Investment positives

We initiate our coverage on Western Mining with an OUTPERFORM rating and a target price of Rmb17.74 (11x 2024e P/E). The firm controls the second largest copper mine in China, enjoying ample mineral resources and reserves. We are upbeat on the growth potential of the company amid the mineral resource management reform in China.

Why an OUTPERFORM rating?

A well-established mining company in west China. The company was established after the restructuring of its predecessor in 2000, the Qinghai Dachaidan Xitieshan Mining Bureau (Xitieshan). The Xitieshan lead and zinc mine started large-scale development in the 1950s. Western Mining is one of the largest non-ferrous metal mining companies in west China. It has ample mineral resources and reserves. It also has copper, lead, zinc, and vanadium smelters.

We estimate that Western Mining ranked No.6 in attributable copper resources among eight major A-share copper companies in 2022, and it ranked No.4 in attributable production volume of copper concentrates among eight major A-share copper companies in 2022.

Reserves and production volume in China's mining industry to increase; average copper prices to rise.

China advanced mineral resource management reform in 2023.

A draft revision to the Mineral Resources Law emphasizes the importance of ensuring national mineral security1. The national natural resource work conference2 held on January 12, 2023, called for additional reserves and production, and encouraged a new round of mineral exploration activities. Exploratory investment continued to increase. iFinD data shows that cumulative non-ferrous metal mining and dressing investment in December 2023 grew 43% YoY.

We think the growth of supply from copper mines may slow after 2024, given near-term additional disruptions and moderate capex since 2016. Demand for copper from the clean energy industry may　continue to increase amid the green transition. We think the global copper supply-demand gap will begin to widen in 2025 and that average copper prices may increase.

Production capacity of the Yulong copper mine increases; Western　Mining pays high dividends, its current valuation is attractive, and we foresee a re-rating ahead.

The Yulong copper mine restarted production after completing a retrofit in November 2023. We estimate that the production volume of copper concentrates at the firm will reach around 160,000t/year and its attributable production volume of copper concentrates may reach about 100,000/year, 20% and 18% higher than the levels prior to the retrofit. We think the production capacity of the company may continue to increase, given the projected lifespan of the Yulong copper mine and the ongoing initiative of increasing reserves and production volume in the domestic mining industry.

The firm pays high dividends. Its dividend payments are higher than those of many other mining companies in China.

The company is unlikely to be affected by overseas geopolitical risks, as all its assets are in China.

The current valuation is attractive. We estimate that its 2024e and 2025e P/E were lower than the sector average as of January 23, 2024.

How do we differ from the market? Investors pay attention to the additional production capacity of the Yulong copper mine. We think the mineral resource management reform in 2023 will likely boost growth of the mining industry. We also analyze the growth potential of the company. In our opinion, the firm will benefit from additional reserves and production as well as higher copper prices. Earnings and valuation may both improve, in our view.

Potential catalysts: Capacity expansion of the Yulong copper mine; higher copper prices; additional reserves and production volume at the company amid the mineral resource management reform.

Financials and valuation

We estimate 2023, 2024, and 2025 EPS at Rmb1.27, Rmb1.61, and Rmb1.67, a CAGR of 5%. The stock is trading at 10.7x 2023e, 8.4x 2024e, and 8.2x 2025e P/E. We initiate coverage with an OUTPERFORM rating and a TP of Rmb17.74. Our TP implies 13.9x 2023e, 11x 2024e, and 10.6x 2025e P/E, offering 30% upside.

Risks

Production volume of copper concentrates at the company disappoints; metal prices decline; business operations at the firm's smelters disappoint.