base metal smelting industry [email protected]...
TRANSCRIPT
![Page 1: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/1.jpg)
Mizuho Securities Equity Research3 September 2012Nonferrous MetalsIndustry Overview
Base metal smelting industryBullish on copper; neutral on nickel and zinc
Senior Analyst:Akifumi Hayashi, CFA+81 3 6202 [email protected]
SummaryWe hereby initiate our coverage of the three major Japanese base metalsmelting companies. We are neutral on the base metal smelting industryoverall, in light of the significant disparities that exist within it, which stem fromuncertainty in short-term base metal price trends and from the supply/demandbalances for the various metals, which are less than universally favorable.While these companies have thus far successfully developed their businesseson a custom smelter model, the limits of this model are gradually becomingapparent. We therefore favor companies with prospects for accelerated growththrough evolution of their business models, such as in expansion in upstreammining operations. We are initiating coverage on Sumitomo Metal Mining witha Buy rating, on Pacific Metals with a Neutral rating, and on Toho Zinc witha Neutral rating.
Base metal prices and implicationsWhile we expect the short-term supply/demand balance for one of the basemetals, namely copper, to be comparatively tight, we expect this balance toremain loose for nickel, another base metal. Although we expect the coppersupply/demand balance to loosen going forward, it will likely remain tightrelative to those of other metals, as supply constraints are likely to limit theamount of surplus. Zinc is currently plagued by oversupply, however, and itappears likely to have the tightest supply/demand conditions over the longterm as older mines are depleted. For nickel, we expect a persistent supplyglut in light of the number of large-scale development projects planned. Forthis reason, we are more bullish on copper-related companies and have morecautious views on nickel- and zinc-related companies.
Share price drivers and valuationsWe see base metal price trends and reforms to company business modelsas the main factors determining share price performance for the basemetal smelting companies. The shares of these three base metal smeltingcompanies are currently trading at PBRs of around 0.5x–0.7x, and their shareprices tend to fluctuate in tandem with base metal prices most heavily weightedin each company’s business structure. Sumitomo Metal Mining is also tradingat a PER roughly on par with that of global competitors. Nevertheless, ouroutlook for copper prices suggests leeway for upward movement in valuations,which deteriorated alongside the drop in nickel prices, and theoretical PBRbased on the relationship between capital costs and ROE also implies upside.
Share price catalysts/risk factorsIn terms of base metal prices, any phenomena that could cause declines insupply could act as catalysts for sector share prices. For individual companies,catalysts include business model reforms involving growth in productionvolume in upstream resource business. Risks to sector share prices include alarger-than-expected drop in base metal prices and unsuccessful developmentprojects.
Figure 1. Investment rating and valuationsCode Rating Share price Price objective Rate of deviation Price objective PER PBR Dividend yield
(¥) (¥) calculationPacific Metals 5541 Neutral 251 250 -0% BPS x roughly 0.5x - 0.4x 0.0%Toho Zinc 5707 Neutral 265 280 6% BPS x roughly 0.7x - 0.6x 2.6%Sumitomo Metal Mining 5713 Buy 808 1,060 31% BPS x roughly 0.9x 8.8x 0.6x 3.5%Note: Share prices are as of 31 August. PER, PBR, and dividend yield data are based on our FY3/13 forecasts.Source: Mizuho Securities Equity Research
Please refer to pages 48 - 49 of this report for important disclosure and analyst certification information.
Mizuho Securities Co., Ltd.
![Page 2: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/2.jpg)
Table of contents Executive summary .................................................................................................. 3
POSITIVE ON SHIFT AWAY FROM CUSTOM SMELTING BUSINESS MODEL ........................ 3
KEY INVESTMENT POINTS ......................................................................................... 3
Valuations .................................................................................................................. 4
BASE METAL PRICES AND KEY SHARE PRICE CHARACTERISTICS .................................. 4
COMPARISON WITH GLOBAL COMPETITORS................................................................ 6
Base metal price forecasts ....................................................................................... 8
(1) COPPER PRICE FORECAST .................................................................................. 8
(2) NICKEL PRICE OUTLOOK .................................................................................... 14
(3) ZINC PRICE OUTLOOK ....................................................................................... 20
Pacific Metals (5541) Taking on challenges in ferronickel business ................. 25
INVESTMENT RATING AND VALUATIONS .................................................................... 25
Toho Zinc (5707) Transition to an integrated mining and smelting business ................................ 33
INVESTMENT RATING AND VALUATION ...................................................................... 33
Sumitomo Metal Mining (5713) New sprouts augur the rise of a new major Japanese base metal company ... 40
INVESTMENT RATINGS AND VALUATION .................................................................... 40
Base metal smelting industry 2
Mizuho Securities Co., Ltd.
3 September 2012
![Page 3: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/3.jpg)
Executive summary Positive on shift away from custom smelting business model
The Japanese base metal smelting companies have thus far successfully developed
their businesses as custom smelters. However, with the maturing of domestic
demand and shifts in global ore supply/demand conditions, they are now
approaching the limits of growth under a custom smelting business model. The base
metal smelting companies are responding to this state of affairs through such means
as expansion into upstream mining business, technological advances in smelting
methods, and enhancement and diversification in downstream business. We believe
these efforts will be the key to future growth for these companies.
We see Sumitomo Metal Mining’s copper and nickel mining businesses and Toho
Zinc’s zinc mining business as growth drivers. We take a positive view of Sumitomo
Metal Mining’s investment in honing its competitive advantages in upstream
resource development through technological advances in smelting, such as in wet
smelting technology for lower-grade nickel ore. We are focusing on the extent to
which companies will be able to develop new mines for copper and zinc, the
development opportunities for which appear likely to decline over the long term.
Such development will depend on these companies’ efforts in exploration operations,
and the potential of the mining sites in which the companies hold rights will also be
crucial. In this area as well, we believe Sumitomo Metal Mining has advantages in its
annual exploration budget of roughly ¥7b and its wealth of exploration projects. We
also believe there is potential for further expansion in resource volumes in Toho
Zinc’s Rasp mine, as mineralization in its ore deposits seems to extend further to the
north.
Key investment points
Share price performance for the base metal smelting companies fluctuates based on
base metal prices. While we expect the short-term supply/demand balance for
copper to be comparatively tight, supply/demand for nickel appears likely to remain
loose. We therefore view copper-related companies as attractive. Factors apart from
market prices that affect share price performance for individual stocks include trends
in upstream mining business. Sumitomo Metal Mining appears attractive both in
terms of the outlook for base metal prices and in terms of individual factors, and we
are therefore initiating our coverage of the company with a Buy rating. While Pacific
Metals faces a number of issues in terms of both market prices and individual
factors, we believe these have been largely priced in, and we are therefore initiating
our coverage of the company with a Neutral rating. Although we look positively on
Toho Zinc’s progress in upstream mining business, we see a risk that short-term
earnings could fall below the market’s expectations, and we are therefore initiating
our coverage of the company with a Neutral rating.
We believe investment opportunities for the sector as a whole will arise when the
various factors that have thus far necessitated a cautious stance move toward
resolution or at least improvement, widening the selection of attractive stocks
beyond those focused on copper. From this standpoint, we intend to closely monitor
trends at the nickel- and zinc-related companies.
Evolution away from custom
smelting business model will
be the key to future success
Focus on Sumitomo Metal
Mining and Toho Zinc’s
efforts in upstream mining
business
Sumitomo Metal Mining
attractive both in terms of the
outlook for base metal prices
and for individual factors
A widening in the range of
attractive stocks could mark a
turning point for the sector
Base metal smelting industry 3
Mizuho Securities Co., Ltd.
3 September 2012
![Page 4: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/4.jpg)
Valuations Base metal prices and key share price characteristics
The share prices of base metal smelting companies tend to be closely linked to base
metal prices. In looking at the correlation between base metal prices and the share
prices relative to TOPIX of the three companies on which we are initiating coverage
(Sumitomo Metal Mining, Toho Zinc, and Pacific Metals), we note that the share
price for Sumitomo Metal Mining shows the strongest correlation with gold and
copper prices, while the correlation with nickel prices is strongest with Pacific Metals
and the correlation with zinc is strongest with Toho Zinc. Accordingly, valuations are
also closely linked with market prices for these base metals. In other words, while
valuations can improve on the back of higher base metal prices, valuations can
deteriorate on lower base metal prices. Valuations since 2010 have generally shown
a link with base metal prices, though we note slight differences as a result of unique
factors.
Figure 2. Correlation between base metal prices and share prices of base metal and trading companies relative to TOPIX (2005 onwards)
Pacific Metals Toho Zinc Sumitomo Metal
Mining
Itochu Marubeni Mitsui Sumitomo Mitsubishi
Copper 0.3 0.2 0.6 0.8 0.7 0.7 0.6 0.7
Nickel 0.8 0.7 0.7 0.6 0.5 0.6 0.7 0.3
Zinc 0.6 0.9 0.5 0.5 0.4 0.4 0.6 0.2
Gold -0.1 -0.4 0.2 0.5 0.3 0.3 0.3 0.3
¥/US$ 0.4 0.6 0.1 -0.2 -0.0 0.0 0.0 -0.1
Note: Correlation of trading company share prices relative to TOPIX is highlighted when the correlation is higher than at other trading companies and the company has upstream rights on relevant products.
Source: Mizuho Securities Equity Research
Share price performance, as noted above, appears reasonable when factoring in the
direct impact of base metal prices on performance at the base metal smelting
companies. We estimate the earnings contribution ratio for gold, copper and nickel
at Sumitomo Metal Mining to be roughly 1:1:1. While the decline in nickel prices
contributed to an earnings deterioration in the nickel business at Pacific Metals to
near the break-even point, nickel also appears to be almost the only factor
contributing to fluctuating earnings at the company. Similarly, the fluctuation in
earnings at Toho Zinc was due almost entirely to lower prices on zinc, because the
company is more strongly weighted in zinc than in non-zinc operations, where
earnings were more stable. Looking back to FY3/11, before base metal company
earnings deteriorated to near the break-even point, we see that nickel accounted for
99% of earnings at Pacific Metals, while zinc accounted for about two-thirds of
earnings at Toho Zinc. The earnings contribution ratio for Sumitomo Metal Mining
now appears to be about the same as it was in FY3/12.
In the same manner as the base metal smelting companies, there is a strong
correlation between share price performance at trading companies and commodity
prices for the mainstay products of those companies. While trading company shares
are even more closely linked to the price of copper than Sumitomo Metal Mining, the
copper business accounts for no more than 10% of total earnings, even at leader
Mitsubishi. The share price of Pacific Metals shows a stronger correlation with the
price of nickel than do the share prices of the trading companies, which are
generally in line with the structure of the business at each company. The correlation
Base metal prices as a share
price and valuations driver
Earnings drivers and
comparison with trading
companies
Base metal smelting industry 4
Mizuho Securities Co., Ltd.
3 September 2012
![Page 5: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/5.jpg)
with the price of zinc is stronger at Toho Zinc than at the trading companies, and a
comparison of operating structure shows no significant difference. Accordingly,
selection based on exposure to zinc and nickel reveals a potential investment
opportunity for base metal companies exceeding that for the trading companies.
