mmg limited 1208.hk buy | target price: hk$3mmg limited (1208.hk) october 25th, 2012 for ratings...

Company Research MMG Limited (1208.HK) October 25th, 2012

For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1

MMG Limited（1208.HK） BUY | Target price: HK$3.80

Diversified Global Metal Miner with Attractive Valuation Investment Highlights

Diversified metal miner with quality metal resources. MMG Limited is a mid-size, diversified global nonferrous metal miner. It provides investors the exposure to various metals include copper, zinc and lead, and gold and silver as by-products of the base metals. Its Century zinc-lead mine is one of the largest operating zinc-lead mine in the world.

Visible production growth led by Dulgald River and Kinsevere. Dulgald River project is one of the largest undeveloped lead-zinc-silver deposites on earth. MMG has already started its works on this project and aim to commence mining operation in 2014. Kinsevere’s copper production is ramping up and is expected to reach its designed capacity of 60KT annually, or a 60% increase on MMG’s copper production in 2011.

Concerns on limited mine life can be relieved by projects in hand. Century mine has only limited life and is expected to close in 2016. It is producing 500KT zinc annually, or 80% of MMG’s total annual zinc production. However, we estimate that the zinc production loss from the closure of Century can be offset by the production of Dulgald River project and the Izok Corridor project which is under feasibility study.

MMG is a true global miner with supports from China central government-led mining giant. MMG is leading other domestic miners in terms of experiences in managing overseas mining operations. With the supports from its holding company which is a truly giant in mining sector, MMG will grow through further engagements into international mining M&As.

Attractive valuation, reiterate BUY rating with a PT of HKD 3.8. Our DCF model reveals a target price of HKD 3.8 per share of MMG. We believe its asset is currently undervalued by the market. With a more attractive earnings multiple and a promising growth prospect, we reiterate our “Buy” recommendation on the stock with target price of HKD 3.8 per share.

Exhibit 1: Financial Summary

Year to Dec 2010A 2011A 2012E 2013E 2014E

Turnover (USD$ m) 1920 2228 2450 2520 2704

Turnover Growth (%) - 16.06% 9.97% 2.85% 7.28%

Net Profit (USD$ m) 409 541 287 303 401

Net Profit Growth (%) - 32.12% -46.93% 5.51% 32.41%

EPS (USD$) 0.08 0.10 0.05 0.06 0.08

P/E (x) 5.1 3.3 7.3 6.8 5.2

P/B (x) 1.4 1.4 1.3 1.3 1.3

Dividend per share(HK$) - - - - -

Source: Guosen Securities (HK)

Nonferrous Metals & Mining Analyst Gao Chengming (Richard) SFC CE No.:AYI710 00852-2899 3141 [email protected] Zhang Xiaoshi (Thomas) SFC CE No.:AYN539 00852-2899 6756 [email protected]

Performance

Source: Bloomberg

Price(HK$) 3.20 Shares Outstanding(m) 5290 Market Cap. (HK$ m) 16292 Free float (%) 28.26 52 Week Range 4.53/2.7 Controlling Shareholder

China Minmetals Non-Ferrous Metals Co.Ltd. (71.6%)

BVPS (HK$) 2.28 Debt ratio (%) 61

Key Data

Related Research

< Poised to Advance on a New Starting Point > February20, 2012

February10,2012

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mailto:[email protected]:[email protected]

MMG Limited (1208.HK) October 25th 2012

This report only represents the personal view of the analyst, please refer to the Disclaimers at the end of the report for details

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1 Diversified metal miner with quality metal resources

MMG Limited (formerly known as Minmetals Resources) is a mid-size, diversified global

nonferrous metal miner. It provides investors the exposure to various metals include copper,

zinc and lead, and gold and silver as by-products of the base metals. The company’s

mining assets under operation include Century in Australia (one of the largest zinc-lead

mine in the world), Golden Grove and Roseberry in Australia (both polymetallic in nature),

Sepon in Laos (copper and gold mine) and Kinsevere in Democratic Republic of Congo

(DRC). In addition, the company also own the Dugald River project, which is one of the

world’s largest known undeveloped lead-zinc-silver deposites. This project is expected to

commence operation in 2014. Another project that is likely to add into company’s

production portfolio is Izok Corridor project in northern Canada with significant deposit of

zinc and copper resources. The project is under feasibility study and the results are likely to

be disclosed in 2014.

