TONGLING NONFERROUS METALS GROUP(000630)：PROPOSE TO INJECT 70% STAKE IN MIRADOR COPPER MINE TO UNLEASH GROWTH POTENTIAL

What's new
Tongling Nonferrous Metals Group proposed to acquire a 70% stake in CRCC-Tongguan Investment (Canada) Co., Ltd. with a consideration of Rmb6.67bn, including Rmb5.67bn from share issuance (85% of the total), Rmb333mn from convertible bonds (5%), and Rmb667mn from cash payment (10%).
Comments
Tongling Nonferrous Metals plans to merge the Mirador copper mine, a high-quality global mine from CRCC-Tongguan, and its copper output may soar by 296%. Resources: CRCC Tongguan holds 100% of the Ecuacorriente, which has estimated copper resources of 2,527mt with an average grade of 0.53%. Output: Phase I of the Mirador mine reached design capacity in 2021, and Phase II completed a feasibility study in February 2022. Phase I and II combined may achieve a treatment capacity of 46.20mnt/yr, according to the firm’s announcement. We estimate they could contribute 237,000t/yr of copper ore production capacity after reaching design capacity, increasing the firm's copper ore capacity from about 56,000t (existing) to 293,000t/yr. The firm's stake in it may soar 296% to 222,000t. Based on the current smelting capacity of 1.6mnt/yr, the self-sufficiency rate of concentrates may rise from 3.5% to 14%. As for profitability, Mirador is a mature open-pit mine in operation, and we estimate that the cost per tonne of copper in Phase I is about US$5,274/t, which may drop to US$4,492/t after Phase II reaches design capacity.
First, the acquisition valuation is not high. Based on the underlying asset's promised Rmb950mn of attributable net profit in 2022 and our forecast of Rmb1.27bn for its earnings, the consideration implies 7x 2022e and 5x 2023e P/E, lower than the current average of 13x P/E for the A-share copper industry. Second, the firm's valuation is attractive to investors after the dilution. If Rmb330mn of convertible bonds and Rmb2.146bn of supporting funds are converted into shares, the firm's equity base will expand to 13.62bn shares, implying a market cap of Rmb42.2bn. We estimate the firm's total (pro forma) attributable net profit at Rmb3.8bn in 2022 and Rmb5.2bn in 2023 , implying 11x 2022e and 8x 2023e P/E (5x after Phase II reaches full capacity). Attributable earnings promise of the underlying assets and our estimate of the firm's original earnings total Rmb3.5bn in 2022 and Rmb4bn in 2023, implying 12x 2022e and 11x 2023e P/E.
Tongling Nonferrous Metals now offers good investment value. First, it will have a high-quality copper mine injected with large production capacity growth potential. Second, the increasing copper processing fees will boost copper smelting earnings. As of December 28, treatment and refining charges for copper was US$85/t, still trending upward. Third, we expect the firm's valuation to grow as it expands its presence in the copper foil business, benefiting from booming consumer electronics and alternative fuel vehicle (AFV) markets.
Financials and valuation
We maintain OUTPERFORM rating. As the firm is expanding its production, we raise our 2022 and 2023 revenue forecasts by 7.9% and 16.5% to Rmb117.4bn and Rmb127.9bn. Given the rising production costs and falling copper prices, we cut our 2022 and 2023 earnings forecasts by 41.3% and 15% to Rmb2.52bn and Rmb3.77bn. Due to the volatility of market valuation, we cut our TP by 23% to Rmb4 (17x 2022e and 11x 2023e P/E), offering 29.0% upside. The stock is trading at 13.0x 2022e and 9x 2023e P/E.
Risks
Slower-than-expected progress in the transaction; disappointing capacity ramp-up of projects; disappointing copper prices.
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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。