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On January 19, JCHX Mining Management Co., Ltd. (JCHX) announced it would invest about US$750mn in the construction of its eastern mining and processing zone at the Lonshi copper mine. The existing West zone of the Lonshi copper mine has an annual production capacity of about 40,000t of copper metal. Once the East zone reaches design capacity, the total annual production capacity of the East and West zones should reach 100,000t of copper metal.

Comments

The East zone of the Lonshi copper mine has large reserves and favorable resource endowment; the successful operation of the West zone lays a solid foundation for future development in the East zone. According to the announcement, copper deposits in the East zone of the Lonshi copper mine are deep. The ore deposits, identified as No.6 and No.7, have a marginal grade of 2.0% total copper (TCu) and extend up to about 1,000m.

In terms of resources, as of October 31, 2024, identified deposits in the East zone amount to about 26.05mnt of ore and 1.04mnt of copper metal, including proved, controlled, and inferred resources at an average grade of 3.99; copper metal discovered and controlled accounted for 70.99%.

According to the announcement, the integrated mining, processing, and smelting project in the West zone of the Lonshi copper mine was put into operation in 4Q23, and we believe the East zone can make full use of existing facilities in the West zone to optimize resource allocation.

The Lonshi copper mine has large output and is highly profitable, which may help the firm increase its production capacity. According to the announcement, the current mining scale of the West zone is 1.7mnt/yr, while the East zone has a design mining scale of 2.5-3.5mnt/yr. After the East zone starts production, the West zone will gradually reduce production to balance the service life of the two zones. The total maximum mining volume of the East and West zones is 4.5mnt per year, implying a copper metal volume of 100,000 tonnes per year.

The construction period of the East zone is 4.5 years, and it should reach full capacity in the fourth year after the mine starts operation. However, given the production cut in the West zone, we think the actual annual

capacity of the two zones will reach 100,000t earlier than expected. From the perspective of reserve expansion, according to the announcement, as deep resources are not sealed and resources may increase, the production and service life of the mine may be extended.

Regarding profitability, according to the announcement, based on copper concentrate’s historical prices in the past three years and recent price trends, the firm estimates the average annual sales revenue of the East zone project at US$540mn, the average annual profit at US$210mn, and the after-tax financial internal rate of return (IFR) at 21.91%. According to the firm's plan, the annual production capacity of its copper mines will increase to about 170,000t.

As a leading provider of integrated mine operation services, JCHX has achieved milestones in its strategy to develop mining services and resources, demonstrating high investment value. The firm has made advancements in both domestic and overseas markets in mining services. We think that the accelerating globalization of its mining services should facilitate faster globalization of the resources segment. In the resources sector, the firm's strategy to develop mining services and resources has helped it transform from a mine development service provider into a mining conglomerate. We expect its earnings growth to accelerate as the output of copper mines ramps up.

Financials and valuation

We keep our 2024 and 2025 earnings forecasts unchanged and introduce 2026 earnings forecast of Rmb2.50bn. The stock is trading at 17x, 13x, and 10x 2024e, 2025e, and 2026e P/E. We maintain an OUTPERFORM rating and TP of Rmb57, implying 23x, 18x, and 14x 2024e, 2025e, and 2026e P/E, offering 39% upside.

Risks

Sharp fluctuations in product prices; disappointing capacity expansion; geopolitical risks in countries where overseas projects are located.