Established smelting company, added resource attributes. The company is deeply involved in the smelting industry. Currently, it has a total production capacity of 0.68 million tons of zinc product smelting and deep processing, ranking first in the country. It also has a production capacity of 0.1 million tons of lead smelting, 4,500 kilograms of gold, and 470 tons of silver. In 2023, Shuikoushan Group transferred 100% of Shuikoushan Limited's shares to the company through asset restructuring. Since then, the company has added resource attributes. Its mines mainly involve lead, zinc, gold, silver, etc. We believe that with the low cost advantage, the company's lead-zinc smelting business is expected to cross the cycle, and medium- to long-term profits may return to a stable range; at the same time, the company's mines are of excellent quality, and performance may enjoy the flexibility brought about by rising commodity prices.
The gold and silver associated with the mine are of high quality. By the end of '23, the company had 13.705 million tons of ore resources, including 0.437 million tons of lead, 0.444 million tons of zinc, 42.6 tons of gold, 1285.5 tons of silver, and 0.008 million tons of copper. Among them, the Kangjiawan mining area has resources of 12.195 million tons, a gold grade of 3.22 g/ton, and a silver grade of 105.41 grams per ton; the lead-zinc mine has resources of 1.095 million tons and a gold grade of 3.07 grams per ton.
The mine has the capacity to expand production. The certified load capacity of the Shuikoushan lead-zinc mine is 0.8 million tons/year. In 2023, the annual output of the Shuikoushan Kangjiawan mine site and the lead-zinc mine was 0.589 million tons and 100,000 tons respectively, totaling 0.689 million tons, with a capacity utilization rate of 86%. The company is actively promoting the Shuikoushan Kangjiawan mine technology upgrading project. After the construction of the project is completed, the overall mining scale of the Shuikoushan lead-zinc mine can reach 0.8 million tons/year. According to the company's “Report on Issuing Shares and Paying Cash to Purchase Assets and Raising Supporting Funds and Related Transactions”, it is calculated that after full production, 2.1 tons of gold metal, 63.3 tons of silver metal, 0.023 million tons of lead metal, and 0.022 million tons of zinc metal can be produced.
Smelting costs are industry-leading, helping to get through the cycle. The company's lead-zinc smelting process is at the leading level in the industry, and the market share of its “Torch” brand zinc alloy is in the first tier. In terms of zinc smelting, technical indicators have been optimized, equipment has been upgraded, labor productivity has been improved, comprehensive recycling capacity has been enhanced, and processing costs have reached the leading position in the industry. Since 24 years, there has been a continuous shortage of zinc concentrate, which has led to a weakening of the bargaining power of zinc smelters and a continuous decline in processing costs. According to SMM, in terms of smelter profits, the profit of the smelter (excluding by-products) was seriously inverted. After entering August, it was inverted by more than 2,500 yuan/ton; in terms of imported minerals, the profit and loss of zinc concentrate imports was near break-even. We believe that the company is a leader in the zinc smelting industry, and also has technical and cost advantages. Short-term pain is difficult to impact the company, and medium- to long-term profits may return to a stable range.
Profit forecasting and valuation. The company is an established smelting company with new resource attributes. Its mines have the capacity to expand production, and are expected to continue to benefit from the flexibility brought about by rising commodity prices. We expect the company's 24-26 EPS to be 0.69, 0.78, and 0.94 yuan/share, respectively. Referring to the valuation level of comparable companies, a PE valuation of 15-16 times 2024 was given, corresponding to a reasonable value range of 10.39-11.08 yuan/share, which for the first time covered a “superior to the market” rating.
Risk warning. Production expansion fell short of expectations; gold prices fell short of expectations; zinc smelting and processing costs fell short of expectations; raw material costs rose.