This performance forecast season is undoubtedly the "world" of the nonferrous metals sector.

According to Choice data, as of July 16th, 63 listed companies in the nonferrous metals sector have released their 1H 2024 performance propects. Of these enterprises, 41 are expected to report a profit for the reporting period.

Among them, there are those with the largest profit scale, such as Zijin Mining Group Limited (02899, 601899.SH), which is expected to achieve a net profit attributable to the mother of RMB 14.55 billion to 15.45 billion in the first half of the year, a year-on-year increase of 41%-50%. There are also companies with large scale and alarming growth rates, such as CMOC Group Limited (03993, 603993.SH), which is expected to achieve a net profit attributable to the mother of between RMB 5.189 billion and RMB 5.735 billion in the first half of the year, a year-on-year increase of 638% to 716%.

As we all know, elephants dancing is not an easy task. It is not surprising that CMOC Group Limited, a global mining industry leader with mining resources around the world, has greatly expanded its profit scale. However, its ability to achieve such rapid profit growth within a short period of time is clearly a problem worth exploring.

Doubled copper and cobalt production, net income "prop block" come to the surface

It is reported that CMOC Group Limited is a rapidly growing global mining industry giant, with mining resources around the world. It operates seven high-quality mines, including the Donggou Mo mine, Shangfanggou Mo mine, Sandaozhuang Mo mine, TFM copper-cobalt mine, KFM copper-cobalt mine, Brazil niobium mine, and Brazil phosphate mine in China, the Democratic Republic of Congo, and Brazil.

In terms of production, the copper ore production volume calculated by the consolidated financial statement caliber for 2023-2028 is expected to increase from 0.39 million tons to 0.9 million tons (according to the median value of the five-year planning guidelines), an increase of 0.51 million tons, or a growth rate of 129%. The company's copper output for 2024 is expected to be 0.55 million tons, ranking second among listed copper companies in China and tenth globally.

The main reason for the more than six-fold increase in the company's net profit growth this time is the combination of two factors, which are explained in detail below:

Firstly, due to the low base number in the first half of last year, this net income growth is particularly impressive.

Specifically, in the first half of 2023, due to the restricted export of its subsidiary TFM's copper-cobalt products, the company was unable to sell most of its copper-cobalt products during that period, resulting in a net profit of only RMB 700 million for the reporting period, the lowest level for the same period since 2017. In contrast, the expected net profit attributable to the mother in the first half of this year is between RMB 5.189 billion and RMB 5.735 billion, with a clear gap in scale.

Secondly, the year-on-year increase in copper-cobalt production and sales, combined with cost optimization and technological upgrading, has driven the company's overall profit scale growth.

In the first half of 2024, CMOC Group Limited's major copper-cobalt mine products achieved a significant increase in production, and comprehensive scale and efficiency gradually emerged. Among them, the copper metal output was 313,788 tons, an increase of about 101% YoY; the cobalt metal output was 54,024 tons, an increase of about 178% YoY. With regards to this performance, the company also stated that net profit growth is mainly due to the copper-cobalt production and sales volume of the main products increasing significantly YoY, the effects of cost optimization and technological upgrading measures are apparent, and the copper market price has strengthened in 2024, which results in performance improvement.

In fact, based on the previously disclosed first-quarter report, the copper sector business has become the "prop block" in the company's profit increase.

In Q1 2024, the company achieved operating income of RMB 46.121 billion, a YoY increase of 4.2%; net profit attributable to the mother was RMB 2.072 billion, a YoY increase of 553%. YoY, the net profit attributable to the mother in Q1 2024 increased by RMB 1.75 billion, mainly due to a YoY increase in gross profit of RMB 4.1 billion. If only considering the mine side, the gross profit margin of the copper, cobalt, molybdenum, tungsten, niobium, and phosphate plate was 71%, 13%, 6%, 4%, 5%, and 2%, respectively. It can be seen that the copper sector has become the prop block of CMOC Group Limited's profit in Q1 2024.