Figure1: MMG asset map

Sources: Company data, Guosen Securities(HK)

According to the MMG’s report, as of June 2011, the company’s metal contained in the Ore

Reserves are 9.1Mt zinc, 0.9 Mt copper, 1.3Mt lead, 102.4million ounces silver and

0.6million ounces gold. Note that the data is issued before the acquisition of Anvil therefore

the copper reserve of Kinsevere mine is not included in the figures above. According to the

competent person’s report, the copper reserve of Kinsevere is 0.8Mt, added on which

almost doubled MMG’s copper reserve in 2011.

Figure2: MMG’s metal resources and reserves

MMG Total Resources

Zinc (Mt) Copper(Mt) Lead(Mt) Silver(Moz) Gold(Moz)

Sepon

1.5

22.1 4.6

Century 3.7

0.6 42.4

MMG owns mines locate in Australia, Canada, Laos and DR Congo; it produces copper, zinc, lead and gold and silver as those base metals’ by products.

MMG’s Copper reserve doubled after the acquisition of Anvil.



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Dulgald River 6.6 0.1 1 61.9

Golden Grove 1.2 0.9 0.1 42.1 0.9

Rosebery 2.4 0.1 0.8 93.6 1.3

Kinsevere

1.4

Izok Lake 1.9 0.4 0.2 33.5

High Lake 0.6 0.4 0.1 38.7 0.5

Total Resources 16.4 4.8 2.8 334.3 7.3

MMG Total Reserves

Zinc (Mt) Copper(Mt) Lead(Mt) Silver(Moz) Gold(Moz)

Sepon

0.7

0.9 0.2

Century 2.5

0.3 15.5

Dulgald River 4.8

0.8 53.2

Golden Grove 0.1 0.2

5.2 0.1

Rosebery 0.7

0.2 27.5 0.4

Kinsevere

0.8

Total Reserves 8.1 1.7 1.3 102.3 0.7

Sources: Company data, Guosen Securities (HK)

2 Visible production growth led by Dulgald River and Kinsevere

MMG’s operating assets and developing projects show that the production of zinc and copper is set to increase, mainly from its Dulgald River and Kinsevere projects respectively.

Dulgald River project is one of the largest undeveloped lead-zinc-silver deposites on earth. MMG has already started its works on this project and aim to commence mining operation in 2014. Running in full capacity, the project is expected to pruduce at least 200KT of Zinc, 25KT of lead and 900K ounces of silver in concentrate annually, or 40% of Century’s current zinc metal production and equivalent to Century’s current lead metal production. The life of the mine is expected to last to year 2036.

MMG has gained 95% ownership of Kinsevere mine through its acquisition of Anvil in 2012. The

Kinsevere mine locates in Democratic Republic of Congo (DRC) with similar mining condition to Sepon copper mine in Laos (open pit operation, hight grade copper oxide ore) . Kinsevere’s copper production is ramping up, however interrupted by power disruptions in 2012Q1 and restarted operation in June thanks to temporary diesel generators. The production of Kinsevere in 2012 will be 35KT copper and will reach its designed capacity of 60KT next year. In addition, MMG is working on the open pit operation on a copper mine in Golden Grove. The copper mine will produce 56KT copper in concentrates in total in the next 5-6years, and the first bunch of production will be delivered in the 4Q2012. With the ramp up in Kinsevere and production expansion in Golden Grove, we expect MMG’s

Dulgald River project is expected to commence on 2014 and to provide an extra 200KT of zinc metal annually. The Kinsevere copper mine is ramping up and will reach its designed capacity of 60KT in 2013.