Figure 3. Estimated earnings by product at base metal and trading companies (FY3/12)
Pacific Metals Toho Zinc Sumitomo Metal
Mining
Itochu Marubeni Mitsui Sumitomo Mitsubishi
Copper 0% 0% 42% 0% 7% 2% 6% 9%
Nickel 71% 0% 37% 0% 0% 0% 0% 0%
Zinc 0% 8% 0% 0% 0% 0% 6% 0%
Gold 0% 0% 48% 0% 1% 0% 1% 0%
Elimination & others 29% 92% -27% 100% 91% 98% 86% 91%
Note: NP breakdown for trading companies, OP for Toho Zinc, and RP for Sumitomo Metal Mining and Pacific Metals. Includes by-product credit. Earnings on base metal products through indirect equity interest at Mitsui’s Vale excluded. Figures show Mizuho estimates for mining earnings at Mitsubishi, Antamina by-product credit included in copper earnings.
Source: Mizuho Securities Equity Research
In looking at valuations on an absolute basis, share prices are trading at a PBR of
0.6x for Sumitomo Metal Mining, 0.6x for Toho Zinc and 0.4x for Pacific Metals
based on our FY3/13 estimates. Factoring beta values of 1.2 at Sumitomo Metal
Mining, 1.5 at Toho Zinc, and 1.4 at Pacific Metals, based on a risk-free rate of 1.3%
and an equity risk premium of 6.0%, we calculate a cost of capital of 8.5% at
Sumitomo Metal Mining, 10.3% at Toho Zinc, and 9.7% at Pacific Metals. Based on
a comparison of the cost of capital and ROE, the difference between theoretical
PBR and actual PBR signals upside potential for Sumitomo Metal Mining’s shares,
but downside potential for Pacific Metals’ shares. Valuations on this basis appear to
be roughly on par for Toho Zinc. Nevertheless, we stress the importance of base
metal price trends for share price performance.
Figure 4. Base metal company capital costs and ROE
Pacific Metals Toho Zinc Sumitomo Metal Mining
PBR (FY3/13 Mizuho estimate) (x) 0.4 0.6 0.6
Rf (%) 1.3% 1.3% 1.3%
Beta 1.4 1.5 1.2
Equity risk premium (%) 6.0% 6.0% 6.0%
Cost of capital (%) 9.7% 10.3% 8.5%
ROE (FY3/13 Mizuho estimate) (%) - - 8%
ROE (FY3/14 Mizuho estimate) (%) 1% 6% 8%
Note: Financial figures based on end-term balance sheets. Share prices as of 31 August. Source: Mizuho Securities Equity Research
We are assigning price objectives based on the aforementioned share-price
characteristics and our short-term forecasts for base metal prices. In light of rising
copper prices, we view a PBR of about 1x as the upper limit for Sumitomo Metal
Mining. On the other hand, the share price has fallen in line with the decline in nickel
prices and PBR appears relatively attractive against the current level of copper
prices. We expect nickel prices to bottom near their current level and believe the
basis for valuations could shift to copper prices. Given these assumptions, we are
setting a price objective based on a PBR of roughly 0.9x and our end-of-FY3/13
BPS estimate. We believe the PBR at Pacific Metals could fall below 0.5x should the
trend toward weak nickel prices continue, but our price objective is based on a PBR
of roughly 0.5x and our end-of-FY3/13 BPS estimate as we expect nickel prices to
Sumitomo Metal Mining
shows upside based on
profitability comparison
Setting our price objectives
Base metal smelting industry 5
Mizuho Securities Co., Ltd.
3 September 2012
![Page 6: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/6.jpg)
bottom near their current level. We expect zinc prices to maintain their current level,
and our price objective for Toho Zinc is thus based on a PBR of roughly 0.7x and our
end-of-FY3/13 BPS estimate.
Comparison with global competitors
When comparing valuations for the three base metal smelting companies to global
competitors, we note that share prices for overseas copper mining companies are
trading at PER levels of about 11x, generally in line with those at the copper
smelting companies. Share prices for overseas nickel companies are trading at an
average PER of about 12x, and the mining and smelting business models for
Sumitomo Metal Mining accordingly do not appear overvalued in comparison. In zinc
operations, mining company PERs are low while smelting company PERs seem
high. This appears to reflect depressed profitability at smelting companies. Against
the global competitors, Pacific Metals and Toho Zinc do not necessarily appear
attractive, given the slump in earnings. However, companies such as Toho Zinc
appear likely to show an improvement heading into FY3/14.
Figure 5. Copper price trends and the copper company share price index
0
100
200
300
400
500
600
Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
Copper company share price index Sumitomo Metal Mining stock price index
Copper price (¢/lb)
(Index: end of 2004 = 100)
Note: Copper company share price index: 100 = end-2004 average for Xstrata, Freeport-McMoran Copper & Gold,
Grupo Mexico, Antofagasta, Teck Resources Source: Mizuho Securities Equity Research
Sumitomo Metal Mining
attractive even when
compared to global
competitors
Base metal smelting industry 6
Mizuho Securities Co., Ltd.
3 September 2012
![Page 7: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/7.jpg)
Figure 6. Base metal company valuations
Market cap Share price PER PBR ROE
Dividend
yield
Dividend
payout ratio
($m) Currency (x) (x) (%) (%) (%)
Copper-related
Xstrata Mining 45,366 952 GBp 11 0.9 8 2.7 31
Freeport-McMoran Mining 34,276 36 USD 11 2.0 18 3.4 36
Grupo Mexico Mining 23,088 39 MXN 10 2.6 25 4.1 43
Antofagasta Mining 17,317 1,107 GBp 12 2.3 19 2.8 35
Teck Resources Mining 15,972 28 USD 9 0.9 9 2.9 27
Copper mine average 11 1.7 16 3.2 34
Jiangxi Copper Refining 6,422 20 CNY 10 1.5 15 2.2 21
Sumitomo Metal Mining Mining, refining 5,793 808 JPY 9 0.6 8 3.5 30
Nickel-related
Norilsk Nickel Mining 29,200 153 USD 8 2.0 25 3.9 31
Eramet Mining 2,933 88 EUR 19 0.8 4 1.8 35
Vale Indonesia Mining 2,393 2,300 IDR 11 1.3 12 6.6 73
Aneka Tambang Persero Mining 1,239 1,240 IDR 8 1.0 13 5.0 39
Nickel Asia Corp. Mining 529 17 PHP 12 1.9 16 4.0 47
Nickel mine average 12 1.4 14 4.3 45
Sumitomo Metal Mining Mining, refining 5,793 808 JPY 9 0.6 8 3.5 30
Pacific Metals Refining 625 251 JPY - 0.4 -1 0.0 -
Zinc-related
Vedanta Resources Mining 4,087 868 GBp 5 0.7 13 4.2 21
Perilya Mining 210 0.27 AUD 6 0.5 9 0.0 0
Zinc mine average 6 0.6 11 2.1 11
Nyrstar Refining 819 3.83 EUR 50 0.5 1 3.9 192
Korea Zinc Refining 6,819 409,000 KRW 11 1.9 18 1.1 12
Zinc ore refining average 30 1.2 9 2.5 102
Toho Zinc Mining, refining 459 265 JPY - 0.6 -2 2.6 -
Note: Share prices as of 31 August 2012. FY12 basis. Consensus forecast by Bloomberg. Figures for Japanese companies are Mizuho estimates. Source: Mizuho Securities Equity Research
Base metal smelting industry 7
Mizuho Securities Co., Ltd.
3 September 2012
![Page 8: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/8.jpg)
Base metal price forecasts (1) Copper price forecast
We expect the price of copper to trend gradually downward over the medium term,
but see significant latent potential for wide price swings in the event of even minor
changes in supply or demand, as we expect the copper price to remain relatively
high (despite trending downward) and expect supply and demand to remain fairly
evenly matched. We expect the long-term equilibrium price to remain fairly high by
historical standards, with the chief determinants being the limited quantity of new
supply sources and the high development costs involved.
Outlook for supply and demand in China
Our forecasts assume a temporary weakening in demand in China in 2012,
particularly from power cable producers, generally a mainstay source of demand.
However, we expect demand to resume stable growth in 2013. We estimate current
annual per-capita copper consumption in China at roughly 5.5kg, and expect this to
rise to 7.5kg over the long term, with China’s annual copper consumption increasing
at an annual rate of around 5%.
Limits on copper mine output
Copper output is coming up against significant downward pressure, some of which
appears to be structural. The copper grade of the world’s major mines is declining;
this is a structural restriction on supply that is part and parcel with the increasing age
of the mines in operation. Worker strikes and other such disruptions of production
also have a substantial impact, with subsequent recoveries in production falling
short of expectations in some cases even when the ostensible issues have been
resolved.
Copper price forecasts
Figure 7. Global supply/demand balance and copper prices
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Production:
Mine MT 15.6 15.7 15.9 16.1 16.3 17.2 18.3 19.4 20.4 21.4
Refined MT 18.0 18.5 18.6 19.2 19.9 20.0 21.1 22.0 22.8 23.7
Consumption MT 18.1 18.2 18.2 19.3 19.5 19.9 20.9 21.6 22.4 23.3
Refined balance MT -0.0 0.3 0.4 -0.2 0.4 0.1 0.2 0.3 0.4 0.4
LME price $/lb 3.2 3.2 2.3 3.4 4.0 3.6 3.5 3.3 3.2 3.0
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research, based on Bloomberg data
We expect the global balance of supply and demand for copper metal to gradually
ease over the medium term. We do not expect to see shortages emerge, assuming
that slowed growth in nominal consumption in China has an impact on the
supply/demand situation in 2012, and that worker strikes and other temporary
disruptions of production at the world’s major copper mines die down over the
medium term. However, we expect any surplus to be quite limited, especially over
the next few years, and therefore believe that even small swings in supply and/or
demand could potentially result in shortages. These conditions are conducive to
keeping the price of copper consistently high. Our forecasts for supply and demand
Supply/demand balance set
to ease—albeit gradually—
barring any disruptions of
production
Base metal smelting industry 8
Mizuho Securities Co., Ltd.
3 September 2012
![Page 9: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/9.jpg)
for copper in the world’s major economies with the exception of China are based on
the GDP growth forecasts included in the IMF’s World Economic Outlook Database
of April 2012.
We expect supply and demand for copper to balance out near the equilibrium point
over the long term as well, and therefore expect the long-term equilibrium price to be
underpinned by marginal producers’ cost of production. We have therefore set our
long-term price assumption at $3/lb, which is the price that would correspond to a
required return of 10% assuming a cash cost of $1.4/lb and new mine development
costs of $17,500 per annual metric ton of output.
