Profitability challenges in 2023; significant room for improvement in 2024

Minmetals Resources achieved net profit of US$9 million to mother in 2023, down about 95% from US$172 million in '22. Although the company's main mine, Las Bambas (LB), resumed normal production and transportation in 1H23 and achieved a 64%/24% increase in project revenue/EBITDA throughout the year; however, due to the blocking of the Kinsevere and Dugald River project operating environments, the company's profit declined sharply. Based on a combination of rising costs and production growth, we adjusted Minmetals Resources' profit forecast for 24/25/26 to US$2.4/6.71 billion (pre-24/25 value: US$4.5/60 billion). In view of the improvement in the company's business environment and the increase in resource reserves, compounded the optimistic outlook for copper prices, the company's rating was raised to “buy”. The target price was HK$2.9, based on 1.37x 2024E BVPS of $0.27 (80% off the company's average PB since 2019, to reflect the uncertainty of disruptions to mine operations).

Las Bambas has resumed stable operation, and the Chalcobamba project has made every effort to keep the LB mine operating steadily since the resumption of transportation in March of last year. The mine was affected by community road blockages in '22, which interrupted transportation for 173 days and stopped production for more than 50 days. In '23, LB copper concentrate production increased 19% year over year to 302,000 tons, and sales also benefited from a 36% year-on-year increase in inventory digestion to the second highest level in history (375,000 tons). The increase in production and sales partially offset the negative impact of the decline in copper prices, and the project EBITDA recorded a 24% year-on-year increase. The LB mine plans to produce 28-320,000 tons of copper in 24. The upper limit depends on the development progress of the CB project. Currently, the company has entered the mining area to make preliminary preparations, and it is expected that pre-divestment work will begin in 1H24. The CB project is expected to help increase the LB mine's mid-term production to 350,000 to 400,000 tons.

The profitability of the Kinsevere and Dugald River projects in 2024 is expected to improve the 2023 Kinsevere project, which saw a 10% year-on-year decrease in production due to declining grade and grid power supply issues, while C1 costs climbed about 30% to $3.29/lb due to increased third-party ore consumption. As ore supply increases in the Sokoroshe II mine site in 2024, the cost is expected to fall back to $2.8-3.15/lb. The Dugald River project was affected by the discontinuation of production in early 23, leading to a decline in production and sales volume and cost increases throughout the year. The project's zinc concentrate production in '24 returned to the level of 175-190,000 tons. At the same time, the cost is expected to drop from $0.93 per pound to 0.7-0.85 US dollars/pound, and profitability is expected to improve.

Another low-cost world-class copper mine's profit contribution is imminent

The company signed a share purchase agreement in 4Q23 to acquire the Khoemacau copper mine in Africa. The mine currently produces about 60,000 tons of copper per year, and production will be further increased to 130,000 tons/year according to the expansion plan. It is expected to be put into operation by 2028 or 2029. The company estimates that the project expansion will bring about 600 million US dollars of EBITDA after completion (150 million US dollars before production expansion), while the C1 cost will drop from the current 1.75 to 2.4 US dollars/pound to 1.45 to 1.65 US dollars/lb, which is in the top 50 of the cost curve. In addition, the project is located in the promising new Kalahari copper belt. It has the potential for further exploration and expansion of production based on the existing 450 million tons of mineral resources (1.4% copper grade), and the long-term output may reach 200,000 tons.

Risk warning: 1) Production in major mines was interrupted; 3) Metal prices were weaker than expected.