3Q24 results fell slightly below our expectations

The company announced 3Q24 results: operating income of 1.15 billion yuan, -18.2% YoY, -11.4% month-on-month; net profit to mother of 0.07 billion yuan, -87.2% YoY, -66.4% month-on-month, net profit after deducting -0.03 billion yuan, slightly lower than our expectations, mainly due to the accelerated decline in lithium prices and increased exchange losses.

First, the accelerated decline in lithium salt prices led to a month-on-month decline in profits. 3Q24 The average price of domestic battery-grade lithium carbonate was 0.079 million/ton, -24% month-on-month. The decline in the company's revenue was significantly lower than the price drop, mainly due to the increase in lithium salt sales. According to the company's announcement, 3Q24 lithium salt sales in the company's own mines reached 0.011 million tons, a significant increase over the previous month.

Second, the company's lithium salt production costs remain low. 3Q24 achieved operating costs of 0.89 billion yuan, +24% month-on-month. Considering the increase in lithium salt sales, we expect the company's production cost per ton of lithium salt to remain basically flat month-on-month. We believe that in the context of low lithium prices, the company can reduce costs in the short term by pressing prices from suppliers and suspending lithium permeable feldspar production, and there is still room for further reduction in the production cost of a single ton of lithium salt in the fourth quarter.

Third, there has been a marked increase in financial expenses. 3Q24 The company's financial expenses were 0.088 billion yuan, +267% month-on-month, which dragged down current profits, and was due to exchange losses due to changes in the exchange rate between the Zimbabwean dollar and the US dollar.

Development trends

The lithium business still has the potential to cut costs further, and the germanium and copper businesses open up room for growth. In terms of the lithium business, the company's lithium salt production costs have continued to decline since the beginning of the year. In the short term, the company can expect to control costs by pressing prices from suppliers and suspending lithium permeable feldspar production. In the long run, the company is promoting investment in the construction of a lithium sulfate plant in Zimbabwe, which can save freight costs to further reduce costs. In terms of the germanium business, the Tsumeb smelter's polymetallic smelting tailings contain 746 tons of germanium metal, an average grade of 253 g/t, and a zinc metal content of 0.209 million tons, with an average grade of 7.12%. The company plans to conduct a feasibility study on the smelter's copper smelting line and increase the germanium-zinc smelting production line. Considering the construction cycle, we expect to contribute to an increase in performance in 2025. In terms of copper business, the company completed the transfer of 65% of the rights in the Kitumba copper mine in Zambia during the reporting period, and the company has already begun research work on the next 0.05 million tons/year copper mine project. Overall, further cost reduction in the lithium business will help the company maintain profits in the downturn cycle. The transformation of zinc-germanium smelting production lines and the development of copper projects are expected to provide new profit growth points for the company.

Profit forecasting and valuation

We keep our 2024-2025 profit forecast unchanged. The current stock price corresponds to the 2024/2025 price-earnings ratio of 30.8 times/26.7 times. Maintaining an outperforming industry rating, due to the smooth progress of the company's small metals and copper mining business, we raised our target price by 33% to 42.01 yuan, corresponding to 38.2 times the 2024 price-earnings ratio and 32.8 times the 2025 price-earnings ratio, with 23% upside compared to the current stock price.

risks

The decline in lithium prices exceeded expectations; the cost reduction of lithium salt fell short of expectations; and the progress of the copper project fell short of expectations.