China copper supply/demand forecasts
Figure 8. Copper supply/demand forecasts for China
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Chinese supply/demand
Refined copper output MT 3.5 3.8 4.1 4.5 5.2 5.1 5.6 5.8 6.1 6.4
Net refined import MT 1.4 1.4 3.1 2.9 2.7 3.0 3.2 3.3 3.5 3.7
Apparent refined consumption MT 4.9 5.2 7.2 7.4 7.9 8.1 8.8 9.2 9.6 10.1
Concentrate import MT 4.5 5.2 6.1 6.5 6.4 7.0 8.2 8.5 8.9 9.1
Concentrate production 0.9 1.1 1.0 1.2 1.3 1.4 1.5 1.7 1.9 2.0
Copper demand:
Power MT 2.1 2.5 3.1 3.6 3.6 3.8 3.8 3.7 3.6
Air conditioners MT 0.8 0.8 1.0 1.3 1.3 1.4 1.6 1.8 1.9
Transportation MT 0.5 0.6 0.7 0.8 0.8 0.9 1.0 1.1 1.2
Electronics MT 0.4 0.4 0.5 0.6 0.6 0.7 0.7 0.8 0.9
Building & construction MT 0.4 0.5 0.6 0.8 0.8 0.9 1.0 1.1 1.2
Others MT 0.6 0.7 0.8 0.8 0.9 1.0 1.1 1.2 1.3
Total MT 4.9 5.4 6.8 7.9 8.1 8.8 9.2 9.6 10.1
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research, based on data from Bloomberg and Antaike
China is the world’s largest consumer of copper, accounting for nearly 30% of the
world’s copper metal consumption, and its effect on the balance of supply and
demand is therefore substantial. According to Antaike, nearly half (46%) of China’s
demand for copper in 2010 was for use in the electric power sector, with air
conditioner and refrigerator production accounting for 15%, automobile production
accounting for 11%, construction accounting for 9%, electronic component
production accounting for 8%, and all other applications together accounting for 11%.
Demand from the electric power sector stems mainly from the production of power
cables for short-distance power distribution and transformers. Power cable
production in China is generally trending upward in tandem with the country’s
electric power output, but we expect to see almost no YoY change in 2012. We also
expect demand for copper for air conditioners and in construction applications to be
fairly weak, but expect growth in demand for other applications to parallel growth in
GDP. Overall, then, we expect China’s demand for copper to increase by around 3%
YoY in 2012. Over the medium term, we expect China’s demand for copper to
bounce back in 2013 with an 8% increase as the demand segments that were
sluggish in 2012 stage recoveries, and we expect YoY growth in demand to stabilize
at 5% in 2014. However, per-capita copper consumption in China stood at only
around 5.5kg in 2010, leaving significant room for consumption to increase over the
long term as the economy expands.
Copper demand in China
stagnant in 2012 but set to
resume growth in 2013
Base metal smelting industry 9
Mizuho Securities Co., Ltd.
3 September 2012
![Page 10: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/10.jpg)
Figure 9. Chinese copper demand by application (2010) (%)
Electric power46%
Air conditioners15%
Automobile11%
Eletroniccomponents
8%
Building &construction
9%
Others11%
Source: Mizuho Securities Equity Research, based on data from Antaike
Figure 10. Per-capita annual copper consumption by country
0
5
10
15
20
25
0 10,000 20,000 30,000 40,000 50,000
US China Japan South Korea GermanyGDP ($/person)
(kg/person)
Source: Mizuho Securities Equity Research, based on data from JOGMEC
China’s apparent copper consumption in 2011 came to roughly 7.9m MT, with
around 5.2m MT of this being refined copper production and the other 2.7m MT
corresponding to the country’s net imports of copper metal. For the refined copper
production, only around 1.3m MT of the copper ore used came from domestic mines,
with the rest coming as copper ore imports (approximately 6.4m MT) or scrap
imports (approximately 4.7m MT). We therefore estimate that China’s self-sufficiency
ratio for copper metal is less than 20%, indicating a heavy reliance on imports.
According to data from Antaike, China’s copper reserves as of the end of 2009
totaled roughly 30m MT, which does not appear sufficient to allow the country to
increase its self-sufficiency ratio to any great extent. We therefore expect the
balance of supply and demand in China to continue having a significant and direct
impact on the world’s balance of supply and demand.
World copper mine output forecasts
Chile is the world’s largest copper producer, accounting for roughly one-third of
global output. In 2011, the country produced approximately 5.3m MT. We expect this
figure to rise to around 6.8m MT in 2016, assuming a 500,000MT increase in annual
output from the Escondida mine and the added contributions of operations starting
at the Antucoya mine (annual capacity of 80,000MT), the Caserones mine
(150,000MT), and the Sierra Gorda mine (110,000MT). Outside of Chile, other
mines scheduled to commence operations include Peru’s Antapaccay mine (in 2H
2012; annual capacity of 160,000MT), Brazil’s Salobo mine (in 2012–2013; annual
capacity of 200,000MT), Mongolia’s Oyu Tolgoi mine (targeted for 2013; annual
capacity of 430,000MT), and Peru’s Las Bambas mine (targeted for 2014; annual
capacity of 400,000MT). Over the medium term, then, we expect worldwide copper
mine output to increase by around 6% annually.
China relies heavily on
imports
South America the driving
force behind copper mine
production worldwide
Base metal smelting industry 10
Mizuho Securities Co., Ltd.
3 September 2012
![Page 11: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/11.jpg)
Figure 11. Production capacity forecasts for major copper mines (vs. 2011) (m MT)
0.0
0.5
1.0
1.5
2.0
2.5
2012 2013 2014 2015 2016
Antapaccay Caserones Salobo Oyu Tolgoi Sierra GordaAntucoya Las Bambas Escondida
Source: Mizuho Securities Equity Research, based on company data
Figure 12. Production capacity and development costs per unit at major copper mines
0
5,000
10,000
15,000
20,000
25,000
2011 2012 2013 2014 2015 2016 2017 Note: Development costs per unit calculated by dividing the development cost
by the annual production capacity; given in $/MT. Development cost for Escondida includes only OGP1 and OLAP. Each bubble’s size corresponds to relative annual production capacity.
Source: Mizuho Securities Equity Research, based on company data
Fundamentals
Here we look at factors that may have a significant impact on the short-term balance
of supply and demand for copper. China is a tremendous presence on the demand
side, but its consumption and imports tend to follow a seasonal pattern, with much of
the activity concentrated in the first half of the year. We therefore expect China’s
consumption and imports to slow in 2H 2012. Other factors as well point to a
slowdown in 2H, including the correlation between power cable production and
copper consumption and that between electrical transformer production and copper
consumption. Among the industry segments that constitute the chief sources of
demand for copper, the electric power sector (the largest source of demand) saw a
20% YoY increase in power cable production in June, with a 5% decline in
transformer production, and a 1% decline in electric power output. In other demand
segments, air conditioner production fell by 30%, refrigerator production fell by 3%,
and automobile production rose by 14%. Overall, then, these YoY changes suggest
weakening demand, with downstream demand seemingly doing little to drive growth
in copper consumption.
China’s copper consumption
may slow in 2H, following
seasonal pattern
Base metal smelting industry 11
Mizuho Securities Co., Ltd.
3 September 2012
![Page 12: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/12.jpg)
Figure 13. China’s copper metal production, consumption, and import volumes
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
(m MT)
Refined production Refined consumption Refined net import Source: Mizuho Securities Equity Research, based on Bloomberg data
Figure 14. China’s power cable production and electric power output
0.0
1.0
2.0
3.0
4.0
5.0
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
(m km)
0
100
200
300
400
500
600
(b kwh)
Power cable output Power generation (RHS) Source: Mizuho Securities Equity Research, based on Bloomberg data
Figure 15. China’s copper metal consumption vs. power cable production
0.0
0.2
0.4
0.6
0.8
1.0
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
(m MT)
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
(m km)
Refined consumption Power cable output (RHS) Source: Mizuho Securities Equity Research, based on Bloomberg data
Figure 16. China’s copper metal consumption vs. transformer production
0.0
0.2
0.4
0.6
0.8
1.0
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
(m MT)
-50
0
50
100
150
200
250
(b volts)
Refined consumption Transformer output (RHS) Source: Mizuho Securities Equity Research, based on Bloomberg data
Figure 17. China’s air conditioner and refrigerator production (YoY)
-40%
-20%
0%
20%
40%
60%
80%
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
Air conditioner production (YoY) Refrigerator production (YoY) Source: Mizuho Securities Equity Research, based on data from the National
Bureau of Statistics of China
Figure 18. China’s automobile production vs. electric power output (YoY)
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
Automotive production (YoY) Power generation (YoY) Source: Mizuho Securities Equity Research, based on data from the National
Bureau of Statistics of China
Base metal smelting industry 12
Mizuho Securities Co., Ltd.
3 September 2012
![Page 13: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/13.jpg)
On the supply side, meanwhile, disruptions of mine production tend to lead to a
tighter supple/demand balance. According to data from Codelco, the average copper
grade coming out of the world’s mines has been falling off markedly almost across
the board since 2000. Presumably, this is at least in part due to the structural
problem of having to dig for ever-deeper ore clusters as mines age. This decline in
copper grade has a surprisingly powerful impact on supply. Again according to
Codelco, the average copper grade has fallen by around 0.02ppt annually for the
past 10 years, which, when set against the world’s current average grade of roughly
0.77%, implies a negative impact on supply of around 2% per year, essentially
canceling out the demand that gets freed up as some copper consumers switch to
alternative metals (BHP Billiton estimates that this demand substitution effect came
to approximately 2% in 2011).
Other disruptions of production have a significant impact as well. At the Grasberg
mine, which was the world’s third largest in 2010 in terms of output (roughly
550,000MT, for a 3% share of worldwide copper production), there was a large-scale
workers’ strike in September–December 2011 that dragged down 4Q 2011 copper
production to around 30,000MT. Freeport, the operator of the mine, issued estimates
in January calling for sales of roughly 420,000MT in 2012, thereby pointing to an
early resolution of the dispute. However, production was again impeded in 1Q 2012,
and copper production was held to just 60,000MT, forcing Freeport to revise down its
2012 sales estimate to approximately 370,000MT. This was followed by another
downward revision, to roughly 340,000MT, in 2Q.
Figure 19. Copper production and copper grade at the Escondida mine (thou MT)
0.0%
0.5%
1.0%
1.5%
2.0%
2008 2009 2010 2011 2012
0
50
100
150
200
250
300
350
400
Escondida production (RHS) Copper grade Source: Mizuho Securities Equity Research, based on data from BHP Billiton
Figure 20. Copper production at the Grasberg mine (thou MT)
0
50
100
150
200
2008 2009 2010 2011 2012 Source: Mizuho Securities Equity Research, based on data from Freeport
Disruptions of mine output
have a substantial impact on
production volumes
Base metal smelting industry 13
Mizuho Securities Co., Ltd.
3 September 2012
![Page 14: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/14.jpg)
(2) Nickel price outlook
We expect nickel prices to remain range-bound over the medium term. Given the
large number of new projects in the works, we expect the growth in nickel supply to
outstrip rising demand, and expect to see a relatively large supply surplus compared
with other base metals. Considering the high cost of producing nickel pig iron (NPI),
a marginal source of nickel, we expect to see an ongoing tug of war between loose
supply/demand conditions and high production costs. Meanwhile, we expect a
relatively large nickel supply surplus to remain in place over the long term as well,
and believe that the long-term equilibrium price is likely to fall below the level
needed to make new projects economically viable.
Nickel demand outlook for China
We expect Chinese stainless steel production (a major source of nickel demand) to
temporarily slow to 6% YoY growth in 2012, but expect production volumes to return
to a normal growth rate of 8% in 2013. We expect Chinese nickel demand to
increase 7% in 2012 and 8% in 2013, more or less tracking stainless steel
production volumes. We expect per-capita nickel consumption in China to increase
from the current level of roughly 0.5kg per year to around 0.7kg over the long term,
and look for Chinese nickel consumption to grow at an annual rate of around 6%.
