Key points of investment:
The cost advantage of the magnetite business is prominent. The external environment eases transportation conditions, and the company can produce 62.5% to 64.5% grade magnetite products by simply separating magnetite stored on the ground. The iron ore business has a clear low cost advantage. The most direct factor affecting the company's magnetite sales at this stage is the operating environment and infrastructure situation in South Africa. Currently, the electricity crisis in South Africa has abated, and the company's iron ore shipments have returned to normal in the second half of 2023. The 2023 Integrated Resource Plan (IRP) announced by South Africa aims to completely resolve the South African energy crisis and completely resolve electricity restrictions. At the same time, the company strengthens communication and cooperation with the South African Railways to improve the company's train capacity and loading efficiency, and is expected to further break the transportation bottleneck in the future.
Construction of the second phase of copper is expected to be completed within the year, and part of the project is being put into operation to begin a second growth. The company re-evaluates the construction progress of copper phase II. The project is expected to be completed in December 2024. As of September 2023, the company's copper phase II project has entered the early trial production stage. After the project is officially put into operation, the design capacity of the copper mine is 11 million tons, and the metal copper production is 70,000 tons. The mine's operating period is expected to be extended to 2033. The company's copper products include copper concentrate, cathode copper, copper wire, etc., and most of them are sold locally in South Africa. The International Monetary Fund expects South Africa's actual GDP growth rate of 1.8% in 2024. Combined with South Africa's announcement of a comprehensive resource plan for 2023, new energy and power infrastructure construction will drive local demand for copper products and benefit the company's local sales of copper products in the long term.
Iron ore: Continuing the pattern of strong supply and weak demand. If favorable, prices are expected to rebound if prices are concentrated 1) Domestic iron ore self-sufficiency continues to increase, and overseas mine supply remains stable. It is expected that China's overall iron ore supply will ease. Steel production is at its peak when demand for downstream steel is stable. Steel production has formed a situation where there is a “top” and “bottom”, and overall demand for iron ore is stable throughout the year.
2) Downstream demand recovered slowly during the peak season in the spring of 2024, and the pressure on iron ore stocks in ports increased. It is expected that the pattern of strong and weak iron ore supply and demand will hardly change fundamentally in the short term. In the future, favorable policies and major projects are expected to boost demand and push the overall inventory level downward. If the Federal Reserve's interest rate cuts are implemented as scheduled, the US dollar index enters a downward cycle, and demand will pick up at an accelerated pace, driven by a combination of favorable policies and major projects. If multiple benefits are concentrated on realizing or supporting the recovery of iron ore prices.
Profit forecasting and investment advice
We predict that in 2024-2026, the company will achieve net profit of 11.21/11.97/1.33 billion yuan, corresponding EPS of 1.72/1.83/2.04 yuan/share. Dazhong Mining, Hainan Mining, and Jinling Mining, which involves iron ore mining and processing, were selected as comparable companies. Based on the closing price on June 4, 2024, the average PE value of comparable companies in 2024-2026 was 14.6/12.6/11.7 times, respectively. Considering the improvement in the business environment in South Africa, the iron ore business has a clear low cost advantage. Part of the copper phase II project is about to be put into operation. It is expected to start a second growth curve, cover for the first time, and give the company a “buy” rating.
Risk warning
(1) The decline in iron ore prices exceeded expectations; (2) the second phase of copper project fell short of expectations; (3) the risk of changes in the South African business environment; and (4) the rise in shipping prices exceeded expectations.