponding PE price is 10.7, 8.8, and 7.5 times. We selected iron ore and copper mining companies in the same industry for valuation comparison, and gave them 12 times PE in 2024, first coverage, and a “buy-A” rating. The target price for 6 months was 21.0 yuan/share.
Risk warning: Project progress falls short of expectations, risk of raw material price fluctuations, overseas business policy risks, forecast assumptions and model errors exceed expectations.