1H23 results in line with our expectations

Tongling Nonferrous Metals Group (TNMG) announced its 1H23 results: Revenue rose 11.1% YoY to Rmb68.80bn, and net profit attributable to shareholders grew 2.57% YoY to about Rmb1.43bn. In 2Q23, revenue rose 4.5% YoY to Rmb34.46bn, and net profit attributable to shareholders grew 1.4% YoY to Rmb775mn.

Smelting and processing fees enter upward trend in 1H23, boosting earnings; volatile copper, sulfuric acid prices weigh on earnings. In

1H23, treatment and refining charges (TC and RC) of copper concentrates entered an upward trend and averaged US$83.71/t (up US$10.62/t YoY), boosting earnings at TNMG. Copper prices fell 5.15% YoY in 1H23 to Rmb67,835/t and domestic average prices of sulfuric acid slid 71.84% YoY to Rmb212.55/t, weighing on profit.

Trends to watch Smelting and processing fees to stay high; smelting profit to remain strong. In July, the China Smelters Purchase Team (CSPT) decided on a guide price for TC and RC of copper concentrate processing in 3Q23 at $95/t (up US$5/t QoQ), hitting a new high since 4Q17. The TC processing fee for imported copper concentrates rose US$7.9/t QoQ in 2Q23 to US$87.56/t. We expect loose copper concentrate supply to continue, smelting and processing fees may remain high, and smelting earnings to remain strong.

Solid full-year sales volume target for 2023; accelerating expansion of copper foil capacity. TNMG announced that it plans to produce 50,000t of copper concentrates, 1.7mnt of copper cathode, 432,000t of copper processing materials, and 4.96mnt of sulfuric acid in 2023. As of end-2022, the firm's copper foil production capacity was 55,000t, and its reverse treated foil (RTF) copper foil for 5G communication and 6mm lithium-ion battery (LiB) foils achieved mass production. TNMG's 15,000t copper foil project in Chizhou and another 10,000t copper foil project in Tongling began construction in 2022. The firm expects its production capacity of high-precision electronic foils may reach 80,000t after these projects come online.

To inject 70% stake in Mirador copper mine; self-sufficiency ratio of copper concentrates to rise, ushering in a new growth chapter. On June 29, the Shenzhen Stock Exchange approved the TNMG proposal to acquire a 70% stake in CRCC-Tongguan Investment (Canada) Co., Ltd. for around Rmb6.67bn. TNMG filings show that CRCC-Tongguan holds 100% of the Ecuacorriente, which has estimated copper resources of 2.53bnt with an average grade of 0.53%. Phase I of the Mirador mine reached design capacity in 2021, and Phase II completed a feasibility study in February 2022. The firm expects Phase I and II combined to reach a treatment capacity of 46.20mnt/yr. We believe this will notably boost TNMG's self-sufficiency rate of copper concentrates.

Financials and valuation

We maintain OUTPERFORM, given the injection of high-quality copper mine into TNMG, strong capacity growth potential, possible growth in copper smelting earnings driven by rising copper processing fees, and the firm's strong presence in copper foil business. We largely maintain our 2023 earnings forecast at around Rmb3.77bn, and introduce our 2024 earnings forecast of about Rmb3.91bn. We maintain our target price of Rmb4 (implying 11.1x and 10.8x 2023e and 2024e P/E), offering 29% upside. The stock is trading at 8.7x 2023e and 8.3x 2024e P/E.

Risks

Disappointing capacity ramp-up of projects; weaker-than-expected copper smelting and processing fees.