3Q24 results slightly miss our forecast

Sinomine Resources Group announced its 3Q24 results: Revenue fell 18.2% YoY and 11.4% QoQ to Rmb1.2bn; net profit attributable to shareholders fell 87.2% YoY or 66.4% QoY to Rmb73mn; and recurring net profit dropped Rmb30mn, slightly missing our expectations due to accelerated decline in lithium prices and increased FX losses.

Profit fell QoQ due to accelerated decline in lithium salt prices. Domestic ASP of battery-grade lithium carbonate fell 24% QoQ to Rmb79,398/t in 3Q24. The decline in the firm's operating revenue was much milder than the decline in product prices, mainly due to rising sales volume of lithium salts. According to the company's announcement, sales volume of lithium salts produced from its own mines rose markedly QoQ to 11,000t in 3Q24.

Lithium salt production cost remained low. In 3Q24, the firm's operating costs rose 24% QoQ to Rmb890mn. We think its production cost per tonne of lithium salt remained largely flat QoQ, given rising sales volume of lithium salts. Considering the low lithium prices, we believe the firm can reduce costs in the near term by negotiating price reduction with suppliers, and suspending production of lithium-permeable feldspar. Its production cost per tonne of lithium salt may decline further in 4Q24.

Financial expenses increased notably. In 3Q24, the firm's financial expenses rose 267% QoQ to Rmb88mn, weighing on its profit, mainly due to FX losses caused by changes in FX rates between Zimbabwean dollar and US dollar.

Trends to watch

Lithium business still has potential for further cost reduction; germanium and copper businesses to see growth. Lithium business: The firm's lithium salt production cost has been falling YTD. In the near term, we expect it to control costs by negotiating price reduction with suppliers, and suspending production of lithium-permeable feldspar. In the long term, the firm is investing in a lithium sulfate plant in Zimbabwe, which may help further reduce costs.

For the germanium business, the polymetallic smelting tailings owned by the Tsumeb smelter contain 746t of germanium metal at an average grade of 253g/t and 209,459t of zinc metal at an average grade of 7.12%. The firm plans to conduct a feasibility study on the transformation of the copper smelting lines and addition of germanium and zinc smelting lines, which we expect to contribute incremental earnings in 2025.

In terms of copper business, the firm completed the acquisition of a 65% stake in the Kitumba copper mine in Zambia during the reporting period, and it has started the feasibility study on a copper mine project with capacity of 50,000t/yr.

Overall, we think falling costs of the lithium business should help the firm sustain earnings in a sector downtrend, and the renovation of zinc and germanium smelting lines and development of copper mine projects should offer new profit drivers.

Financials and valuation

We keep our 2024 and 2025 earnings forecast unchanged, and the stock is trading at 30.8x 2024e and 26.7x 2025e P/E. We maintain OUTPERFORM. As the firm's metal and copper mining businesses are progressing smoothly, and may offer new profit growth drivers, we raise our target price 33% to Rmb42.01, implying 38.2x 2024e P/E and 32.8x 2025e P/E, offering 23% upside.

Risks

Sharper-than-expected decline in lithium prices; slower-than-expected cost reduction of lithium salts; disappointing progress of copper projects.