No value digging here; initiating coverage with Sell

Deutsche Bank Markets Research Rating Sell Asia China Resources Metals & Mining Company Minmetals Rare Earth Date 28 August 2015 Initiation of Coverage No value digging here; initiating coverage with Sell Reuters Bloomberg Exchange Ticker 000831.SZ 000831 CS SHZ 000831 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 1,993.8 702.0 837.9 1,119.1 2,069.1 Reported NPAT (CNYm) 255.3 -55.6 15.2 75.4 190.0 DB EPS growth (%) -24.4 – – 394.6 152.1 DB EPS FD(CNY) 0.26 -0.06 0.02 0.08 0.19 PER (x) 87.3 – – 207.9 82.4 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close A pure smelter likely to struggle; Sell ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 27 Aug 2015 (CNY) 15.97 Price target - 12mth (CNY) 6.00 52-week range (CNY) 39.90 - 13.60 HANG SENG INDEX 21,080 James Kan Research Analyst (+852) 2203 6146 james.kan@db.com Price/price relative 10203040508/132/148/142/15Minmetals Rare EarthHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -17.8 -58.9 -34.4 HANG SENG INDEX -13.4 -24.9 -15.4 Source: Deutsche Bank Minmetals Rare Earth, with 12kt of smelting/separation capacity and a 4.7kt production quota, is an industry leader in heavy rare earth separation. However, its gross margin was squeezed from 25% in 2013 to 12% in 2014 by rare earth price weakness and severe overcapacity in smelting/separation and consensus earnings look far too optimistic. Although there could be potential rare earth-related asset injections from parent Minmetal Group in 2017, we believe the stock's demanding valuation is unsustainable and initiate with a Sell rating and a DCF-based TP of RMB6.0, implying ~60% potential downside. Focused on middle and heavy rare earths, but not capturing value Minmetals Rare Earth is the largest Chinese rare earth smelter, focusing on middle and heavy rare earth smelting/separation. After the acquisition of Jianfeng in late 2014, it now owns three separation plants with a total production quota of 4.7kt. Although we expect its margin to improve on a price recovery in praseodymium, neodymium, and, to a lesser extent, dysprosium and terbium oxides, upstream miners and downstream high-end producers are likely to be more significant beneficiaries of new dynamics in the rare earth industry. As a pure smelter, Minmetals Rare Earth will likely be impacted by the overcapacity situation in China’s smelting industry. Potential asset injections from parent company, but already in the share price The potential asset injections from parent company Minmetal Group have been the major focus of investors. Minmetal Group currently owns three mining companies with a ~2,140t mining quota and another three separation plants with a ~2,570t separation quota. The potential injections of separation plants are already reflected in our model. There’s still substantial uncertainty regarding mine injections. Based on our analysis, however, its valuation still looks demanding after incorporating all potential asset injections. Initiating with Sell on 60% potential downside; higher rare earth price a risk We adopt DCF (WACC: 8.8%, tgr: 2%, in line with industry LT growth rate) to derive our target price of RMB6.0. Our TP translates into ~2.3x 2016E BVPS. The stock currently trades at ~5.8x 2016E BVPS, far higher than domestic smelters’ ~3.0x 2016E BVPS. With c.3%/7% ROAE in 2016 and 2017, we believe the valuation is unsustainable. We initiate coverage on this company with a Sell. Risks: higher rare earth prices. 28 August 2015 Metals & Mining Minmetals Rare Earth Page 2 Deutsche Bank AG/Hong Kong Model updated:26 August 2015 Running the numbers Asia China Metals & Mining Minmetals Rare Earth Reuters: 000831.SZ Bloomberg: 000831 CS Sell Price (27 Aug 15) CNY 15.97 Target Price CNY 6.00 52 Week range CNY 13.60 - 39.90 Market Cap (m) CNYm 15,665 USDm 2,442 Company Profile China Minmetals Rare Earth mainly engages in south ionic rare earth separation and processing. The company focuses on production and di