CMOC GROUP(603993)：COPPER AND COBALT CAPACITY DOUBLES;MAKING BREAKTHROUGHS IN LITHIUM EXPANSION

　　2022 results slightly miss our forecast
　　CMOC Group （China Molybdenum） announced its 2022 results: Revenue fell 0.5% YoY to Rmb172.99bn and net profit attributable to shareholders grew 18.8% YoY to Rmb6.07bn. In 4Q22, revenue fell 14.3% YoY or 0.4% QoQ to Rmb40.5bn and attributable net profit fell 50.8% YoY or 34.3% QoQ to Rmb0.76bn. The results slightly missed our expectations.
　　Royalty payment affected sales and earnings despite substantial growth in output. In 2022, the firm’s copper output rose 19% YoY to 0.28mnt （including 0.25mnt at Tenke Fulgurate mine （TFM） and 0.023mnt at Northparkes mine）， 102% of the full-year guidance. Cobalt output rose 10% YoY to about 20,300t, 107% of the full-year guidance. Sales-output ratios of the firm’s copper and cobalt were 51% and 62% in 2022 due to outstanding royalty payment issues and setbacks in sales at TFM. However, IXM （a subsidiary） holds a certain amount of self-produced inventory and reported gross profits through sales, which offset part of the negative impact caused by falling sales volume.
　　Trends to watch
　　The firm expects further enhancement in 2023; copper and cobalt segments likely to see impressive growth. The firm drew a clear development roadmap and expects to achieve its development goals in three steps, including: 1） cost reduction and efficiency improvement; 2） doubling production capacity; and 3） becoming a world-leading company. The firm will begin production at its TFM mixed ore project and Kisanfu Mine project in 2023, which we think may significantly increase its capacity and output. In addition, the firm guides its 2023 copper and cobalt output at 0.29-0.33mnt and 21,000-24,000t for the TFM project, and 70,000-90,000t and 24,000-30,000t for the Kisanfu project. This implies medians of 0.39mnt and 49,500t for total copper and cobalt output, up 53% and 144% YoY from 2022, as the TFM and Kisanfu projects are likely to be completed and commence operation in 2023.
　　Cooperation with CATL helps expand presence in new energy vehicle （NEV） metals and make breakthroughs in lithium layout. In September 2022, the firm announced that CATL would acquire 24.68% of Luoyang Mining Group. In March 2023, CATL became the firm’s second-largest shareholder. In January 2023, the firm announced a plan to cooperate with CATL, and the two companies will jointly develop two giant salt lakes in Bolivia and build lithium extraction plants. In the future, we think the firm will continue to promote its M&A projects and build closer ties with CATL. Meanwhile, it expects the battery value chain in Africa and the lithium lake value chain in Bolivia to start construction in 2023. We expect the firm to make great leaps in expanding into the lithium industry.
　　The firm has been communicating with relevant parties in the Democratic Republic of the Congo （DRC） regarding royalty payment for the increase of reserves at the TFM project. As of end-2022, the firm has finished the feasibility study report for the mixed ore project at TFM, which was approved by the DRC Ministry of Mines. Meanwhile, TFM plans to hire an international independent third-party institution to verify the increase in reserves. Upon reaching a consensus, the company will negotiate with Gecamines on royalty payment based on the corresponding increase in copper metal reserves. The firm expects a negotiated solution as soon as possible.
　　Financials and valuation
　　We leave our 2023 and 2024 earnings forecasts largely unchanged. A-shares are trading at 12.2x 2023e and 9.3x 2024e P/E. H-shares are trading at 7.9x 2023e and 5.8x 2024e P/E. We maintain an OUTPERFORM rating and our TPs for both shares, implying 16x and 11x 2023e and 12x and 8x 2024e P/E, offering 31% and 34% and upside.
　　Risks
　　Construction of copper and cobalt projects disappoints; disappointing negotiations on royalty payment for increase of reserves in DRC; sharper-than-expected decline in metal 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。