Zhejiang Huayou Cobalt Co.Ltd(603799) (603799)
Event: the company announced on the evening of December 22 that it planned to acquire 100% equity of Zimbabwe prospect lithium mining company and related creditor’s rights under the inter company loan agreement with us $422 million. 1) Huayou international mining, a subsidiary, acquired 87% of the equity of prospect lithium mining company held by a wholly-owned subsidiary of prospect Australia for us $378 million and the related creditor’s rights of prospect company to prospect lithium mining company under the inter company loan agreement; 2) Huayou international mining plans to acquire 6% equity of prospect lithium mining company held by natural person Kingston kajese and 7% equity of prospect lithium mining company held by tamari trust family trust for us $44.24 million.
comment:
The transportation of the underlying asset is convenient, the grade of lithium oxide is 1.06%, and the lithium resource is converted into lithium carbonate equivalent of 1.9 million tons. Prospect lithium owns 100% interest in Arcadia lithium mine in Zimbabwe. Arcadia lithium mine is located in mashonalan region, Zimbabwe. The project is close to the main Expressway and railway intersection, power grid and regional export center. The roads are two lane cement roads with convenient transportation. As of October 2021, the JORC (2012) standard resource of Arcadia project is 72.7 million tons, with lithium oxide grade of 1.06%, tantalum pentoxide grade of 121ppm, lithium oxide metal quantity of 770000 tons (lithium carbonate equivalent of 1.9 million tons) and tantalum pentoxide metal quantity of 8800 tons.
A pilot production line has been operated, with an annual output of about 265000 tons of lithium concentrate. The feasibility study report of Arcadia project published in December 2021 shows that the project has a construction period of 2 years, a production life of 18 years, open-pit mining, an annual ore processing capacity of 2.4 million tons, an annual output of 147000 tons of spodumene concentrate, 94000 tons of technical lithium permeable feldspar concentrate, 24000 tons of chemical lithium permeable feldspar concentrate and 0.3 tons of tantalum concentrate. By the end of 2020, a small-scale open mining has been carried out, and a lithium permeable feldspar pilot production line has been operated. The first batch of products will be shipped and sold in October 2021.
Under the ideal condition, the annual profit is expected to reach US $250 million according to static calculation. According to the cash cost of US $344 / T in the feasibility study report of Arcadia lithium mine (the full cost is about US $430 / T, assuming that the cash cost accounts for 80% of the full cost), the current price of lithium concentrate (5% grade) is US $2355 / T (Baichuan Yingfu, December 22), the sea freight is USD 80 / ton, assuming that the total rate is 30%. In the ideal state, the static estimated annual profit can reach USD 250 million (the comprehensive tax rate of Zimbabwe mining company is 18%).
Profit forecast, valuation and rating: this acquisition will help the company strengthen the layout of upstream lithium resources and enhance lithium resource reserves. We continue to be optimistic about the company’s integrated layout of lithium battery materials, and the profits of nickel and lithium battery materials projects are gradually released. We temporarily ignore the performance increment of lithium business and maintain the early profit forecast. It is estimated that the net profit attributable to the parent company from 2021 to 2023 will be RMB 3.25/41.4/5.67 billion respectively, with a year-on-year increase of 179% / 28% / 37%. The corresponding PE of the current stock price is 42 / 33 / 24x respectively, maintaining the “buy” rating.
Risk tip: the price of cobalt and copper fluctuates greatly, the progress of the company’s investment projects is less than expected, and the sales volume of new energy vehicles is less than expected; Risk of cash flow deterioration due to high capital expenditure; Risk of lithium price falling beyond expectations