Excess nickel supply
There are a large number of new major nickel supply projects in the works. Many of
these projects involve using high pressure acid leach (HPAL) technology to process
low-grade ores, and hence it is becoming increasingly difficult to develop nickel
resources. We therefore assume that it will take roughly 4–5 years for these projects
to reach full capacity, but even then, we estimate a nickel supply glut. Some of these
new projects are facing difficulties starting up beyond those factored into our
conservative assumptions, and this has the potential to push down nickel supply
volumes.
Nickel price forecasts
Figure 21. Global nickel supply/demand balance and nickel prices
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
World MT 27.8 25.9 24.6 30.7 32.1 33.1 34.9 36.7 38.6 40.2
Production:
Mine MT 1.570 1.496 1.363 1.541 1.825 1.923 2.062 2.183 2.326 2.471
Refined MT 1.454 1.399 1.358 1.433 1.661 1.735 1.846 1.935 2.040 2.142
Consumption MT 1.354 1.333 1.306 1.424 1.655 1.708 1.801 1.895 1.994 2.080
Refined balance MT 0.100 0.066 0.051 0.009 0.007 0.027 0.045 0.040 0.046 0.061
LME price $/lb 16.9 9.6 6.7 9.9 10.4 8.0 7.5 7.5 7.5 7.5
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research, based on ISSF and Bloomberg data
We expect the global nickel metal supply/demand balance to continue to loosen
over the medium term. Based on the May 2012 Demand Index of the International
Stainless Steel Forum (ISSF), we expect global stainless steel production volume to
continue to see relatively high annual growth at around 5%, and we therefore
assume that nickel demand will also see firm growth. On the other hand, a number
of new major nickel projects were launched in 2011 or are being launched in 2012,
and with capacity utilization at these projects gradually ramping up over four to five
Supply/demand conditions
loosening given abundance
of new major nickel supply
projects
Base metal smelting industry 14
Mizuho Securities Co., Ltd.
3 September 2012
![Page 15: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/15.jpg)
years, we expect to continue to see additional nickel supply volumes becoming
available in 2013 and beyond. With that said, there are variables involved, namely
the possibility that the supply/demand balance could improve given the difficulties
involved with the major projects, and the possibility of lower-than-expected capacity
utilization at new projects.
We expect the supply/demand balance to remain relatively loose over the long term
as well, and therefore expect the long-term equilibrium price to be lower than the
price needed (we estimate $11.00/lb) to meet the 10% returns required to make new
projects economically viable, and we expect the price to approach the cash cost
(around $7.00–$10.00) of the marginal nickel supply source (NPI). We therefore
assume a long-term equilibrium price of $7.50/lb.
Nickel supply/demand outlook for China
Figure 22. Nickel supply/demand outlook for China
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Stainless steel production MT 7.206 6.943 8.805 11.256 12.592 13.348 14.402 15.453 16.580 17.452
Nickel mine production MT 0.066 0.079 0.085 0.080 0.090 0.092 0.095 0.098 0.101 0.104
NPI production MT 0.074 0.078 0.096 0.163 0.200 0.210 0.230 0.240 0.245 0.250
Refined nickel MT 0.145 0.127 0.173 0.151 0.280 0.332 0.366 0.409 0.461 0.499
Refined total production MT 0.219 0.205 0.269 0.314 0.480 0.542 0.596 0.649 0.706 0.749
Refined nickel import MT 0.103 0.117 0.265 0.181 0.212 0.219 0.225 0.232 0.239 0.246
Refined consumption MT 0.327 0.339 0.564 0.489 0.713 0.761 0.821 0.881 0.945 0.995
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research, based on ISSF, Bloomberg, and Brook Hunt data
As the world’s largest consumer of nickel, accounting for roughly 40% of
consumption, China has a substantial impact on the global supply/demand balance.
According to Antaike, just under 80% of China’s nickel demand in 2010 was for use
in stainless steel. This percentage is relatively high considering that stainless steel
accounts for roughly 60% of global nickel consumption. China’s stainless steel
production volumes have risen at a sharp annual rate of 20% over the past 10 years,
but stainless steel currently equates to just under 2% of China’s crude steel
production volumes, and considering that stainless steel equates to just under 3% of
crude steel production volumes in Japan, we still see substantial room for growth.
Figure 23. Breakdown of Nickel demand in China
Stainless steel78%
Alloy and foundry8%
Plating9%
Batteries4%
Others1%
Source: Mizuho Securities Equity Research, based on Antaike data
Figure 24. Breakdown of global Nickel demand
Batteries& others
7%
Stainless steel60%
Alloy steel7%
Ni base10%
Cu base1%
Plating14%
Foundry3%
Source: Mizuho Securities Equity Research, based on INSG data
Chinese nickel demand
supported by growing
stainless steel production
volumes
Base metal smelting industry 15
Mizuho Securities Co., Ltd.
3 September 2012
![Page 16: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/16.jpg)
According to INSG data, metal products account for 31% of nickel end demand in
China, while construction and engineering applications account for 20% and 15% of
end demand, respectively. This demand is mainly for stainless steel products, with
the metal products category including stainless steel tableware, the construction
category including elevators, escalators, and air conditioners, and the engineering
category including products such as heat exchangers. We expect China’s stainless
steel production to grow by just 6% YoY in 2012, but expect production to return to
8% growth in 2013. We expect Chinese nickel consumption to grow by 7% in 2012
and 8% in 2013, with the main source of demand coming from growth in stainless
steel production. Per-capita nickel consumption in China amounted to roughly 0.5kg
in 2010, and we see substantial room for growth over the long term as a result of
improvements in living standards.
Figure 25. Nickel consumption in China by end-use application
Others4%Tubular
products7%
Electroniccomponents
11%
Automobiles12%
Engineering15%
Building &construction
20%
Metal products31%
Source: Mizuho Securities Equity Research, based on INSG data
Figure 26. Per-capita nickel consumption by country
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 10,000 20,000 30,000 40,000 50,000
US China Japan South Korea Germany GDP ($/person)
(kg/person)
Source: Mizuho Securities Equity Research, based on JOGMEC data
China’s nickel consumption amounted to roughly 710,000MT in 2011, with refined
nickel production accounting for roughly 280,000MT, NPI production accounting for
roughly 200,000MT, and nickel metal imports accounting for roughly 210,000MT.
China began producing NPI in 2006, and has been able to accomplish this by
importing low-grade nickel ore. The cost of producing NPI is high, so while this
marginal supply source expands when nickel prices are high, the producers are
unable to compete when nickel prices fall. According to Antaike, the cost of
producing NPI was just over $10.00/lb as of July 2011, with ore accounting for just
under half of the production cost. Meanwhile, Brook Hunt estimates that the cost of
producing NPI was $7.00/lb–$9.00/lb in 2010. Although in the past we saw a sharp
rise in NPI production, we assume that it will be difficult for producers to increase
NPI production volumes at the current nickel price, and we therefore expect 2012
NPI production to remain roughly flat YoY at 210,000MT, while we expect nickel
metal production to continue to grow to 330,000MT. We expect Chinese nickel
production to rise 13% YoY in 2012 and 10% in 2013.
Chinese stainless steel
demand supported by
improvements in living
standards
NPI is the marginal nickel
supply source
Base metal smelting industry 16
Mizuho Securities Co., Ltd.
3 September 2012
![Page 17: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/17.jpg)
Figure 27. Nickel production volumes in China (m MT)
0.0
0.1
0.2
0.3
0.4
0.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Refined nickel NPI Source: Mizuho Securities Equity Research, based on Bloomberg and Brook
Hunt data
Figure 28. NPI cost breakdown ($/lb)
Nickel ore48%
Electric power27%
Coke6%
Auxiliary material4%
Lime2%
Others12%
Source: Mizuho Securities Equity Research, based on Antaike data
Supply outlook for global nickel mining projects
There are a number of new major nickel supply projects in the works. Several of
these projects launched production in 2011, namely the Vale New Caledonia (VNC)
Nickel project (formerly known as Goro, annual production capacity of 60,000MT),
the Onca Puma nickel project (58,000MT), and the Barro Alto project (36,000MT).
Meanwhile, the Ambatovy (60,000MT) and Koniambo (60,000MT) projects are
expected to launch in 2012; the Long Harbour (50,000MT), and Taganito
(30,000MT) projects are expected to launch in 2013; and the Kabanga nickel project
(45,000MT) is expected to launch in 2014. These projects have a total annual
production capacity of 400,000MT, or roughly one-quarter of the global nickel
demand in 2011. However, given the drop off in undeveloped sources of high-grade
ore in recent years, major nickel projects have had to shift to the use of HPAL
technologies, and hence it is becoming increasingly difficult to develop nickel
resources. There are some concerns about producers’ abilities to achieve their
production plans considering the uncertainties of using HPAL technology on a large-
scale commercial basis and the potential for issues with non-HPAL processes in
large-scale operations. We estimate that it will take the new large nickel projects
roughly 4–5 years to achieve their stated production capacities.
Indonesia—the number two global producer of nickel ore behind Russia—produces
just over 10% of the world’s nickel ore, and is working to ban exports of
unprocessed ores from 2014. It is unclear whether the country will be able to fully
enforce the ban given the short time before it would go into effect. If Indonesia were
to implement an export ban, there is a possibility that the impact on the overall
global nickel supply/demand balance would be limited if refining is carried out in
Indonesia. This could, however, tighten up the supply/demand balance for ore and
lead to increased competition for overseas smelters, who are dependent on
Indonesia for ore imports. This mainly applies to NPI and ferronickel smelters, and
we believe there would be a limited impact on overseas smelters using intermediate
products.
While there are a large
number of new nickel mining
projects planned, it is
becoming increasingly
difficult to develop nickel
resources
Indonesian ban on nickel ore
exports could have
detrimental effect on
overseas ferronickel smelters
Base metal smelting industry 17
Mizuho Securities Co., Ltd.
3 September 2012
![Page 18: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/18.jpg)
Figure 29. Production outlook for new nickel projects (thou MT)
0
100
200
300
400
2011 2012 2013 2014 2015 2016 2017 2018
Goro Onca-Puma Barro Alto AmbatovyKoniambo Kabanga Long Harbour Taganito
Source: Mizuho Securities Equity Research, based on company materials and Brook Hunt data
Figure 30. Production capacity and development unit costs at major nickel mines
0
20,000
40,000
60,000
80,000
100,000
120,000
2010 2011 2012 2013 2014 2015 Note: Development unit costs are development costs divided by annual
production capacity and shown in $/MT. Bubble sizes denote annual production capacity. Development costs for Kabanga nickel project estimated by Mizuho Securities.
Source: Mizuho Securities Equity Research based on company materials
Fundamentals
We have reviewed factors that are likely to have a major impact on the short-term
nickel supply/demand balance. On the demand side, China is a major factor. There
is somewhat of a seasonal pattern to China’s nickel consumption and nickel ore
imports. Stainless steel production, the largest source of China’s nickel demand,
tends to be more heavily concentrated in the first half of the year (1H). As a result,
the production and importing of nickel, a raw material used in stainless steel
production, tends to be concentrated in the latter half of the preceding year (2H). In
light of this seasonal pattern, we expect volumes to pick up as we head into the
latter half of the year. However, given the concerns over Indonesia’s ban on ore
exports, it appears that China has imported large quantities of nickel ore in advance
of this ban, and we expect this to have a negative impact on nickel ore import
volumes from here.