In terms of production performance, the company's copper production volume in Q1 2024 was about 0.147 million tons, a YoY increase of 122.9%, achieving 27% of the annual production volume guideline; its cobalt production volume was 0.0252 million tons, a YoY increase of 392.2%, and achieving 39% of the annual production volume guideline. However, during the same period, the YoY changes in molybdenum and tungsten production were -15.7% and +0.33%, respectively, reaching 3,474 and 1,921 tons. The YoY changes in niobium and phosphate production increased by 9.9% and 3.3% to 2,506 tons and 279,000 tons, respectively. It can be seen that the production of other mineral resources except copper and cobalt has not increased significantly. The substantial increase in cobalt production volume is mainly due to the YoY increase in cobalt production brought about by copper growth.

With copper prices trending upwards and cobalt prices bottoming out, is there still money to be made?

From a business structure perspective, CMOC Group Limited engages in the selection, smelting and deep processing of copper, cobalt, molybdenum, tungsten, niobium and phosphate ores, has a relatively complete integrated industry chain and has formed a "mine+trade" model, and has built a world-class resource company through a "three-step" process.

Under the balanced layout of the business sector, CMOC Group Limited also has sufficient momentum to smooth out different resource cycles. This is also reflected in the performance of the copper and cobalt markets in the first half of the year.

In terms of the copper market, copper prices showed an upward trend in the first half of this year. Among them, LME copper broke through the resistance level of $8,700 per ton on March 13 and started a one-way upward trend. It reached a historical high of $11,104.5 per ton on May 20 and then began to adjust. As of June 23, LME copper has fallen back to a minimum of $9,551 per ton, but still maintains a high level of operation.

In terms of the cobalt market, since the beginning of this year, the cobalt market has continued to cool down. According to choice data, as of June 2024, the LME cobalt spot price was $26,854 per ton, a drop of more than 67% from the high point of $81,790 per ton in April 2022.

Taking a closer look, behind the high-level operation of copper prices, on the one hand, the market believes that there is a "huge demand" for copper in the context of energy transformation; on the other hand, it comes from the influx of speculative funds; while the continued cool-down of cobalt prices this year is due to the sluggish demand for the electric vehicle market and the expectation of material surplus, which further squeezes the profit of the cobalt smelting link. Therefore, we can also see that at the price level that drives profits, CMOC Group Limited mainly owes it to the copper price.

As the saying goes, "those who do not learn from the past are doomed to repeat it," looking at the future copper and cobalt markets, is CMOC Group Limited's "gold digging" behavior still feasible?

According to Everbright's forecast, it is estimated that new energy (photovoltaic, wind power, and new energy vehicles) will contribute 87% of the global copper total demand increment in 25 years. According to the forecast, the supply-demand gap for refined copper in the world in 2023-2025 is -0.17/-0.42/-0.75 million tons, and the supply-demand gap accounts for -0.6%/-1.5%/-2.6% of demand, and the copper price is expected to reach $12,000 per ton or more in 2025. As the profit "anchor" of CMOC Group Limited, the copper sector will further increase the company's profitability.

In terms of the cobalt market, given that cobalt plays a key role in turning to clean energy and zero net emissions, the cobalt market may soon return to supply-demand balance. Among them, CarbonCredits, a research and investment platform, pointed out in April this year that although the bottom of the cobalt price is uncertain, some analysts expect that the price will gradually improve in the next few quarters. A report by the International Energy Agency (IEA) predicts that because cobalt plays a key role in achieving global net-zero emissions in the next few decades, by 2030, the value of cobalt will increase seven times, and by 2050, it will increase ten times, and the market will reach over $400 billion.

In summary, CMOC Group Limited's performance "prepares for takeoff" without copper and cobalt exceeding expectations. At the same time, the outlook for copper and cobalt in the future also adds certainty to CMOC Group Limited's subsequent performance growth. However, it should be noted that the company currently also faces risks such as downstream demand falling short of expectations, mine production exceeding expectations, etc., and the high debt ratio performance (the debt-to-asset ratio in Q1 2024 is 57.95%). The market is still optimistic and cautious, and the post-performance stock price rise is a good illustration.