Key points of investment
The “mine+trade” model has a global layout and has become a leading resource leader: “mine+trade”: The company mainly has two major business segments: mining sector business (copper, cobalt, molybdenum, tungsten, niobium and phosphorus) and mine trade business. The total revenue share in 2022 was 15%/85%, respectively, and the gross profit contribution accounted for 66%/34%. Global resource leader: Since 2013, the company has bucked the trend and acquired overseas resources, successively acquired Australian NPM copper-gold mine, Brazilian niobium-phosphate mine, Congo (gold) TFM copper-cobalt mine, and IXM and KFM copper-cobalt ore, the world's third-largest basic metals traders, expanding its business globally. As of 2022, the company has become the world's leading producer of tungsten, cobalt, niobium, and molybdenum, as well as a leading producer of phosphate fertilizer in Brazil.
Long-term copper supply is limited, and cobalt reserve production is growing steadily: 1) Copper supply has been tight for a long time, and new energy sources of electricity have become a growth point for demand.
Supply: Copper has long been constrained by insufficient supply due to limited capital expenditure, geopolitics, and declining mine grade. Demand: From 2013-2023, the overall consumption of refined copper in the world and China showed an upward trend, with annual demand exceeding 25 million metric tons. From the perspective of downstream demand, the electricity sector accounts for nearly 50% of China's copper consumption. We expect there are broad prospects for copper demand development along with the “14th Five-Year Plan” Guonan Network investment and the new energy sector. 2) Cobalt reserves and production are growing steadily, and demand for new energy electric vehicles is strong. Supply: Global cobalt reserves are rising steadily. In 2022, global cobalt reserves were 8.3 million tons, yoy +9.2%. By region, production is mainly concentrated in the Democratic Republic of the Congo (DRC) region, accounting for 68% of the world. By enterprise, the CR2 in terms of resource volume in 2021 was Luoyang Molybdenum Industry and Glencore, accounting for 38% of the world. Demand side: Cobalt is mainly used in new energy fields such as lithium batteries. In 2016-2021, the consumption of cobalt in the Chinese market increased from 31,000 tons to 55,000 tons, and the CAGR was 11.8%, showing an overall upward trend.
It has world-class high-quality resources, and mining+trade forms a synergy of growth: 1) Resource side: It has world-class high-quality resources, and has accumulated and underdeveloped the performance of the “copper and cobalt” core metal. The company currently has 5 mines around the world and 3 mining areas in Brazil, of which copper and cobalt account for 1.1%/19.4% of global reserves. Copper: We are optimistic about the potential for the company's copper resources to rise rapidly. From a price perspective, according to our estimates, the copper price will rise by 10%, and the company's gross margin will increase by about 1 pct. Looking at the revised stock price, the company's stock price is expected to have a strong positive correlation with copper supply and demand and the expectation of US interest rate cuts in 2024, which will drive the company's stock price to rise. From a production perspective, the company's TFM and KFM copper resources have huge potential in 2024. Due to abundant reserves and high grade, the company expects to produce 52-570,000 copper in 2024 ton (yoy+ 24%-36%), leading to a large increase. Cobalt: The quantitative growth logic remains unchanged. Cobalt production is 56,000 tons (yoy +174%) in 2023, and the company expects to produce 60,000 to 70,000 tons in 2024, which is a steady increase. The rest of the sectors: the niobium-phosphorus sector is stable in volume and price, and the gross margin of the molybdenum and tungsten sector has rebounded slightly through fine management. We look forward to the release of the Donggobi molybdenum ore in the future. 2) Countertrend expansion turned a resource advantage into a cost advantage. The company's 5 countertrend acquisitions all brought about a significant rise in stock prices. At the same time, the company's cost control efforts were ahead of schedule, achieving the cost reduction target of 500 million US dollars in 3 years ahead of schedule. 3) The technical side continues to invest in R&D to reduce costs and increase efficiency.
The company pioneered the application of 5G technology and driverless technology to achieve remote operation, improve work safety, and increase production efficiency by more than 40%. 4) IXM creates a new model of “mining+trade” to achieve collaborative cooperation and resource integration. IXM is the third largest metal trader in the world. Its business covers 80+ countries. It has now extended to the company's copper-cobalt-cobalt-niobium-niobium variety business industry chain, which has played a joint role.
Profit forecast and investment rating: We expect the company's 2023-2025 EPS to be 0.3, 0.4, and 0.6 yuan/share, respectively, and the corresponding PE will be 20/14/11 times, respectively. Based on the company's significant increases in TFM and KFM copper deposits in 2024, and future production releases can be expected to resolve equity issues. It was covered for the first time, and a “buy” rating was given.
Risk warning: Increased market competition; geopolitical risks; metal prices fall short of expectations.