Figure 31. Stainless steel and nickel production volumes in China
0
200
400
600
800
1,000
1,200
1,400
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
(m MT)
0
10
20
30
40
50
60
70
80
(thou MT)
Refined nickel production (RHS) Refined nickel imports (RHS)China stainless steel production Nickel ore production (RHS)
Source: Mizuho Securities Equity Research, based on Bloomberg data
Figure 32. China’s nickel ore import volume
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
(thou MT)
China nickel ore imports (Indonesia) China nickel ore imports (Philippines)
China nickel ore imports (total)
Source: Mizuho Securities Equity Research, based on Bloomberg data
Seasonal patterns suggest
that Chinese nickel
consumption will rise heading
into 2H, but frontloaded
imports likely to push down
imports
Base metal smelting industry 18
Mizuho Securities Co., Ltd.
3 September 2012
![Page 19: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/19.jpg)
In China, which accounts for roughly 40% of global stainless steel production,
production was up just 2% YoY in June. Industrialized nations make up the bulk of
the world’s remaining stainless steel production. In Japan, which is the largest of
these other stainless steel producers, production is currently weak (down 5% in
June), and we do not expect the inventory cycle to lend major support given that
major cyclical swings are unlikely.
Figure 33. YoY comparison of Chinese stainless steel production volumes
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
China crude steel production (YoY) China stainless steel production (YoY) Source: Mizuho Securities Equity Research from Bloomberg data
Figure 34. YoY comparison of Japanese stainless steel production and inventory volumes (%)
-50%
0%
50%
100%
Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Production (YoY) Inventory (YoY) Inventory (weeks of production) (RHS) Source: Mizuho Securities Equity Research from Bloomberg data
With stainless steel fundamentals lacking strength, it is difficult to take a bullish
stance on nickel demand. There are, however, a number of factors supporting nickel
supply. Of the new major nickel projects, three (VNC, Onca Puma, and Barro Alto)
started production in 2011, and two (Ambatovy and Koniambo) are scheduled to
start production in 2012. Although VNC produced 5,000MT in 2011, production was
halted in May due to issues at its sulfuric acid plant, and production is scheduled to
restart in 4Q 2012 once repairs are completed. Onca Puma produced 7,000MT of
nickel in 2011, but issues with its ferronickel furnaces shut down both of its furnaces
in May and June 2012.
Expect stainless steel cycle
to have neutral impact
Several of the new nickel
projects having difficulties
with startups
Base metal smelting industry 19
Mizuho Securities Co., Ltd.
3 September 2012
![Page 20: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/20.jpg)
(3) Zinc price outlook
We expect zinc prices to strengthen over the medium term. Many existing mines are
expected to close, and the current supply surplus appears likely to be diminished
even as new mines come on line. Over the long term, we therefore forecast a
tightening in the supply/demand balance. In such an environment, we expect the
long-term equilibrium price to remain high enough for marginal producers to
maintain economic viability.
Chinese zinc demand outlook
Chinese production of galvanized steel sheets is one of the primary sources of
zinc demand, and we forecast a temporary slowdown in growth in galvanized steel
sheet production volume in 2012 to roughly 6% YoY. However, we expect a
subsequent return to stable growth, with a volume increase of roughly 9% in 2013.
We expect Chinese demand for zinc metal to move roughly in tandem with
galvanized steel sheet production, rising 4% in 2012 and 9% in 2013. Over the
long term, we expect Chinese per-capita zinc consumption to increase from the
current roughly 4kg to around 6kg per year, and we forecast annualized growth of
roughly 6% in Chinese zinc consumption volume.
Zinc supply tightening
Over the next five years, zinc mines with combined production capacity of over 1m
MT are expected to close mining operations in the five largest zinc-producing
countries and regions outside of China. It appears unlikely that the new mines
coming on line will be able to compensate for this drop in production capacity, and
we therefore forecast tighter supply conditions for zinc.
Zinc price forecasts
Figure 35. Global supply/demand balance and zinc prices
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Production:
Mine MT 11.1 11.8 11.5 12.4 12.8 13.2 13.6 14.3 15.0 15.5
Refined MT 11.4 11.7 11.3 12.9 13.1 13.5 14.0 14.7 15.4 15.9
Consumption MT 11.3 11.5 11.1 12.5 12.5 13.0 13.6 14.3 15.1 15.9
Refined balance MT 0.1 0.2 0.2 0.4 0.5 0.6 0.3 0.4 0.2 -0.1
LME price $/lb 1.5 0.9 0.8 1.0 1.0 0.9 0.9 1.0 1.1 1.0
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research, based on Bloomberg data
Over the medium term, we expect a gradual reduction in the current global supply
surplus for zinc metal. We forecast global annualized growth in zinc demand of
roughly 5% and global annual mining production volume growth of only roughly 4%
as a result of major mine closures. As a result, we expect the supply/demand
balance to improve. Our assumptions for zinc demand in major countries and
regions outside of China during the period covered by our forecasts are based on
the GDP growth forecasts in the IMF’s April 2012 World Economic Outlook Database.
Supply/demand balance
should improve following
major mine closures
Base metal smelting industry 20
Mizuho Securities Co., Ltd.
3 September 2012
![Page 21: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/21.jpg)
As we expect the supply surplus to wind down over the long term, we forecast long-
term equilibrium prices to remain high enough for marginal producers to maintain
economic viability. We have therefore set our long-term price assumption at just over
$1/lb, which is the price that would correspond to a required return of 10% assuming a
cash cost for marginal producers of slightly under 70¢/lb and development costs of
$2,900 per annual metric ton of output for the new mines coming on line in 2013 or
thereafter.
Chinese zinc supply/demand outlook
Figure 36. Chinese zinc supply/demand outlook
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Refined zinc output MT 3.7 4.0 4.3 5.2 5.2 5.4 5.9 6.4 7.0 7.7
Refined zinc imports MT 0.0 0.2 0.7 0.3 0.3 0.4 0.4 0.4 0.4 0.4
Refined zinc exports MT 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net refined imports MT 0.0 0.1 0.6 0.3 0.3 0.4 0.4 0.4 0.4 0.4
Apparent refined consumption MT 3.7 4.2 4.9 5.5 5.5 5.7 6.3 6.8 7.4 8.0
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research, based on data from Bloomberg
China is the world’s largest consumer of zinc, accounting for just over 40% of global
zinc consumption, and therefore has a substantial impact on the global
supply/demand balance. According to JOGMEC (Japan Oil, Gas, and Metals
National Corporation), roughly 55% of China’s zinc demand in 2010 was for use in
galvanizing (coating steel or iron with zinc), followed by die cast alloys (15%), oxides
(10%), brass (9%), and batteries (9%). The main applications of galvanizing are
steel sheets and structural materials. Chinese production of galvanized steel sheets
currently equates to roughly 5% of Chinese crude steel production volume.
Considering that galvanized steel sheet production volume accounts for more than
10% of crude steel production volume in Japan, we see significant room for growth.
We believe this low ratio is partially the result of the limited adoption in China of
galvanized steel sheets for automotive bodies, a major source of demand for
galvanizing.
Figure 37. Breakdown of Chinese zinc demand
Galvanized55%
Batteries9%
Oxides10%
Brass9%
Die cast alloys15%
Others2%
Source: Mizuho Securities Equity Research, based on JOGMEC data
Figure 38. Chinese galvanized steel sheet production volume and crude steel production volume (thou MT)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
0%
1%
2%
3%
4%
5%
6%
7%
China galvanized sheet production Galvanized sheet/Crude steel production (RHS) Source: Mizuho Securities Equity Research, based on Bloomberg data
Chinese zinc demand
bolstered by increased
galvanized steel sheet
production volume
Base metal smelting industry 21
Mizuho Securities Co., Ltd.
3 September 2012
![Page 22: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/22.jpg)
We forecast a temporary slowdown in growth in Chinese galvanized steel sheet
production volume in 2012 at 6% YoY, but expect a recovery to 9% growth in 2013.
We forecast 4% growth in Chinese zinc consumption in 2012 and 9% growth in 2013,
mainly driven by expanded production of galvanized steel sheets. Per-capita zinc
consumption was roughly 4kg in 2010, and we believe there is significant potential
for long-term expansion as standards of living improve.
China’s overall zinc consumption was roughly 5.5m MT in 2011, produced from
roughly 4.3m MT in domestically mined ore, roughly 2.9m in imported ore, and
roughly 800,000MT in net imports of zinc metal and unprocessed alloy. As it appears
that Chinese domestic zinc ore represents ore concentrate, we believe China is
highly dependent on zinc imports.
Figure 39. Per-capita zinc consumption by country
0
2
4
6
8
10
12
0 10,000 20,000 30,000 40,000 50,000
US China Japan South Korea GermanyGDP ($/person)
(kg/person)
Source: Mizuho Securities Equity Research from JOGMEC data
Figure 40. Chinese zinc ore and zinc metal production and import volume (m MT)
0
100
200
300
400
500
600
700
800
900
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
China zinc ore production China zinc ore importChina refined zinc net imports China zinc slab productionChina zinc slab consumption
Source: Mizuho Securities Equity Research, based on Bloomberg data
Global zinc mining supply outlook
Zinc production volume at currently operating mines is expected to decline sharply
as many of these mines close. In the five years through 2016, we estimate a loss of
1.15m MT in production volume, or 13% of total mining production volume in 2011.
Among mines scheduled to end operations are the Perseverance and Brunswick
mines in 2013 (annual production capacity of 135,000MT and 209,000MT,
respectively), the Lisheen and Angas mines in 2014 (42,000MT and 40,000MT), the
Golden Grove and Duck Pond mines in 2015 (71,000MT and 34,000MT), and the
Century, Skorpion, and Myra Falls mines in 2016 (497,000MT, 53,000MT, and
45,000MT).
During the same period, however, we expect an additional annual production
capacity of 540,000MT from new mines. New mines scheduled to come on line in
2013 include the Bracemac-McLeod mine (with production capacity of 90,000MT),
the Lalor mine (70,000MT), and an expansion of the Mount Isa mine (180,000MT).
In 2014, the Dugald River mine is scheduled to come on line with capacity of
200,000MT. As we expect an accelerated decline in production volume at currently
operating mines, we forecast a tightening in zinc supply/demand conditions even
after factoring in the additional capacity from new mines.
China highly dependent on
zinc imports
Decline in production volume
at existing mines likely to
accelerate
Base metal smelting industry 22
Mizuho Securities Co., Ltd.
3 September 2012
![Page 23: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/23.jpg)
Figure 41. Combined production capacity of zinc mines ending mining operations (m MT)
-1.5
-1.0
-0.5
0.0
2012E 2013E 2014E 2015E 2016E
Source: Mizuho Securities Equity Research, based on company data
Figure 42. Production forecasts for major zinc mines (m MT)
3.0
3.5
4.0
4.5
5.0
5.5
2011 2012E 2013E 2014E 2015E 2016E
Existing Mines New Mines Note: Major zinc mines include mines in Peru, Oceania, India, the US, and
Canada. Source: Mizuho Securities Equity Research, based on company and Bloomberg data
Fundamentals
Here we look at factors that may have a significant impact on the short-term
supply/demand balance for zinc. China is a tremendous presence on the demand
side, and Chinese galvanized steel sheet production volume tends to move roughly
in tandem with crude steel production. For this reason, galvanized steel sheet
production momentum tends to follow a seasonal pattern, with much of the activity
concentrated in the first half of the year. Raw material zinc metal consumption
volume and production volume could be said to move nearly in tandem with or
slightly ahead of galvanized steel sheet production volume. Chinese zinc
consumption has been falling through June, when it declined 2% YoY, in advance of
galvanized steel sheet production, which rose 28% in June, and we expect zinc
consumption to be bolstered in 2H by procurement in preparation for galvanized
steel sheet production in 1H 2013.
