An Emerging Global Mining Giant; Riding On Cobalt And Copper Momentum
Thursday, 25 January 2018Refer to last page for important disclosures. 1 China INITIATE COVERAGE China Molybdenum Co (3993 HK) An Emerging Global Mining Giant; Riding On Cobalt And Copper Momentum China Molybdenum Co has evolved into one of the world’s leading mining companies with diversified resources exposure. We forecast 40%+ EPS CAGR in 2017-20, given: a) our positive view on copper and cobalt in the medium to long term, b) the likelihood of tungsten and molybdenum’s high-margin advantage persisting, and c) the niobium and phosphate segments providing stable cash flows. Initiate coverage with BUY and target price of HK$6.78 on DCF life-of-mine valuation. Copper: Positive outlook in the medium term on solid fundamentals. From a global perspective, we favour copper among base metals for the next 2-3 years given: a) supply constraint due to under-investment, mines’ grade declines and elevated mine strike risks; and b) demand supported by traditional consumption and rising adoption of electric vehicles (EV). We expect LME copper prices to stay high at US$7,000-7,200/tonne in 2018-20. China Molybdenum Co (CMOC) owns two world-class copper mines Tenke Fungurume Mining S.A (Tenke) and Northparkes Mine (Northparkes) with a combined mined copper production of 240k-260k tpa. Cobalt: Riding on EV momentum. We expect the cobalt market to remain tight in the foreseeable future, due to the rising demand from EV batteries which is expected to outpace the potential supply increase. We think ternary is the main trend among cathode materials for EV batteries, while cobalt is a core material in ternary batteries. As early as in 2020, we think the forecast demand for EV-related metal will be significant, requiring an extra 390kt of copper and 24kt of cobalt (c.50% of 2017 demand from EV batteries). CMOC is now the second-largest cobalt producer globally, with an annual production of 16-18kt from the Tenke copper and cobalt mine in the Democratic Republic of the Congo. Tungsten and molybdenum: Low-cost advantage amid market recovery. CMOC started as a leading molybdenum producer in China, with an annual output of 17-20kt of molybdenum and 11k-13k tpa of tungsten.The current mine in operation is San Dao Zhuang Mo&W mine, which enjoys a high gross margin of 40%+ vs domestic peers’ 20%. We believe supply and demand dynamics would support the relatively stable tungsten and molybdenum markets in the next few years. Niobium and phosphate: Stable cash flow. CMOC entered this business through an acquisition in Brazil in 2016. This segment is expected to have contributed 19% of total revenue in 2017; we think it will continue to provide stable positive cash flows and enhance the company’s anti-cyclical nature. Initiate coverage with BUY and target price of HK$6.78. We use DCF life-of-mine to derive our target price of HK$6.78 (WACC: 8.0%), or an implied 13% upside. For 2018-19, the stock trades at 22x and 20x PE, and 2.5x and 2.4x P/B respectively. KEY FINANCIALS Year to 31 Dec (Rmbm) 2015 2016 2017F 2018F 2019F Net turnover 4,197 6,950 23,584 28,924 30,742 EBITDA 1,635 2,450 10,576 14,497 15,960 Operating profit 890 1,290 7,506 11,295 12,624 Net profit (rep./act.) 761 998 2,858 4,735 5,358 Net profit (adj.) 761 998 2,858 4,735 5,358 EPS (Fen) 5.0 5.9 14.9 21.9 24.8 PE (x) 97.5 82.4 32.8 22.2 19.6 P/B (x) 4.7 4.4 2.7 2.5 2.4 EV/EBITDA (x) 114.9 76.6 17.8 13.0 11.8 Dividend yield (%) 0.5 0.7 1.6 2.6 3.0 Net margin (%) 18.1 14.4 12.1 16.4 17.4 Net debt/(cash) to equity (%) 2.1 127.6 33.3 29.2 23.6 Interest cover (x) 35.4 6.0 6.6 10.4 11.4 ROE (%) 4.8 5.5 10.0 11.8 12.5 Consensus net profit - - 2,598 3,896 4,337 UOBKH/Consensus (x) - - 1.10 1.22 1.24 Source: CMOC, Bloomberg, UOB Kay Hian BUY Share Price HK$5.97 Target Price HK$6.78 Upside +13.0% COMPANY DESCRIPTION China Molybdenum Co is a mineral mining and exploration company engaged in the mining and processing of molybdenum, tungsten, copper, cobalt, niobium and phosphate minerals. STOCK DATA GICS sector MaterialsBloomberg ticker: 3993 HKShares issued (m): 3,933.5Market cap (HK$m): 200,112.6Market cap (US$m): 25,595.43-mth avg daily t'over (US$m):48.0Price Performance (%) 52-week high/low HK$6.02/HK$2.061mth3mth 6mth 1yrYTD25.7 18.2 60.1 168.9 18.9 Major Shareholders %Cathay Fortune Corporation 24.69Luoyang Mining Group 24.68 FY18 NAV/Share (Rmb) 1.93 FY18 Net Debt/Share (Rmb) 0.56 PRICE CHART 901201501802102402703002.003.004.005.006.007.00(%)(lcy)CHINA MOLYBDENUM CO LTD-HCHINA MOLYBDENUM CO LTD-H/HSI INDEX0100200300400Jan 17Mar 17May 17Jul 17Sep 17Nov 17Jan 18Volume (m)Source: Bloomberg ANALYST(S) S
