Hegang Resources: The target of copper and iron resources, Hegang Steel Resources is mainly involved in the three major businesses of copper, magnetite, and vermiculite. In 2022, the iron ore sector contributed 71% of the company's revenue and 94% of gross profit; in the future, as the second phase of the copper project reaches production, the copper sector is expected to contribute considerable performance elasticity. (1) Copper business: The company's future copper resources mainly come from the Copper Phase II project. Copper Phase II holds 965,300 tons of metallic copper reserves and a design production capacity of 70,000 tons. Assuming a copper price of 60,000 yuan/ton (excluding tax) and an annual output of 70,000 tons of metallic copper, the company's full production cost is estimated to be about 36,800 yuan/ton, which is expected to contribute 704 million yuan to net profit of mother. In terms of pace, the second phase of copper is scheduled to be put into operation by the end of 2024, and production will be completed in 2026.

(2) Iron ore business: The company's iron ore resources mainly come from associated ore isolated during the early copper mining process. The shipment volume depends on carrying capacity; the company's current shipping capacity is 8 million tons/year. Calculated from the four links of “refining - land transportation - port - shipping”, the company's complete production cost of iron ore may reach 65 US dollars/ton, forming a significant cost advantage compared to domestic iron ore companies.

Copper: Shortage of supply and demand+upward cycle, with both win rate and odds

In the past three years, global demand for wind power, photovoltaics, and electric vehicles has developed rapidly (demand for new energy accounts for about 13% in 23 years), offsetting the negative impact of the downturn in the traditional economy. Instead, obvious copper stocks have been reduced to historic lows. Looking ahead, copper not only benefits from the upward cycle, but also benefits from the optimization of the demand structure for new energy development, as well as supply constraints caused by supply disturbances and constraints, and the tight balance of the industry is expected to continue. (1) Demand: European and American industries have bottomed out+the impact on domestic real estate is manageable, and demand for copper is expected to maintain a growth rate of nearly 3%. Even if the completion end of real estate falls by 50% in the future, the estimated impact on copper demand is only 2+%. To counterbalance this, the average annual contribution of new energy sources can increase by 3+%. (2) Supply: Upfront capital expenditure peaked+grade decline, limiting the growth potential of copper supply in the next few years; however, disturbances on the copper mine production side have intensified in recent years, further exacerbating the shortage of copper resources. (3) Catalysis: In the context of this round of interest rate cuts by the Federal Reserve, demand for copper in Europe and the US is relatively small, and the industry bottomed out early; the service sector, as evidenced by interest rate cuts, is weakening, and the impact on copper demand is very limited; it may be expected to open up room for domestic policy relaxation, boosting copper demand expectations, and thereby catalyzing an upward trend in commodities.

Iron ore: A variety with strong domestic demand, with an excellent pattern supporting supply rigidity. As the most elastic variety that reflects domestic demand, iron ore is expected to rebound steadily with the support of an excellent supply pattern and improved domestic economic expectations. (1) In the past: The oligopoly supply pattern constrained production flexibility (about 75% of global shipments CR4) + low downstream steel concentration and obvious overcapacity, boosting iron ore's strong position in the black industry chain. The profit level of leading companies is clearly ahead of other resource varieties. (2) Currently: Since the beginning of the year, domestic demand for steel for construction has stalled and declined, causing steel prices to plummet, and the industry has generally fallen into cash flow losses; under negative feedback from production cuts, iron ore prices have declined to a high level. (3) Outlook: In the short term, as temperatures warm up and local funding conditions improve, demand for construction steel is expected to gradually pick up, forming fundamental support; and there is still room for policy strength. It's just a long term. Against the backdrop of the commissioning of the domestic “cornerstone plan”, development of the Simandou project, and rising demand from emerging countries represented by India, global iron ore supply and demand are expected to grow, and the extent of shortage or excess needs to be closely tracked.

Revaluation of Hegang Steel's resources: The copper sector is clearly elastic. Davis can double click to resume the company's past equity performance. The stock price is highly correlated with iron ore prices, and the correlation with copper prices is weak. In this cycle, the price of iron ore fell sharply, and the price of copper was approaching a record high; however, the company's stock price did not fall with the price of minerals, but was gradually revalued by the market as copper prices rose or reflected the value of the company's copper business. After all, 1) in this round of strong copper growth, the first-line target is leading the way, and the flexible standard is expected to follow; 2) The current phase II copper project of the company is progressing smoothly. The certainty has improved markedly compared to the previous one, and the extent of improvement is significant at the expected level. Looking ahead, the company is a resource target for the copper and iron sector. Under the expectation that profits in the iron ore sector will stabilize, the copper sector's profit and valuation are both elastic; it is expected that “Davis double hit” will be achieved in the spillover market of rising copper. The company's net profit from 23 to 25 is estimated to be 960, 10.76, and 1.05 billion yuan, corresponding to PE of 10.9x, 9.7x, and 9.5x. It is recommended to pay attention.

Risk warning

1. Low expectations for the growth rate of new energy; 2. Real estate stagnates and declines; 3. Overseas manufacturing is weak; 4. The commissioning progress of Copper Phase II is low.