Figure 43. Chinese galvanized steel sheet and crude steel production (m MT)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
0
10
20
30
40
50
60
70
China galvanized production China crude steel production (RHS) Source: Mizuho Securities Equity Research, based on Bloomberg data
Figure 44. Chinese galvanized steel sheet and zinc metal production volume
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
(m MT)
0
100
200
300
400
500
600(thou MT)
China galvanized production China zinc slab consumption (RHS)
China zinc slab production (RHS) Source: Mizuho Securities Equity Research, based on Bloomberg data
Chinese zinc metal
consumption volume easing
ahead of galvanized steel
sheet production
Base metal smelting industry 23
Mizuho Securities Co., Ltd.
3 September 2012
![Page 24: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/24.jpg)
Looking at the galvanized steel sheet cycle elsewhere, we turn to Japan, the world’s
fourth-largest consumer of zinc metal. In Japan, galvanized steel sheets account for
roughly half of zinc metal demand, and galvanized steel sheet production volume
tends to parallel trends in automobile production. The galvanized steel sheet
shipment/inventory cycle is nearing peak momentum along with a recovery in
production and shipments and a decline in inventories, and we therefore expect
momentum to wane. We nevertheless believe a major drop in galvanized steel sheet
production volume is unlikely considering that galvanized steel sheet production was
subdued compared to automobile production during the recent recovery phase.
Figure 45. Japanese automobile production volume and galvanized steel sheet production
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
Automotive production (m vehicles) Galvanized sheet production (m MT) Source: Mizuho Securities Equity Research, based on Japan Automobile
Manufacturers Association and Bloomberg data
Figure 46. YoY growth in production of Japanese automobiles, galvanized steel sheets, and zinc metal
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
Automotive production (YoY) Galvanized production (YoY)Refined zinc production (YoY)
Source: Mizuho Securities Equity Research, based on Japan Automobile Manufacturers Association, Ministry of Economy, Trade and Industry, and Bloomberg data
Japanese galvanized steel
plate cycle near peak, but
cyclical swings narrowing
Base metal smelting industry 24
Mizuho Securities Co., Ltd.
3 September 2012
![Page 25: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/25.jpg)
Pacific Metals (5541) Taking on challenges in ferronickel business
Investment rating and valuations
We determined our ¥250 price objective for Pacific Metals by applying a PBR of
approximately 0.5x to our FY3/13 BPS forecast of ¥559. Since the company’s share
price tends to be correlated with market trends (mainly nickel prices), we have set
our price objective with reference to our short- to medium-term market forecasts.
Since the price objective is 0% below the current share price, we are initiating
coverage with a Neutral rating.
Investment thesis
The company has several difficult problems to overcome in terms of the business
environment for ferronickel. These include pressure on production volume from
lower ore grades, and the ban on ore exports from Indonesia expected to be
introduced in 2014. Given the recent share price performance, we believe several of
these factors have already been priced in. However, the business environment is
also affected by several structural factors, and we do not see much chance of any
dramatic improvement. Given the characteristics of the share price, we also see the
company’s high exposure to the nickel market, where we believe fundamentals are
relatively weak, as a negative. We expect earnings to continue at low levels close to
the break-even point over the medium term, and we believe this has negative
implications for share price valuations.
Earnings outlook
We forecast FY3/13 RP of ¥1.5b (down 57% YoY), close to the break-even point.
This is slightly below the company’s new downwardly revised RP forecast (¥2.8b),
announced on 3 August, and the Quick consensus forecast (¥2.0b). The reason we
expect a ¥2.0b YoY reduction in profit is that we expect a ¥7.0b negative impact
from nickel prices, partly made up for by a roughly ¥4.0b positive impact from higher
ferronickel volumes. The reason for setting our forecast around ¥1.3b below the
company forecast is that we expect the impact of nickel prices to be ¥900m worse
than the company assumes.
We forecast FY3/14 RP of ¥2.4b (up 60% YoY), continuing at close to the break-
even point as in FY3/13. This is below the Quick consensus forecast (¥4.5b). The
reason we expect a ¥900m increase in profits is that we expect an increased impact
from cost cutting to more than make up for a roughly ¥1.0b negative impact from
nickel price changes.
Share price catalysts and risks
There are three main potential catalysts: 1) reductions in supply stemming from
difficulties with new nickel development projects; 2) the withdrawal of proposed
measures prohibiting ore exports from Indonesia; and 3) the commercialization of
wet smelting. The main risks are an unexpected decline in market prices and
downward pressure on production volume as a result of a drop in ore grades.
Base metal smelting industry 25
Mizuho Securities Co., Ltd.
3 September 2012
![Page 26: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/26.jpg)
Focus points and summary
Market exposure
Share price performance at the base metals companies tends to be closely
correlated with price movements in the resources in which each company has the
highest weighting. Accordingly, movements in base metals prices and the
fundamentals in these markets tend to have a major impact on share price
performance. An examination of the performance relative to TOPIX indicates that the
share price of Sumitomo Metal Mining tends to be more closely correlated with
copper and gold prices than those of its competitors, and also closely correlated to
the nickel price. At Pacific Metals, the share price is more closely correlated to nickel
prices than at any of its competitors, while at Toho Zinc the share price is closely
correlated with zinc prices. These correlations are in line with the differences in the
structure of the business at each company.
Figure 47. Relative share price performance of base metals companies against TOPIX and correlation with metal prices (2005 onwards)
Pacific Metals Toho Zinc Sumitomo Metal Mining
Copper 0.3 0.2 0.6
Nickel 0.8 0.7 0.7
Zinc 0.6 0.9 0.5
Gold -0.1 -0.4 0.2
¥/US$ 0.4 0.6 0.1
Source: Mizuho Securities Equity Research, from Bloomberg data
Over the short to medium term, we are most optimistic about copper prices, followed
by zinc and nickel, while for the long term we are most optimistic about zinc,
followed by copper and nickel. The reason for our short- to medium-term
preferences is that the short-term supply/demand balance for copper is the tightest
in relative terms, at close to equilibrium, while the balance for nickel is currently the
slackest. An examination of the current physical premium also shows that zinc is
relatively strong, closely followed by copper. However, there is only a small physical
premium for nickel, and we believe this supports our view. Our long-term outlook is
based on our forecasts for the long-term equilibrium price.
Share price performance
closely correlated with metals
prices
Preferences for short to
medium term: copper, zinc,
and nickel, in that order
Base metal smelting industry 26
Mizuho Securities Co., Ltd.
3 September 2012
![Page 27: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/27.jpg)
Figure 48. Nickel prices and the nickel premium
0
2
4
6
8
10
12
14
Jan 2010 Jan 2011 Jan 2012
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Nickel price ($/lb) Nickel premium (Europe) ($/MT)
Nickel premium (Shanghai) ($/MT) Nickel premium (US) ($/lb) (RHS)
Source: Mizuho Securities Equity Research, from Bloomberg data
The key characteristic of Pacific Metals’ share price is that when nickel prices are
rising, it is possible to target a PBR of close to 0.8x, but when nickel prices are
falling the lower bound of the valuation range tends to be a PBR of below 0.5x.
Figure 49. Nickel price and PBR at Pacific Metals
0
200
400
600
800
1,000
1,200
1,400
Jan 2010 Jan 2011 Jan 2012
0.0
0.5
1.0
1.5
Nickel PBR (RHS)
(¢/lb) (x)
Source: Mizuho Securities Equity Research, from Bloomberg data
Base metal smelting industry 27
Mizuho Securities Co., Ltd.
3 September 2012
![Page 28: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/28.jpg)
Business environment becoming increasingly difficult
Fall in ferronickel ore grades
Ferronickel is a raw material for stainless steel, and it accounts for just over 20% of
world nickel production. Pacific Metals is in the second tier of the world’s top 10 in
terms of contained nickel production, but it is one of the world’s leading producers of
ferronickel, after Eramet and BHPB. The company can theoretically produce around
40,000MT of nickel per year at three of the world’s largest electrical furnaces, but
currently the limit of real production capacity appears to be around 36,000MT. The
main reason is that, given the recent decline in ore grade, the amount of nickel which
can be produced from a given volume of ore is falling. According to the Japan Mining
Industry Association, if we index the grade of nickel at 100% in FY90, the grade of
ferronickel ore had fallen by 10.8% through FY09, and is expected to fall further. In
terms of ore from the Philippines (which accounts for just under half of the ore the
company purchases), saprolite, which is used as a raw material for ferronickel
production, has seen a particularly marked deterioration in grade over the last few
years, especially ore from Rio Tuba Nickel Mining (RTNM). Accordingly, there is now a
structural impediment to a recovery in the company’s ferronickel production volumes in
the form of deterioration in the quality of saprolite, which is suitable for dry smelting.
Figure 50. Global ferronickel production trends (thou MT)
0
50
100
150
200
250
300
350
2006 2007 2008 2009 2010
Eramet BHPB Pacific Metals Xstrata SMM Nippon Yakin Others Source: Mizuho Securities Equity Research, from Pacific Metals data
Figure 51. Saprolite ore grades for Japanese shipments of saprolite from RTNM
1.6%
1.8%
2.0%
2.2%
2009 2010 2011 Source: Mizuho Securities Equity Research, from NAC data
Expecting to see global tightness in supply/demand balance for
ferronickel raw materials
Indonesia plans to impose a prohibition on ore exports from 2014, but if we assume
that the ore will be smelted at new facilities in Indonesia itself, the new measures
should make little difference to the global supply/demand balance for nickel. Since
the new regulations will only apply to unprocessed ore, we expect intermediate
products, such as nickel matte, which is used as a raw material for electrical nickel,
to be exempt as long as its grade complies with the terms of the new regulations.
Accordingly, we believe the main potential problem will be at overseas smelters
which rely heavily on unprocessed ore from Indonesia. Since unprocessed nickel
ore is mainly used as a raw material in the production of ferronickel and nickel pig
iron (NPI), we expect to see the supply/demand balance for this raw material ore
tighten.
The grade of raw materials
suitable for dry smelting
operations is falling
Impact of ban on Indonesian
exports of unprocessed ore
on ferronickel raw materials
Base metal smelting industry 28
Mizuho Securities Co., Ltd.
3 September 2012
![Page 29: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/29.jpg)
In 2011, Pacific Metals purchased 49% of its raw materials from Indonesia, 35%
from the Philippines, and 16% from New Caledonia. Its long-term procurement
contract with Indonesia expires in May 2014. Accordingly, finding an alternate source
of ore instead of Indonesia is a key issue for the company. Indonesia exported
around 200,000MT of nickel ore per year until 2011, giving it a global market share
of just over 10%, and if all of the importing countries have to find an alternate source
at once, then we expect to see a considerable tightening in the supply/demand
balance.
Ahead of the introduction of prohibitions on the export of ore from 2014, Indonesia
imposed a 20% tax on ore exports starting in May 2012, but so far we believe this
has had only a limited impact on ferronickel smelters. The basic price for ore, which
was decided on 1 June, was $41.52/MT (on a wet volume basis) for nickel ore with a
content of more than 2% used as a raw material for ferronickel. Assuming a nickel
grade of 2%, we assume the price of contained nickel is around $0.90/lb. The
imposition of a 20% tax on this price results in a cost increase of around $0.20/lb if
all of the cost is borne by the buyer. Even if the company sources 49% of its nickel
ore in Indonesia, we calculate the impact on OP as limited, at only around ¥600m
per year.
