Copper prices have soared due to factors such as cuts in large-scale copper production around the world, acceleration in the development of new energy sources, and the impact of the Federal Reserve's interest rate cut expectations compounded by the tight geographical situation and impacting the bulk market. Currently, Luntong has broken through the 10,000 US dollar integer mark, and Shanghai Copper has broken through the 82,000 yuan line. Since 2024, copper prices have increased by 16% cumulatively. This has attracted great attention from the market, and the title “Dr. Copper” is constantly being mentioned.

The soaring price of copper “took off” the stock price of Luoyang Molybdenum Industry (03993). Since 2024, the company's stock price has increased by more than 85%. So apart from waiting for the “watch the sky and eat” copper cycle, what is the certainty of the Luoyang Molybdenum Industry itself, and how long can its stock price spike continue?

Copper becomes the biggest operational highlight

The global layout of Luoyang Molybdenum Mining has operated 7 high-quality mines in China, the Congo (DRC) and Brazil, including Donggobi Molybdenum Mine, ****gou Molybdenum Mine, Sandaozhuang Molybdenum Mine, TFM copper-cobalt mine, KFM copper-cobalt mine, Brazilian niobium mine, and Brazilian phosphate ore, helping it grow into a leading global copper-cobalt enterprise. In the first quarter of 2024, thanks to the implementation of the logic of a sharp rise in the volume and price of copper products, the performance of the Luoyang molybdenum industry exploded.

Financial reports show that in 2024Q1, the company achieved operating income of 46.121 billion yuan, a year-on-year increase of 4.2% and a decrease of 15.5%; net profit to mother of 2,072 billion yuan, an increase of 553% year-on-year and a decrease of 64.3% month-on-month; net profit after deducting non-return to mother of 2,091 billion yuan, an increase of 3083% year-on-year and a decrease of 57.1% month-on-month.

On a year-on-year basis, net profit to mother increased by 1.75 billion yuan in 2024Q1, mainly due to a year-on-year increase of 4.1 billion yuan in gross profit. If only the mining side is considered, the copper, cobalt, molybdenum, tungsten, niobium, and phosphorus sectors account for 71%, 13%, 6%, 4%, 5%, and 2% of gross profit, respectively. It can be seen that in the first quarter of 2024, the copper sector has become the ballast stone for the profit of the Luoyang Molybdenum industry.

On a month-on-month basis, net profit attributable to 2024Q1 decreased by 3,735 billion yuan month-on-month. The main profit reduction item was gross profit of 2.96 billion yuan month-on-month. The month-on-month decline in gross profit was also due to a sharp 43% month-on-month drop in copper sales.

Specifically, in terms of operating conditions, TFM+KFM, the core mining has both reached production, and copper and cobalt production capacity has entered a centralized release period. The construction of the TFM hybrid mine went smoothly in the first quarter of 2024. The three production lines (Central District Hybrid Mine, Eastern District Oxide Ore and Hybrid Mine) were fully produced in March 2024. Up to now, they have formed an annual production capacity of 450,000 tons of copper and 37,000 tons of cobalt. In terms of production, 2024Q1's copper production is about 147,000 tons, up 122.9% year on year, and has completed 27% of the annual production guideline; cobalt production is 252,000 tons, up 392.2% year on year, and has completed 39% of the annual production guideline.

However, during the same period, molybdenum and tungsten production changed -15.7% and +0.33% to 3474 and 1921 tons, respectively, while niobium and phosphorus production increased 9.9% and 3.3% year-on-year to 2506 tons and 279,000 tons, respectively. As can be seen, with the exception of copper and cobalt production, production of other mineral resources has not increased much. However, cobalt production greatly exceeded expectations, mainly due to the increase in cobalt production associated with the increase in copper.

In terms of price, the 2024Q1 copper and cobalt prices were 8438 US dollars/ton and 13.5 US dollars/pound, respectively, changing +3.4% and -10.7%, respectively, and falling 5.5% and 20.5%, respectively; the price of molybdenum and tungsten was 3,317 yuan/ton and 124,000 yuan/ton (black tungsten concentrate), up 6.1% and 3% month-on-month, respectively, with year-on-year changes of -30.3% and +4.7%, respectively. As can be seen, copper prices did not soar in the first quarter, and the decline in cobalt prices was even more significant.

Although copper prices rose 3.4 percentage points month-on-month, copper sales fell sharply by 43% month-on-month, which may have caused the copper sector's performance to fall short of market expectations. According to the Zhitong Finance App, the company's actual copper sales volume during the period was 126,000 tons. Compared with mine-side sales, it was converted into in-transit inventory, which in turn generated additional taxes (income tax+resource tax of 2-3 billion yuan). The actual sales volume of cobalt was 24,000 tons, which is not much different from mine-side sales. In the same period last year, due to the equity incident, copper and cobalt products were not sold in 2023Q1, so the profit of the copper and cobalt sector increased sharply over the same period last year. However, the month-on-month ratio seemed to fall short of investors' expectations.

