20140327-巴黎银行证券-Poised_for_a_re-rating_12页_475kb

CHINALCO MINING 3668 HK: Summary

Core Content

Chinalco Mining (CMC) is a company developing the Toromocho Project in central Peru, which is expected to start production of copper concentrate in 2014. The project is significant, with proved and probable reserves of 7.3 million tonnes of copper, 290,000 tonnes of molybdenum, and 10,500 tonnes of silver. The company is currently undergoing commissioning and stabilization of its facilities, with the copper concentrator reaching 60% utilization as of March 8, 2014, and the molybdenum hydro-metallurgy plant nearing completion.

Main Points

• Project Status:

  • 100% of EPC works for the copper concentrator are complete.
  • 99.2% of EPC works for the molybdenum hydro-metallurgy plant are complete, with full commissioning expected in April 2014.
  • Pre-stripping and ore mining have reached 9.7 million cubic meters and 11.7 million tonnes, respectively, as of March 8, 2014.

• Production Guidance:

  • CMC expects 2014 production of 124kt of copper concentrate and 1.75kt of molybdenum oxide.
  • The guidance is below planned production due to power supply commissioning delays.

• Mine Expansion Plan:

  • CMC plans to expand the ore milling rate from 95ktpd to 145ktpd by end-2016, with a USD1.32bn capex.
  • This expansion is expected to increase copper output from 224kt to 329kt in 2018.
  • The valuation is expected to rise from HKD1.60/sh to HKD2.08/sh if the expansion is factored in.

• Investment Thesis:

  • Net income estimates are misleading due to accelerated depreciation.
  • Investors should focus on free cash flow (FCF), which is expected to average USD772m/yr.
  • CMC trades at a significantly lower EV/FCF multiple (5x) compared to global peers (17x), indicating potential undervaluation.

• Catalysts:

  • First concentrate shipment and stabilization of the copper concentrator and molybdenum plant.
  • Delivering on guided operating costs will validate the investment thesis.

• Risks:

  • Delays in mine commissioning.
  • Lower-than-expected copper prices.
  • Higher-than-expected operating costs.

Key Information

• Target Price: HKD1.60
• Current Share Price: HKD0.99
• Upside: +61.6%
• Market Recommendations: 4 positive, 1 negative
• Projected FCF:
  • 2014E: USD252m
  • 2015E: USD886m
  • 2016E: USD901m
• Projected Net Income:
  • 2014E: USD-244m
  • 2015E: USD90m
  • 2016E: USD118m
• Normalized Net Income:
  • 2014E: USD109.4m
  • 2015E: USD447m
  • 2016E: USD477m
• Valuation Metrics:
  • 2015E P/E: 18.8x (vs sector average 13x)
  • 2015E EV/FCF: 5x (vs sector average 17x)
• Company Background:
  • Toromocho is the second-largest pre-production copper project globally.
  • Key executives include Dr. Xiong Weiping (Chairman), Dr. Peng Huaisheng (CEO), and Ms. Liang Yunxing (CFO).
  • Major shareholder: Chinalco (85%)
  • Market Cap (USD m): 1,702
  • Free Float (%): 15
  • 3m Historic Volatility (%): 54.7

Key Assumptions

• Copper Price:
  • 2014E: USD6,750/tonne
  • 2015E: USD6,500/tonne
• Molybdenum Oxide Price:
  • 2014E: USD10.25/tonne
  • 2015E: USD11.20/tonne
• Silver Price:
  • 2014E: USD20.0/oz
  • 2015E: USD20.0/oz

Earnings Sensitivity

• Base Case Net Income:
  • 2014E: USD-244m
  • 2015E: USD90m
• 10% Copper Price Increase:
  • 2014E: USD-194m (21% change)
  • 2015E: USD176m (94% change)
• 10% Silver Price Increase:
  • 2014E: USD-239.2m (2% change)
  • 2015E: USD98.8m (9% change)
• Base Case FCF:
  • 2014E: USD252m
  • 2015E: USD886m
• 10% Copper Price Increase:
  • 2014E: USD306m (21% change)
  • 2015E: USD973m (10% change)
• 10% Silver Price Increase:
  • 2014E: USD257m (2% change)
  • 2015E: USD894m (1% change)

Valuation Comparison

• EV/FCF:
  • Chinalco Mining: 5x (2015E)
  • Global Average: 17x
• P/E:
  • Chinalco Mining: 18.8x (2015E)
  • Global Average: 13x
• P/BV:
  • Chinalco Mining: 3.0x (2015E)
  • Global Average: 2.4x

Conclusion

CMC is currently trading at a discount relative to its peers, particularly when considering its FCF generation. Despite initial losses due to accelerated depreciation, the company's long-term potential is significant, especially with the planned mine expansion and the expected normalization of production and earnings. The investment thesis is supported by the company's ability to generate substantial FCF and its favorable valuation metrics.