The expansion of gross profit in the copper sector drove a slight year-on-year increase in net profit

Jiangxi Copper achieved net profit of 6.51 billion yuan in 2023, an increase of 8.5% over the previous year. The profit increase was mainly due to the expansion of gross profit in the cathode copper sector. In 2023, the output of the company's main products except copper concentrate increased. Among them, production of cathode copper/ processed copper/ gold/silver increased by 14.0%/2.9%/26.9%/9.6% year-on-year, and copper concentrate production remained stable at 200,000 tons. The company plans to further increase production of its main products in 24. As one of the leaders in the domestic copper industry chain, it may benefit more fully from the reduction in refined copper supply and the rise in copper prices due to the shortage of mining terminals, although the profit of the smelting business will be affected by the decline in TC/RC. Based on higher copper and gold price assumptions and reduced production costs, we adjusted the company's 24-26E net profit to 75.1/85.8/8.67 billion yuan (previous value: 60/59/100 million yuan), raised the A/H shares to a “buy” rating, and adjusted the target price from 18.5 yuan to 25.9 yuan (11.2x 24/25E average EPS, in line with the PE average over the past three years) and HK$16.0 (original HK$11.3; 44% discount compared to A shares).

Production will continue to expand in 2024. Industry leaders may benefit from improved market supply and demand. The company will produce 2.1 million tons of cathode copper, 1.82 million tons of processed copper, 113 tons of gold and 1,352 tons of silver in 2023, a significant increase of 14.0%/2.9%/26.9%/9.6% over the previous year. Production guidance for 2024 climbed further, including 2.23 million tonnes of cathode copper and 128 tonnes of gold. Although spot processing fees for copper concentrate continue to decline due to the shortage of raw materials, most companies process long orders, and processing fees for long orders in 2024 are still at a high level ($80/ton vs. $88/ton in 2023). On the other hand, in an environment where spot processing costs continue to be sluggish, smelters on the right side of the industry's cost curve may face pressure to cut production; as the largest domestic cathode copper producer with leading technological advantages, the company may benefit more fully from the improvement in the refined copper supply and demand pattern and the increase in copper prices brought about by production cuts.

Production cuts are expected to drive up short-term copper prices. Shortage on the mining side supports the rise in medium- to long-term copper prices from the shutdown of the first quantum of 350,000 tons of Panamanian copper at the end of last year to British and American resources lowering the original 24/25 production guide by 20,000,000 tons. Various supply-side disruptions caused the market to anticipate a slowdown in copper ore supply. Under a continuous slump in concentrate processing fees, domestic smelters are expected to stimulate a sharp rise in copper prices. The supply and demand structure of refined copper may improve under the trend of reduced production in smelters. In the medium to long term, the deepening transformation of new energy sources has brought new impetus to copper consumption. Copper used in wind power installations and electric vehicles is growing rapidly, and the supply gap may continue to expand to drive copper prices upward, and the interest rate cut cycle has also provided another boost to the rise in copper prices. We expect an average copper price of $8,800/10,000 per ton in 2024/25.

Risk warning: Global economic growth was significantly weaker than expected; supply-side incremental releases exceeded expectations.