JCHX MINING MANAGEMENT(603979)：STRENGTHENS SERVICE-AND RESOURCE-BASED DUAL-DRIVER STRATEGY;EXTENDS PRESENCE IN OVERSEAS COPPER MINES

　　What's new
　　On December 8, JCHX Mining Management (JCHX) announced its plan to subscribe for 50% equity in CMH, a wholly-owned subsidiary of Cordoba Minerals, through a Framework Agreement with conditions at a maximum of US$100mn. Ivanhoe Mines is the controlling shareholder of Cordoba Minerals with a 63.36% stake, and JCHX is the second largest shareholder with 19.995% of the shares. CMH holds 100% equity in Cobre, a firm that owns 100% of the mining rights of the Alacran copper-gold-silver deposit at the San Matias Project in Colombia. Upon completion of the acquisition, JCHX will hold a 50% stake in the San Matias Project via CMH.
　　Comments
　　The San Matias Project has multiple mining rights, and the firm is conducting a feasibility study on San Matias’ Alacran copper-gold-silver assets. According to the agreement, Cordoba will restructure CMH so that CMH will have shares in the Alacran copper-gold-silver assets and assets nearby under the San Matias project. The San Matias project is going through the feasibility study and other preliminary work in preparation for obtaining a mining license.
　　Rich and diverse metal resources with potential for reserves increase. According to the NI 43-101 Code Technical Report[1], the Alacran copper-gold-silver project has 102mnt ores with an average grade of 0.41% copper, 0.26g/t gold, and 2.30g/t silver. It has 0.53mnt of copper metal, 30t of gold, and 282t of silver in total. Given that the surrounding mining titles are not included in the report, we think that the estimated reserves of the Alacran project will likely increase.
　　High recovery rate and low mining cost. According to the pre-feasibility study, the service life of the Alacran copper-gold-silver project should be 13 years, with daily open ore capacity of 22,000t. The project will produce 31,000t of copper, 1.7t of gold, and 12t of silver annually. Average concentrate recovery rates stood at 92.5% for copper, 78.1% for gold, and 62.9% for silver. Average C1 cost (a standard metric used in copper mining) is US$2.59/pound, or US$1.18/pound after excluding sales of precious metal by-products.
　　Profitable returns with short payback periods. According to the pre-feasibility study report, based on a copper price of US$4.28/lb, gold prices of US$1,778/oz, and silver prices of US$21.93/oz, the project’s net present value after tax comes to US$650mn (with 8% discount rate). Its internal rate of return (IRR) reaches 32.7% with a payback period of 2.4 years. The consideration of copper per tonne is approximately Rmb1,907, increasing by Rmb410 from the previous acquisition consideration. We believe that the acquisition at a large premium will provide JCHX priorities for mining and indicates that the firm is upbeat about the project prospects.
　　Expanding presence in copper mines by building up complementary strengths with Ivanhoe. Upon the completion of the deal, the firm's copper reserves attributable to shareholders will increase by 25% to 1.32mnt, laying a foundation for the firm's transformation from a mining service provider to a mineral resources supplier. The firm focuses on mine development, and Ivanhoe is an expert in exploration. We believe that the cooperation between the two firms may form competitive synergies for mutual benefits.
　　Financials and valuation
　　Given the potential growth of the firm’s production capacity in 2023, we maintain our 2022 attributable net profit forecast at Rmb691mn and raise our 2023 forecast by 16.5% to Rmb1,000mn. We maintain OUTPERFORM rating. Considering the recovery of the domestic economy and rising sector valuation, we raise our TP by 44.1% to Rmb36.41 (31x 2022e and 22x 2023e P/E), offering 25.5% upside. The stock is trading at 25x 2022e and 17x 2023e P/E.
　　Risks
　　Volatile metal prices; project operation disappoints; political risks in countries where overseas projects are located.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。