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Century Golden Grove Roseberry Dulgald River

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2011 2012E 2013E 2014E 2015E 2016E Sepon Golden Grove Kinsevere

copper production in year 2012 increase to 142KT (41%YoY), and further increase to 174KT (23%YoY) in 2013.

Figure3: MMG’s estimated zinc production (Thousand ton) Figure4: MMG’s estimated lead production (Thousand ton)

Sources: Company data, Guosen Securities (HK) Sources: Company data, Guosen Securities (HK)

Figure5: MMG’s estimated copper production (Thousand ton)


The company’s exposures to metals are changing as its production structure is shifting. In FY2011, 50% of MMG’s revenue came from zinc & lead; and we estimate their contribution to revenue will fall to 40% in 2012. While copper provided 40% of MMG’s revenue in 2011, the kick-in and ramp-up in Kinsevere will lead copper to 50% revenue of MMG’s total in 2012. We estimate the EBITDA will follow a similar trend: the copper’s contribution to EBITDA will increase from 48.6% in year 2011 to 55.6% in 2012 and to 58.6% in 2013, then fall back to around 50% in 2014 due to the commence of Dulgald River project.

Copper will surpass zinc in 2012 to become the largest contributor to MMG’s EBITDA.



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2011 2012E 2013E 2014E 2015E 2016E Century Golden Grove Roseberry Dulgald River Sepon Kinsevere

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Century Golden Grove Roseberry Sepon

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Century Golden Grove Roseberry Sepon Kinsevere

Figure6: MMG’s revenue decomposition by mines Figure7: MMG’s FY 12revenue decomposition by metals


Figure8: MMG’s EBITDA decomposition in FY2011 Figure9: MMG’s EBITDA decomposition in FY 2012E


3 Concerns on limited mine life relieved by projects in hand

One of the market’s concerns on MMG is that some of its mine sites, particularly one

of its core asset, Century mine, has only limited life and is expected to close in 2016.

Century mine currently produces 500KT zinc annually, or 80% of MMG’s total annual

zinc production.



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While it is true that the closure of Century will impact the company’s zinc production

and earnings, we believe that other projects MMG has can relief such concern. The

Dulgald River project, as mentioned above, is already being worked on and is

expected to commence production in 2014 then ramp up to the designed annual

capacity of 200-220KT zinc in 2015, which will make up 40% of the zinc lost from

Century.

Another project may boost company’s zinc production after the closure of Century is

its Izok Corridor project in Canada. The project includes the Izok Lake and High Lake

deposit with significant zinc, lead and copper resources. According to MMG, the

expected initial annual production of the project can reach 180KT zinc and 50KT

copper. Should that come true, the economic value comes from Dulgald River and

Izok Corridor together can more than offset the loss from Century, base on the current

metal prices. The pre-feasibility study on Izok Corridor project is concluded and

definitive feasibility study is in process.

Therefore, although the concern of depleting Century is looming, MMG’s production of

Zinc will remain the current level at 600KT in year 2012 and 2013, and the commence

of Dulgald River in 2014 will lead zinc production to increase to 750KT. The negative

impact from Century’s closure may appear in year 2016 onwards, but we believe such

impacts will be relieved considering MMG’s resource base and projects in hand.

4 True global miner with supports from China Central Government-led mining giant

The matter that differentiates MMG from other SOE miners and privately owned

miners is that MMG is a true global miner with production sites and management

experiences span from developed countries (such as Australia) to developing

countries (such as Laos and DR Congo). When other domestic miners are either

struggling with their overseas investments or cautiously probing the opportunities to

expand abroad, MMG is already several steps ahead. We believe that it is going to be

a strategic requirement for Chinese domestic miners to expand their resources

coverage overseas, and MMG’s extensive international mining management

experiences is a grand advantage.

