Investment positives

We initiate coverage on Chengtun Mining Group Co., Ltd (CMGC) with an OUTPERFORM rating and a target price of Rmb8.35, implying 15x 2023e P/E and 31.1% upside.

Why an OUTPERFORM rating?

Business development: CMGC has built a clear integrated business model by controlling upstream resources and expanding into LiB materials.

Upstream resources: CMGC focuses on copper and cobalt mineral resources and smelting in the Democratic Republic of Congo (DRC), hence laying a solid foundation for its earnings. Meanwhile, it is exploring Indonesian market. The firm has expanded into nickel resources through its stakes in Youshan Nickel Co. and ChengMach Nickel Co. in Indonesia.

Lithium-ion battery (LIB) materials: CMGC began to focus on new energy-related metals after acquiring Kelixin in 2018 to expand into deep processing of cobalt salt. Subsequently, it bought an equity stake in XTC New Energy Materials, and built nickel sulphate and ferric phosphate projects in Guizhou, China. In addition, it also built an integrated project in Guizhou for high nickel matte refining, precursors, and cathode materials. These moves are helping CMGC further strengthen its presence in the LiB material market.

Core competitive edges: Strong access to mineral resources; solid operation, governance, and execution; strategic collaboration and synergies. CMGC has formulated a clear strategy of controlling upstream resources to support downstream business development and expansion. It has effectively motivated its professional management team. The firm, with its solid operation and governance, can scale-up its projects rapidly, and it is efficient in business execution. In addition, CMGC is dedicated to expanding its business in new energy-related metals. It has built partnerships with leading upstream firms (e.g., Huayou and Tsingshan) and downstream companies like XTC New Energy Materials and Sunwoda. It also collaborates with Chengxin Lithium, a firm with the same controlling shareholder as CMGC. We are upbeat on CMGC’s strategic synergies.

Investment bright spots: Upcoming ramp-up of copper, cobalt, and nickel projects; integrated development; and laterite nickel ore’s second round of evolution. We think CMGC is likely to be re-rated.

New copper, cobalt, and nickel projects are to ramp up. The firm’s smelting project, CCM, in the DRC (with production capacity of 30,000t/year of copper and 5,800t/year of cobalt) came online at end-2021. Its Kalongwe project (with production capacity of 30,000t/year of copper and 3,556t/year of cobalt) is scheduled to start production at end-2022. We expect CMGC’s copper capacity to be around 60,000t in 2022 and 90,000t in 2023, doubling and tripling copper capacity (30,000t/year) of another of its smelting projects, CCR, in 2021. We estimate CMGC’s cobalt capacity could reach 9,000t in 2022 and 14,000t in 2023, implying 157% and 300% growth from its 3,500t cobalt capacity of the CCR project.

Nickel: We expect ChengMach Nickel’s 40,000t high nickel matte project to be built in 2H23. This, combined with Youshan Nickel Co., could expand CMGC’s nickel capacity to about 80,000t/year, in our view. Furthermore, ChengMach produces high nickel matte using side-blowing approach, giving it a cost advantage.

CMGC’s vertical expansion into cobalt and nickel makes the company more competitive. Expansion of resource output helps boost CMGC’s business capabilities and availability of raw materials. Meanwhile, low-cost raw materials and technological innovation enable CMGC to build strong product-delivery capabilities and gain cost advantages. This strengthens the firm’s relationships with quality customers and helps CMGC benefit from their growth. In addition, given that ramped up production of nickel matte and nickel hydroxide increases nickel sulfate supply, we think cost performance of ternary LiB materials could increase. We believe ternary LiB material companies with advantages in business integration are likely to be re-rated.

How do we differ from the market? CMGC has formulated a clear resource-oriented development strategy. Its copper, cobalt, and nickel projects have large room to ramp up. We are more optimistic about the firm’s resource control abilities and its earnings growth prospects.

Potential catalysts: Smooth progress in projects such as CCM, ChengMach, and Kalongwe; efforts to further strengthen its LiB material business; turnaround in copper and cobalt prices.

Financials and valuation

We expect CMGC’s 2022 and 2023 EPS to be Rmb0.27 and Rmb0.56, implying a 30.2% CAGR. Initiate with an OUTPERFORM rating and a target price of Rmb8.35 (15.0x 2023e P/E and 31.1% upside). The stock is trading at 23.6x 2022e and 11.4x 2023e P/E.

Risks

Volatile metal prices; disappointing progress in Congo and Indonesian projects; policy risks to overseas resources.