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MMG (1208 HK) Summary

Core Content

MMG (1208 HK) is a Chinese-based mining company primarily focused on materials, with a current share price of HKD2.84 and a target price of HKD3.40, representing a 20% increase. The company's market capitalization is HKD15.0B, and its average daily trading volume is USD2M. The main recommendation for the stock is BUY, and the company is currently owned by major shareholders such as China Minmetals Corp. (73.4%) and others.

Main Points

• Target Price Increase: The target price has been raised from HKD2.75 to HKD3.40 due to improved market fundamentals and a forward-looking valuation.
• Earnings Revisions: The analyst has slightly increased the 2014-16 earnings forecasts, mainly due to upward revisions in zinc and lead price forecasts.
• Project Updates: The Las Bambas project (Peru) is expected to have an update in mid-October, while the Dugald River project will be reviewed later in 2015 or early 2016.
• 1H14 Performance: The company reported solid operations in 1H14, with cost savings and higher sales volumes offsetting lower selling prices, leading to improved EPS YoY.
• Zinc Market Outlook: The zinc market is in deficit, and the outlook is positive, especially in China, where auto galvanizing penetration is only 20%.
• Share Price Volatility: The share price has been volatile, with a notable drop before the earnings announcement, but the analyst does not see any fundamental reason for this decline.
• Financial Leverage: The company's financial leverage is high due to recent acquisitions, but it is manageable, and management aims to reduce it to around 45%.
• Valuation and Forecast: The target price is based on a DCF model with assumptions of a WACC of 10%, zero long-term growth, and a rolling forward of valuation to mid-2015.

Key Information

• Zinc Price Forecast: Increased to USD2,165/t in 2014, USD2,315/t in 2015, and USD2,370/t in 2016, aligning with consensus for 2014 and 2015, but still below for 2016.
• Gold Price Forecast: Lowered to USD1,292/oz in 2014, USD1,225/oz in 2015, and USD1,150/oz in 2016, with a long-term forecast of USD1,000/oz.
• Lead Price Forecast: Increased to USD2,118/t in 2014, USD2,100/t in 2015, and USD2,161/t in 2016, with long-term forecast at USD1,940/t.
• Project Development: The Las Bambas project is progressing well, with an expected ramp-up to full production by early 2017, and the Dugald River project will be reviewed in late 2015 or early 2016.
• Earnings and Profitability: 1H14 EPS was USD0.007, up from USD0.005 in 1H13 but down from USD0.015 in 2H13. The gross margin improved to 42.9%, and operating margin increased to 10.6%.
• Balance Sheet: The company has a net debt/equity ratio of 100.5%, with total assets increasing to USD10,718.6M by FY16E.
• Cash Flow: Free cash flow is expected to be negative in 2014 but positive in 2015 and 2016, with a projected cash flow from operations of USD557.9M in 1H14.

Valuation and Market Feedback

• Valuation Metrics: The company's core P/E ratio is expected to rise from 9.3 in FY12A to 37.2 in FY16E.
• DCF Valuation: The target price is based on a DCF model that has been rolled forward from early- to mid-2015, assuming no long-term growth beyond 2020.
• Market Performance: The share price has shown a 51.1% increase over 12 months, outperforming the market index.

Summary

MMG is a mining company with a focus on materials, currently trading at HKD2.84 and a target price of HKD3.40. The analyst has raised the target price due to improved market fundamentals and a forward-looking valuation. The company's earnings have been slightly revised upwards due to increased zinc and lead price forecasts. The Las Bambas project is progressing well and is expected to reach full production by early 2017, while the Dugald River project will be reviewed later in 2015 or early 2016. The company's financial leverage is high, but manageable, and the analyst encourages a long-term view. The valuation is based on a DCF model, and the company's profitability has improved in 1H14. The balance sheet shows a net debt/equity ratio of 100.5%, and the cash flow is expected to be positive in 2015 and 2016. The company's share price has shown strong performance, with a 51.1% increase over 12 months.