The supports from MMG’s holding company give the company a promising vision of

growth. MMG’s holding company, China Minmetals Corporation, is a truly Central

Government-led giant in metals and mining sector. In 2011, it is ranked No.169 among

the Fortune Global 500 and No.4 among metal companies. Supported by the holding

company, MMG can not only access to capital in lower cost, but also the strength to

engage into further international mining M&As. We believe MMG is strategically

poised by China Minmetals its platform to expand its mining asset in a global context.

Such mandate fits China’s strategy as well, which is to secure more metal resources

The zinc production loss from the closure of Century in 2016 onwards can be offset by the production of Dulgald River project, and the Izok Corridor project which is under feasibility study. In short term, the production of zinc will maintain the current level in 2012 and 2013, and will increase further in 2014 when Dulgald River start to produce.

MMG is leading ahead other domestic miners in terms of experiences in managing overseas mining operations.

With the supports from its holding company which is a truly giant in mining sector, MMG will grow through further engagement into international mining M&As.



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to satisfy its accumulating appetite. MMG’s management also, in several occasions,

expressed the ambition to quadrupling its current market share in four to five years

and it is not likely going to happen through organic growth. Therefore we believe MMG

will continue seeking M&A opportunities in mining sector and with the support from

China Minmetals Corporation, it has a very promising growth prospect.

5 DCF Valuation reveals stock price undervalued

With our updated metal price assumptions, we still find MMG’s valuation attractive at

this stage. DCF model is employed to derive the NPV of each project the company

has, then the net debt is subtracted from the total NPV of the projects. Our model

reveals an equity value of HKD3.8/share.

Figure10: MMG’s NPV valuation at 10% discount rate

Location Project NPV (m USD) MMG Ownership MMG Interest(m USD)

Sepon Laos 1,067 90% 960

Kinsevere Congo DRC 1,030 90% 927

Century Australia 661 100% 661

Rosebury Australia 307 100% 307

Golden Grove Australia 140 100% 140

Dulgald River Australia 310 100% 310

Mutoshi Congo DRC 53 70% 37

Izok Lake Canada 150 100% 150

Net Debt (907)

Company NAV 2,586

Stock Price 3.80


MMG’s EPS in FY2011 was 11.9 US cent. In that year, MMG realized 152million USD

investment return, wrote back 64million USD M&A expense allowance, and earned

91million USD from selling its non-operating business; all of which were not recurring

items. Therefore it should not be surprising to find out MMG’s EPS in FY2012 to be

much lower than that of FY2011, even though the mining production of MMG actually

healthily increased. We estimate MMG’s EPS in FY2012/13/14 to be 0.054/ 0.057/

0.076USD, or 0.42/ 0.45/ 0.59 HKD. The current stock price, 3.08HKD, corresponds

to a P/E multiple (‘12e) of 7.3x.

Our DCF model estimates a target price of HKD 3.8/share.



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Figure11: Peer group valuation matrix

Name Ticker

Closing

Price

(HKD)

Market Cap

(million

HKD)

EPS (HKD) P/E (x)

2011A 2012E 2013E 2011A 2012E 2013E

MMG Ltd 1208 HK 3.1 16292 0.9 0.4 0.5 3.3 7.3 6.8

Jiangxi Copper 358 HK 20.9 86771 2.3 1.9 1.8 9.1 11.1 11.6

Aluminum Corp of China * 2600 HK 3.6 74748 0.0 -0.4 -0.2 149.0 -8.4 -20.8

China Molybdenum * 3993 HK 3.5 46680 0.3 0.3 0.3 12.7 13.2 11.8

China Polymetallic Mining * 2133 HK 1.5 2960 -0.3 0.3 0.7 - 5.7 2.3

China Nonferrous Mining * 1258 HK 2.2 7746

0.3 0.6 - 7.2 4.0

Sources: Company data, Guosen Securities (HK), earning estimates of stock with * are Bloomberg consensus

We believe that MMG’s asset is currently undervalued by the market. With more

attractive earnings multiple compare to its industrial peers and a promising growth

prospect, we reiterate our “Buy” recommendation on the stock with target price of

HKD3.8 per share.



