Actively strengthen the mineral resources sector to create a second growth curve
In the process of infrastructure construction at home and abroad, China Railway obtained a number of mineral resource projects through “resource financialization” and “resource exchange projects”. It mainly relied on the operation of China Railway Resources Group, a wholly-owned subsidiary. The net profit returned to mother in '22 was 5.08 billion yuan, accounting for 14.5% of the total. At this stage, the company has wholly-owned, controlled or invested at home and abroad to build a total of 5 mines. The main products are copper, cobalt, molybdenum, lead, zinc, and silver, all of which have now entered the mature operation stage. As of the end of 23H1, the above 5 mines had resources/reserves including 7.58 million tons of copper, 590,000 tons of cobalt, 630,000 tons of molybdenum, 170,000 tons of lead, 420,000 tons of zinc, and 813 tons of silver. The corresponding production of these six metals in '22 was 30.3, 0.5, 1.5, 1.0, 24,000 tons, and 45 tons of silver, respectively.
Copper prices are rising rapidly, and the profit contribution of mineral resources is expected to increase
The company's current minerals have all entered the mature operation stage. We judge that subsequent changes in production are relatively limited, and future revenue flexibility may mainly come from changes in mineral prices. From the perspective of revenue share, we estimate that copper revenue accounted for more than 70% of the mining business sector in '22, which is the core variable affecting the profits of iron ore resources in China. Among them, 83.4% of copper production comes from the indirect holding of 41.72% shares in Huagang Mining's SICOMINE copper-cobalt mine. In '22, Huagang Mining's revenue was 151 billion yuan, net profit was 7.5 billion yuan, and net profit reached 49.9%. Copper prices have risen rapidly since 24 years. As of March 15, the spot closing price of LME copper had reached 8,907 US dollars/ton, up 5% from the average price for the full year of 23. By March 18, the average domestic copper price had reached 73,000 yuan/ton, equivalent to 10,274 US dollars/ton at the 7.1 exchange rate. Assuming that the production of major mineral resources in '24 is the same as in '22, the price of copper is assumed to be 8907 US dollars/ton, and the price of the remaining mineral resources is calculated by taking into account the USD/RMB exchange rate and shareholding ratio. We expect the net profit attributable to the iron ore resources sector to reach 5.64 billion yuan in 24, accounting for 16.3% of the overall net profit attributable to mother. If other conditions remain unchanged, and the copper price is calculated according to the latest domestic price of 73,000 yuan/ton, the net profit of the China Iron Mining Resources sector is expected to reach 6.42 billion yuan, accounting for 18.6%.
Build a blue chip for mineral resources of central and state-owned enterprises and maintain a “buy” rating
Taking into account factors such as increased financial pressure from local governments and debt conversion since the second half of '23, we lowered the company's net profit forecast for 23-25 to 328, 346, and 36.5 billion yuan (the previous value was 353/398/44.4 billion yuan), +5.0%, 5.3%, and 5.5% year-on-year respectively. Of these, the net profit of China Railway Resources Group for 24 is estimated to be the average of 6 billion yuan, and the net profit of the rest of the business is 28.6 billion yuan. By the close of trading on March 18, Jiangxi Copper, Zijin Mining, and Western Mining all agreed to have an average PE of 13.5 times. We used a segmented valuation method to give the mineral resources sector 13 times PE, corresponding to a market value of 78.4 billion dollars, and 5 times PE for other businesses, corresponding to a market value of 142.8 billion dollars, a total market value of 221.2 billion yuan, corresponding to a target price of 8.94 yuan. There is still room about 31% from the current stock price, maintaining a “buy” rating.
Risk warning: Prices of mineral resources fluctuate greatly, order carry-over speed falls short of expectations, increased competition among central enterprises has led to declining profit margins, and infrastructure investment growth falls short of expectations.