On the cost side, the Q1 company's expense ratio in 2024 was 3.4%, up 0.4 percentage points month-on-month and 0.7 percentage points year-on-year. Four fees increased by 340 million yuan year-on-year, mainly due to the year-on-year increase in management expenses and financial expenses of 235 million yuan and 88 million yuan. The increase in management expenses was mainly due to the increase in management personnel and related expenses due to the commissioning of TFM and KFM, the year-on-year increase in financial expenses, or an increase in interest expenses due to an increase in the size of debt and an increase in foreign debt interest rates.

It is worth noting that as of March 31, 2024, the company's total debt reached 102,914 billion yuan, and current liabilities were 53.556 billion yuan, up 12.61% year on year; short-term loans were 23.883 billion yuan, 20.69% year-on-year; the company's balance ratio was about 58% during the same period. It is worth noting that in recent years, the company's balance ratio has been high for a long time, and it can be seen that the company continues to increase its leverage to expand its business.

The copper market's “Newton hour” has arrived, and cobalt prices are still at the bottom of the market

Luoyang Molybdenum Industry fully lays out all major metal resources. In 2023, the company's copper, cobalt, niobium and phosphorus production reached a record high. The copper production volume was close to the 10th largest in the world, making it the world's largest producer of cobalt, while maintaining the world's leading production of molybdenum and tungsten. The advantage of a balanced layout is that it can smooth out different resource cycles. However, the downside is that when the copper market is in a procyclical cycle, cobalt prices at the bottom of the market can also drag down the company's overall performance.

It takes an average of about 5 years from the initial development of copper mines to the final volume of production. Judging from history, the copper industry's capital expenditure is positively correlated with copper prices. The rise in copper prices in 2010 has positively stimulated mining companies' investment and construction in mines. In 2015-2020, copper prices were lower, mining companies' motivation to invest capital declined, and copper ore capital expenditure was low.

In the long run, due to the low level of capital expenditure in the industry after 2015, the growth rate of copper ore may slow down, and the increase in production is limited. While supply growth is trending to slow after 2025, economic recovery combined with demand for new energy sources will continue to drive copper demand. Zhongtai Securities expects that in 2025, as the growth rate of copper supply slows, copper supply and demand will continue to be mismatched, and the supply gap will reach 150,000 tons.

Goldman Sachs pointed out that copper shortage pressure is still increasing, and copper prices are expected to continue to soar. Goldman Sachs raised the average copper price forecast for 2024 by 600 US dollars to 9,800 US dollars/ton, and to 15,000 US dollars/ton in 2025.

John Caruso (John Caruso), senior market strategist at RJO Futures, pointed out that the “Newton moment” for the copper market has arrived. “Apple has fallen on the heads of global commodity traders and end users, who have just realized the reality of future demand growth.”

Looking specifically at the Luoyang molybdenum industry, the company's core mines have all completed production and entered the centralized release period of production capacity. Based on the calculation of the 2023 KFM mine copper and cobalt production output and the TFM mine production output, it is expected to produce about 560,000 tons of copper and 71,000 tons of cobalt for the whole year, making it steadily a world-class mining enterprise. The pro-cyclical copper price performance is expected to further consolidate the company's profitability.

It is reported that with the support of TFM and KFM, copper will become one of the biggest highlights of the company's operations in 2024. The company's highest copper increase in 2024 was more than 150,000 tons. Judging from public data from major mining companies around the world, the Luoyang molybdenum industry has become the largest source of new global copper production in 2024. In addition, Luoyang Molybdenum Industry proposed a new round of copper production capacity expansion plans. The company will promote the development of TFM Phase III and KFM Phase II to achieve the goal of producing 800,000 to 1 million tons of copper per year in 2028.

However, looking at the cobalt market, cobalt prices fell to the lowest range in history. As of April 5, 2024, MB cobalt (standard grade) fell to 12.60-14.80 US dollars/lb, MB cobalt (alloy grade) fell to 16.5-17.5 US dollars/lb. It has already fallen to the bottom of the historical range (2019 price low was 12.43 US dollars/lb, 2016 price low was 10.30 US dollars/lb), and the discount factor for intermediate goods fell to 56%-58%. The current price is close to the cost of gold mining in the Congo. The “freezing point” of cobalt prices is weakening the profitability of the cobalt sector in the Luoyang Molybdenum industry.

In summary, with the further release of production capacity, the Luoyang molybdenum industry will continue to take advantage of the upward trend in copper prices and further optimize profitability. However, the price of cobalt, which is difficult to break through in the short term, and the high balance ratio in the long term have also become a bumpy path for the company.