Figure 52. Pacific Metals: nickel ore procurement breakdown (2011) (%)
New Caledonia16%
Philippines35%
Indonesia49%
Source: Mizuho Securities Equity Research, from Pacific Metals data
Impact of ban on Indonesian
ore exports should be limited
Base metal smelting industry 29
Mizuho Securities Co., Ltd.
3 September 2012
![Page 30: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/30.jpg)
Figure 53. Plans for Indonesian nickel smelting plants
Company Location Type Capacity Capex Startup
ktpa $m
Antam East Halmahera FeNi 27 1,600 2014
Antam Pomalaa 12 490 2014
Antam Mandiodo NPI 12 400 2015
PT Barong Barajas Energy Sulawesi
PT Billy Indonesia Kendal 100
Solway Group East Halmahera FeNi 400 3,000
Risingsun Mining & Mineral FeNi
Jien Nickel Ni matte 160
Dafeng Port Group Kendari FeNi 200 600
E United Group 330
Source: Mizuho Securities Equity Research, from JOGMEC, Antam, and Xinhua data
Move towards wet smelting method
The company now needs to respond to the problem of the ore supply/demand
balance and is starting to move towards wet smelting. Specifically, the company is
considering using a normal pressure leaching process at the mine to improve the
grade of low-grade ores which are difficult to process through dry smelting, making
an intermediate product in the form of concentrated nickel hydroxide and then using
this in the dry smelting process at Hachinohe. It completed construction of a pilot
plant in March 2010 with an investment of ¥8.8b, and ran the plant on a test basis
until March 2011. This demonstrated that it would be possible to use the
intermediate product in nickel smelting. Currently, the plant is preparing for the
commercialization of this intermediate material and refining its normal temperature
leaching technology. However, we believe it is still too early to determine whether or
not this initiative will prove successful.
In December 2011, the company purchased a roughly 3% interest in the Indonesian
Weda Bay project, which uses the same normal pressure leaching process for wet
smelting, at a cost of ¥3b. This project is scheduled to eventually produce 65,000MT
of nickel per year, and the final investment decision (FID) is scheduled for the
beginning of 2013.
Move to wet smelting to help
resolve problems, but
outcome still uncertain
Base metal smelting industry 30
Mizuho Securities Co., Ltd.
3 September 2012
![Page 31: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/31.jpg)
Figure 54. Assumptions underlying our earnings forecasts
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Copper ¢/lb 3.5 4.4 4.2 4.1 3.5 4.1 3.8 3.6 3.4 3.4 3.6 3.5 3.3
Nickel ¢/lb 10.8 12.6 11.5 10.4 8.6 10.8 9.2 8.0 7.4 7.4 8.0 7.5 7.5
Zinc ¢/lb 1.0 1.1 1.1 1.1 0.9 1.1 1.0 1.0 0.8 0.8 0.9 0.9 1.0
Lead ¢/lb 1.0 1.2 1.2 1.2 1.0 1.1 1.0 1.0 0.8 0.8 0.9 0.9 1.0
Gold $/oz 1,226 1,388 1,508 1,662 1,683 1,560 1,691 1,612 1,600 1,600 1,626 1,550 1,450
Silver $/oz 20 32 38 38 32 35 33 29 28 28 30 28 27
Forex ¥/US$ 86 82 78 77 79 79 80 80 80 80 80 80 80
Source: Mizuho Securities Equity Research
Figure 55. Consolidated profit/loss statements (¥b)
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2QE 3QE 4QE Full-yearE
Sales 74.8 2.0 14.7 13.8 17.8 48.3 14.6 11.7 10.7 10.6 47.5 43.4 43.4
GP 24.0 0.1 2.2 0.0 2.0 4.3 1.5 1.1 1.2 1.4 5.2 6.4 6.4
SG&A expenses 5.5 0.4 0.8 1.5 1.5 4.2 1.5 1.5 1.5 1.5 5.9 6.0 6.0
OP 18.5 -0.3 1.4 -1.5 0.5 0.2 0.0 -0.4 -0.3 -0.0 -0.7 0.4 0.4
Dividend income 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.1 0.0 0.0
Equity-method gain/loss 2.1 0.8 1.2 1.0 0.3 3.3 0.6 0.5 0.5 0.5 2.0 2.0 2.1
Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Non-operatiing profit 0.1 -0.0 -0.0 -0.1 0.2 -0.0 0.0 0.0 0.0 0.0 0.1 -0.1 -0.1
RP 20.8 0.5 2.6 -0.5 1.0 3.5 0.7 0.1 0.2 0.5 1.5 2.4 2.5
Extraordinary income & loss -3.3 -1.6 -1.5 0.6 -0.3 -2.8 0.4 0.0 0.0 0.0 0.4 0.0 0.0
Pretax profit 17.4 -1.1 1.1 0.1 0.7 0.7 1.2 0.1 0.2 0.5 2.0 2.4 2.5
Corporate tax 6.2 -0.6 0.1 -0.0 0.1 -0.5 3.2 0.1 0.1 0.2 3.5 0.8 0.9
Minority interest gain 0.0 -0.0 0.0 -0.0 0.0 -0.0
NP 11.3 -0.4 0.9 0.1 0.6 1.2 -2.0 0.1 0.1 0.3 -1.5 1.6 1.6
Corporate tax rate 35% 57% 12% -49% 9% -68% 266% 39% 39% 39% 174% 34% 34%
EBITDA 26.1 9.8 7.8 9.4 9.7
Note: EBITDA = OP + equity method profits + depreciation expenses. E = Mizuho Securities estimates. Source: Mizuho Securities Equity Research
Figure 56. Segment profits (¥b)
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Nickel 18.4 -0.3 1.3 -1.5 0.5 -0.0 0.1 -0.4 -0.3 -0.1 -0.8 0.3 0.3
Wholesale power supply 0.2 0.0 -0.0 0.0 0.3 0.3 0.0 0.1 0.1 0.1 0.2 0.2 0.2
Others -0.1 -0.1 0.1 0.0 -0.2 -0.1 -0.1 -0.0 -0.0 -0.0 -0.1 -0.1 -0.1
Consolidated 18.5 -0.3 1.4 -1.5 0.5 0.2 0.0 -0.4 -0.3 -0.0 -0.7 0.4 0.4
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Base metal smelting industry 31
Mizuho Securities Co., Ltd.
3 September 2012
![Page 32: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/32.jpg)
Figure 57. Consolidated balance sheet (¥b)
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
Cash and deposits 41.5 30.9 31.0 31.0 31.0
Other short-term assets 18.7 17.7 12.7 12.8 12.8
Current assets 60.1 48.5 43.7 43.8 43.8
Fixed assets 49.9 52.1 54.0 55.0 56.1
Other long-term assets 16.5 23.3 24.2 24.8 25.8
Total assets 126.5 123.9 121.8 123.6 125.7
Interest-bearing debt 0.9 0.6 0.3 0.4 1.1
Other debt 15.2 12.4 12.4 12.7 12.8
Shareholders' equity 110.5 109.8 108.3 109.7 110.9
Other comprehensive income -0.1 1.1 0.8 0.8 0.8
Net assets 110.5 110.9 109.1 110.5 111.7
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Figure 58. Consolidated cash flow statements (¥b)
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
NP before tax 17.4 0.7 2.0 2.4 2.5
Depreciation 5.5 6.4 6.4 7.0 7.2
Change in working capital -1.8 -8.5 1.5 -1.0 -0.9
Operating cash flow 21.2 -1.5 10.0 8.4 8.8
Investment cash flow -24.6 9.4 -9.1 -8.5 -9.1
Free cash flows -3.4 7.9 0.9 -0.1 -0.3
Financing cash flow -3.9 -1.9 -0.7 0.1 0.3
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Figure 59. Valuations and financial indicators
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
Common shares (m) 195 195 195 195 195
Per share:
Dividends (¥) 17.0 2.0 0.0 1.0 2.0
Dividend payout ratio 29% 33% 0% 12% 24%
EPS (¥) 58 6 -8 8 8
BPS (¥) 565 568 559 566 572
PER (x) - - - 30.6 30.6
PBR (x) - - 0.4 0.4 0.4
ROA 9% 1% -1% 1% 1%
ROE 10% 1% -1% 1% 1%
Net D/E -37% -27% -28% -28% -27%
Note: Financial analysis indicators based on term-end balance sheets. ROA based on NP. Share prices as of 31 August close. E = Mizuho Securities estimates.
Source: Mizuho Securities Equity Research
Base metal smelting industry 32
Mizuho Securities Co., Ltd.
3 September 2012
![Page 33: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/33.jpg)
Toho Zinc (5707) Transition to an integrated mining and smelting business
Investment rating and valuation
We are setting our price objective for Toho Zinc at ¥280, based on applying a PBR
of approximately 0.7x to our FY3/13 BPS forecast of ¥430. Since the share price
tends to be highly positively correlated with metal prices (particularly zinc prices), we
have used this level to reflect our short- to medium-term metal price forecasts and
the risk that short-term earnings could fall below the company's forecasts. Since the
price objective is 6% above the current share price, we are initiating our coverage
with a Neutral rating.
Investment thesis
The company’s zinc business is currently in the process of transformation from the
previous smelting business to a more integrated mining and smelting business that
also involves mining operations and the commencement of operations at new mines.
As a result, we believe the business is becoming less subject to the influence of any
tightening in the ore supply/demand balance. We expect these factors to underpin
the share price over the medium to long term. In addition, we believe the
characteristics of the share price mean that the company’s high exposure to zinc,
where we forecast a relatively tight supply/demand balance over the long term, will
also act as a support for the share price. However, given the current share price
trend and the level of consensus forecasts, we believe it is still too early to conclude
that the market has fully priced in concerns about a downward revision to the
company’s FY3/13 earnings forecasts. We expect this to present a risk in the short
term.
Earnings outlook
For FY3/13, we forecast a recurring loss of ¥1.9b (following RP of ¥2.9b in FY3/12).
This is below the company’s forecast for full-year RP (¥4.7b) and the Quick
consensus RP forecast (¥2.5b). The main reasons we expect a ¥4.8b YoY decline in
profits are the drop in zinc prices (with a negative profit impact of around ¥2.0b), the
drop in lead prices (around ¥1.5b), and a negative impact from foreign exchange
translation losses (around ¥1.0b).
The main reason we expect profits to be ¥6.6b below company forecasts is that we
have been cautious in our cost assumptions for the aging Endeavor mine, where we
expect to see a loss (accounting for roughly ¥3b of the difference between the
company's forecasts and ours). The difference in zinc price assumptions has a
roughly ¥1b negative impact on forecasts, and we also expect to see a ¥2b loss on
inventory valuations.
For FY3/14, we forecast a turn to the black, with RP of ¥5.3b. Although we forecast
a major improvement compared to FY3/13, we still expect profits to come in below
the Quick consensus forecast (¥7.7b). The reason we expect a ¥7.2b YoY earnings
increase is that we expect the operating rate at the Rasp mine, which will start
operations in 2H 2012, to be more than 80% in FY3/14, and expect it to turn
profitable, with a positive profit impact of around ¥4.0b. In addition, we expect the
impact of inventory valuation profits and losses in the smelting segment to turn
positive, with an impact of around ¥2.0b, and also expect a ¥1.0b positive impact
from the absence of the previous year’s forex translation losses.
