20140425-Maybank_KERPL-High_risk,_higher_reward_29页_1mb

Summary of Minmetals MMG (1208 HK)

Core Content

Minmetals MMG (1208 HK) is a Chinese mining company that has initiated a "Buy" recommendation with a target price of HKD2.45, representing a 38% increase from the current share price of HKD1.78. The company's market capitalization is HKD9.4B, with a share price upside forecasted at 50% annually until 2017, when the Las Bambas copper mine reaches full production. The DCF valuation assumes a long-term copper price of USD2.85/lb, which is 8% below the consensus, and the target price is based on conservative assumptions.

Key Points

• Share Price & Valuation:

  • Current share price: HKD1.78
  • Target price: HKD2.45 (+38%)
  • Market capitalization: HKD9.4B
  • DCF-based valuation assumes a long-term copper price of USD2.85/lb, with a 50% share price upside until 2017.
  • The company has a strong backing from China Minmetals, a state-owned enterprise (SOE), which helps alleviate balance sheet concerns.

• Project Overview:

  • Las Bambas Copper Mine: Acquired in a USD5.85b deal with Glencore, with MMG holding 62.5%. Construction is ~60% complete, and first production is expected in mid-2015, with full production by 2H16.
  • Dugald River Zinc Project: Expected to reach full production by 2H16, with updates planned by year-end.
  • The project has substantial geological potential, with 90% of the license area unexplored.

• Financials:

  • The acquisition cost and CAPEX are fully funded through a shareholder loan and bank debt.
  • Debt financing is expected to be manageable, with a minimum 2.0x EBITDA/net interest expense during 2015/16.
  • Net debt/equity is expected to rise significantly in 2014-2016 due to the acquisition and CAPEX.

• Key Catalysts:

  • Closing of the Las Bambas acquisition by September 2014.
  • Updates on the Dugald River zinc project by year-end.
  • Higher forecast copper prices.
  • Potential adjustments to project parameters by MMG after acquisition.

• Project Parameters:

  • Full capacity production: 394,000t of copper, 95,000 oz of gold, 5.87moz of silver, and 986t of molybdenum.
  • C1 cash costs are expected to be USD0.79/lb of copper, which is in the first quartile globally.
  • The project is expected to generate USD1.5b in EBITDA at full capacity, with MMG's share at USD0.9b.
  • EBITDA margin is estimated at 55% at full capacity.

• Ramp-Up Schedule:

  • Initial ramp-up to 20% in 2H15.
  • 50% in 1H16.
  • 100% in 2H16.
  • First full year of production is expected in 2017.

• Risk Factors:

  • Lower than forecasted metal prices.
  • Higher than forecasted interest expenses.
  • A stronger AUD/USD exchange rate.
  • Delays or disruptions in mine development.

• Valuation Sensitivity:

  • The DCF valuation is sensitive to changes in WACC and copper price.
  • A 9% WACC and consensus copper price of USD3.09/lb could increase the target price to HKD4.30.
  • The tables show that the NPV equity increases significantly with higher copper prices and lower WACC.

• Market Position:

  • The acquisition of Las Bambas is expected to position MMG among top-tier mining companies with profitable, long-lived assets.
  • The project has low operating costs and high potential for expansion.

• Other Projects:

  • Toromocho: A well-advanced project in central Peru with similar reserves but lower grade and no gold component. Expected to reach full production in late 2014, with some delays in approvals and power supply.

Conclusion

Minmetals MMG is positioned for significant growth due to its acquisition of Las Bambas, a large and low-cost copper project. The company's strong SOE backing and management expertise are critical in managing the project's risks and maximizing its value. Despite the current net losses, the company's cash flows are expected to be sufficient to service debt and provide surplus for repayment by 2017. The investment recommendation is based on a DCF model with conservative assumptions, but the potential for upside remains strong due to the project's scale, quality, and long-term prospects.