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6 Risks

Commodity prices: The prices of metals have obvious effects on MMG’s

earning, and they may fluctuate against the company’s favor.

Cost inflation: As many central banks are pumping liquidity into the market, the

company’s production costs may increase faster than our expectation.

Overpaying acquisition target: Because engage in M&A to expand MMG’s

asset and production base is an important growth strategy to the company, it

may spend too much on target in order to pursue growth.



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Appendix1: MMG’s Income Statement (Million USD)

2010A 2011A 2012E 2013E 2014E

Revenue 1,920 2,228 2,450 2,520 2,704

COGS -1,042 -1,302 -1,493 -1,520 -1,536

Gross Profit 878 926 958 1,000 1,168

Selling Expenses -74 -80 -82 -85 -91

G&A Expenses -59 -136 -145 -150 -157

Exploration Expenses -56 -64 -90 -100 -100

Other Expenses -169 109 -100 -100 -100

EBIT 521 755 541 565 720

Net Interest Expenses -39 -46 -85 -84 -83

EBT 483 709 456 481 637

Net Profit 430 575 319 337 446

Minority Interests -21 -34 -32 -34 -45

Net Income to Common Shareholders 409 541 287 303 401

Source: Bloomberg, Guosen Securities (HK)



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Appendix2: MMG’s Balance Sheet (Million USD)

2008A 2009A 2010A 2011A 2012H1

Cash 241 61 398 1,097 155

Short-term investment 1 4 177 97 53

Account receivables 172 37 364 126 124

Inventory 90 39 364 278 334

Other current assets 5 1 6

Total current assets 508 140 1,309 1,597 666

Property, plant and equipment 81 206 1,672 1,755 3,128

Long-term investments 196 22 229 5 23

Goodwill 331 18 132

211

Other long-term assets 32 12 125 97 152

Total long-term assets 642 259 2,158 1,856 3,514

Total assets 1,150 400 3,467 3,454 4,180

Account payable 104 23 187 188 223

Defered income tax liability 0 8 129 118 75

Short-term borrowings 40 6 83 787 355

Other current liabilities 105 22 353 75 132

Total current liabilities 248 60 752 1,168 785

Long-term debts 70 153 1,839 295 1,009

Other long-term liabilities 21 31 343 497 771

Total long-term liabilities 91 183 2,181 791 1,779

Total liabilities 339 243 2,934 1,959 2,564

Share capital 13 2 19 34 34

Reserves and retained profit 773 146 458 1,402 1,524

Shareholder's equity 786 148 477 1,435 1,558

Non-controlling interest 25 9 56 59 58

Total equity 811 156 533 1,494 1,616

Liabilities and equity 1,150 400 3,467 3,454 4,180

Source: Bloomberg, Guosen Securities (HK)



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Information Disclosures

Stock ratings, sector ratings and related definitions Stock Ratings: Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months. Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months. Sell: A negative return of 10% or more relative to overall market within 6 –12 months. Sector Ratings: Buy: The sector will outperform the overall market by 10% or higher within 6 –12 months. Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months. Sell: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Interest disclosure statement The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an officer of the listed companies covered in this report and has no financial interests in the companies. Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities (HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no individual employed by the listed companies.

Disclaimers The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed companies. This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or completeness of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular investment objectives, financial situation or needs of individual clients and does not constitute a personal investment recommendation to anyone. Clients are wholly responsible for any investment decision based on this report. Clients are advised to consider whether any advice or recommendation contained in this report is suitable for their particular circumstances. This report is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)’s written authorization, any form of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information and opinions contained therein are subject to change and may be amended without any notification. This report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guosen Securities (HK) and its group companies to any registration or licensing requirement within such jurisdiction.

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