Base metal smelting industry 33
Mizuho Securities Co., Ltd.
3 September 2012
![Page 34: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/34.jpg)
Share price catalysts and risks
There are two main potential catalysts: 1) a reduction in supply as a result of zinc
mine closures; and 2) the establishment of an integrated operating system for
mining and smelting as the company grows volumes in its upstream resource
operations. The main risks are an unexpected fall in market prices and the potential
failure of some business development plans.
Focus points and summary
Market exposure
Share price performance at the base metals companies tends to be closely
correlated with price movements in the resources in which each company has the
highest weighting. Accordingly, movements in base metals prices and the
fundamentals in these markets tend to have a major impact on share price
performance. An examination of the performance relative to TOPIX indicates that the
share price of Sumitomo Metal Mining tends to be more closely correlated with
copper and gold prices than those of its competitors, and also closely correlated to
the nickel price. At Pacific Metals, the share price is more closely correlated to nickel
prices than those of any of its competitors, while at Toho Zinc the share price is
closely correlated with zinc prices. These correlations are in line with the differences
in the structure of the business at each company.
Figure 60. Relative share price performance of base metals companies against TOPIX and correlation with metal prices (2005 onwards)
Pacific Metals Toho Zinc Sumitomo Metal Mining
Copper 0.3 0.2 0.6
Nickel 0.8 0.7 0.7
Zinc 0.6 0.9 0.5
Gold -0.1 -0.4 0.2
¥/US$ 0.4 0.6 0.1
Source: Mizuho Securities Equity Research, from Bloomberg data
Over the short to medium term, we are most optimistic about copper prices, followed
by zinc and nickel, while for the long term we are most optimistic about zinc,
followed by copper and nickel. The reason for our short- to medium-term
preferences is that the short-term supply/demand balance for copper is the tightest
in relative terms, at close to equilibrium, while the balance for nickel is currently the
slackest. An examination of the current physical premium also shows that zinc is
relatively strong, closely followed by copper. However, there is only a small physical
premium for nickel, and we believe this supports our view. Our long-term forecasts
are based on our forecasts for the long-term equilibrium price.
Tendency for relative share
price performance to be
closely correlated with market
prices
Preferences for short to
medium term: copper, zinc,
and nickel, in that order
Base metal smelting industry 34
Mizuho Securities Co., Ltd.
3 September 2012
![Page 35: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/35.jpg)
Figure 61. Zinc prices and the zinc premium
0
20
40
60
80
100
120
140
Jan 2010 Jan 2011 Jan 2012Zinc price (¢/lb)Zinc premium (Shanghai) (monthly average) ($/MT)Zinc premium (Rotterdam) ($/MT)Zinc premium (New Orleans) ($/MT)Zinc premium (Shanghai) ($/MT)
Source: Mizuho Securities Equity Research
One of the key characteristics of the share price at Toho Zinc is that when zinc
prices are rising it is possible to target a PBR of close to 0.9x, but when zinc prices
are falling the valuation tends to fall to a PBR of below 0.6x.
Figure 62. Zinc prices and Toho Zinc PBR
0
50
100
150
Jan 2010 Jan 2011 Jan 2012
0.0
0.5
1.0
1.5
Zinc PBR (RHS)
(¢/lb) (x)
Source: Mizuho Securities Equity Research
Base metal smelting industry 35
Mizuho Securities Co., Ltd.
3 September 2012
![Page 36: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/36.jpg)
Transformation from custom smelting to integrated mining and
smelting business
Zinc smelting business
Toho Zinc makes refined zinc at Annaka Smelting (100% owned) and Hachinohe
Smelting (10.48% owned). On an equity basis, the company has around 100,000MT
of zinc production capacity (giving it a domestic market share of around 20%).
Earnings in the company’s custom smelting business come mostly from treatment
charges (TCs) + price escalators + free metal. TCs are set in line with the actual
supply/demand balance for ore, and dropped to $191/MT in 2012 compared to
$229/MT in 2011. Price escalators show the additional percentage gained by the
smelter when LME price changes against the fixed base price. In 2011, the escalator
was 6% compared with a standard price of $2,500/MT, while the de-escalator was
4%. In 2012, the escalator has been 2%–5% against a standard price of $2,000/MT,
while the de-escalator has been 2%. Ore buying conditions worsened on a YoY
comparison in 2012, but we expect the supply/demand balance for ore to trend
tighter over the long term, and believe it is unlikely we will see a significant
improvement in ore buying conditions. The free metal indicates the difference
between the amount of metal content paid for at the time of ore buying and the
actual smelting yield. According to Nyrstar, the difference in the amount actually
obtained is more than 10%, and this is a major source of income for custom
smelters, on a par with treatment charges.
Figure 63. Japanese companies’ zinc mining and smelting production stakes by equity holding (2010) (thou MT)
Zinc mines 2010 Actual Zinc ore refining 2010 Actual
1 Sumitomo 226 1 MMS 214
2 Mitsubishi 43 2 Dowa Holdings 154
3 MMS 30 3 Toho Zinc 97
4 Toho Zinc 30 4 SMM 97
5 Dowa Holdings 12 5 Mitsubishi Material 10
6 Mitsui 7 6 Nisso Metallochemical 4
Japan total 348 Japan total 575
Source: Mizuho Securities Equity Research, based on JOGMEC data
Figure 64. Trends in zinc ore buying purchase conditions
2008 2009 2010 2011 2012
Base TC $/MT 300 195 273 229 191
Basis price $/MT 2,000 1,250 2,500 2,500 2,000
De-escalator % -7% -10% -4% -4% -2%
Escalator % 7% 13% 9% 6% 2%–5%
Source: Mizuho Securities Equity Research, from Nyrstar data
Tightening of ore
supply/demand balance
leaves little room for
improvement in zinc ore
purchase conditions
Base metal smelting industry 36
Mizuho Securities Co., Ltd.
3 September 2012
![Page 37: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/37.jpg)
Zinc mining business
Toho Zinc purchased Australian zinc mining affiliate CBH Resources (CBH) in
September 2010 for a consideration of ¥23b and turned it into a fully owned
subsidiary. CBH already operated the Endeavor mine, and is developing the new
Rasp mine, which is scheduled to commence production in 2012. Annual production
capacity at the Endeavor mine is 44,000MT, and the life of the mine is estimated at
six years. However, according to CBH, it appears the mine can be expanded further.
The Rasp mine was completed in April 2012, and normal production is planned to
start in 3Q. The company plans to produce 40,000MT of conatined zinc in
concentrate in the third year of operations, and it estimates the life of the mine at
more than 15 years.
Once the Rasp mine (developed at an initial investment of ¥13b) reaches full
production, we expect the cover ratio showing the company’s equity share of zinc
production against the amount of ore needed by its zinc smelting business (i.e., the
self-sufficiency ratio) to rise from just over 10% immediately prior to the
transformation of CBH into a fully owned subsidiary to around 70%, and the shift to
an integrated model of operations covering mining to custom smelting will mean that
the company is much less exposed to shifts in the supply/demand balance for zinc
ore. This will represent a significantly different business model compared to the
other Japanese companies, which are mainly in custom smelting business. The
Rasp mine has reserves not only of zinc, but also of lead and silver, and this should
make it even more competitive as a result of by-product credit. Our earnings
forecasts are based on average levels of cash costs for global zinc mining
operations after taking by-product credit into account. According to JOGMEC,
mineralization in the ore deposits at the Rasp mine extends further to the north, and
we believe that over the long term there is still further upside for resource volumes.
Figure 65. Toho Zinc product sales volume trends (thou MT)
0
20
40
60
80
100
120
140
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E FY3/16E FY3/17E
0%
20%
40%
60%
80%
100%
Zinc sales volume Proprietary mine weighting (RHS) Note: The self-sufficiency ratio is based on Mizuho estimates, calculated as
estimated equity interest in mining production divided by product sales in smelting operations. E = Mizuho Securities estimates.
Source: Mizuho Securities Equity Research, from Toho Zinc data
Figure 66. Estimated production at Toho Zinc's zinc mine interests (thou MT)
0
20
40
60
80
100
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E FY3/16E FY3/17E
Endeavor Rasp Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
New Rasp mine to start
production in 2012, leading to
sharp increase in self-
sufficiency ratio once it
reaches full production and
allowing shift to integrated
mining and smelting business
model
Base metal smelting industry 37
Mizuho Securities Co., Ltd.
3 September 2012
![Page 38: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/38.jpg)
Figure 67. Assumptions underlying our earnings forecasts
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Copper ¢/lb 3.5 4.4 4.2 4.1 3.5 4.1 3.8 3.6 3.4 3.4 3.6 3.5 3.3
Nickel ¢/lb 10.8 12.6 11.5 10.4 8.6 10.8 9.2 8.0 7.4 7.4 8.0 7.5 7.5
Zinc ¢/lb 1.0 1.1 1.1 1.1 0.9 1.1 1.0 1.0 0.8 0.8 0.9 0.9 1.0
Lead ¢/lb 1.0 1.2 1.2 1.2 1.0 1.1 1.0 1.0 0.8 0.8 0.9 0.9 1.0
Gold $/oz 1,226 1,388 1,508 1,662 1,683 1,560 1,691 1,612 1,600 1,600 1,626 1,550 1,450
Silver $/oz 20 32 38 38 32 35 33 29 28 28 30 28 27
Forex ¥/US$ 86 82 78 77 79 79 80 80 80 80 80 80 80
Source: Mizuho Securities Equity Research
Figure 68. Consolidated profit/loss statements (¥b)
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Sales 103.6 24.5 26.5 28.4 26.4 105.9 23.7 21.9 22.3 22.6 90.4 95.7 100.6
GP 16.0 2.0 3.0 1.6 4.0 10.5 0.5 1.5 2.6 2.7 7.3 13.7 15.8
SG&A expenses 7.5 1.6 2.1 2.1 1.9 7.7 1.9 2.0 2.0 2.0 7.9 8.0 8.0
OP 8.5 0.4 0.9 -0.5 2.0 2.8 -1.5 -0.5 0.6 0.7 -0.6 5.7 7.8
Dividend income 0.1 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1
Equity-method gain/loss -0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest -0.6 -0.1 -0.1 -0.1 -0.1 -0.4 -0.1 -0.1 -0.1 -0.1 -0.5 -0.4 -0.4
Non-operating profit 0.8 0.2 -1.2 0.4 0.9 0.3 -0.9 0.0 0.0 0.0 -0.9 0.0 0.0
RP 8.7 0.6 -0.4 -0.2 2.8 2.9 -2.4 -0.6 0.5 0.6 -1.9 5.3 7.5
Extraordinary income & loss 3.8 0.2 0.0 -0.1 -0.1 0.1 -0.1 0.0 0.0 0.0 -0.1 0.0 0.0
Pretax profit 12.5 0.8 -0.3 -0.2 2.8 3.0 -2.5 -0.6 0.5 0.6 -2.0 5.3 7.5
Corporate tax 4.9 0.7 -0.2 0.2 1.3 2.0 -0.8 -0.2 0.2 0.2 -0.7 1.8 2.5
NP 7.5 0.1 -0.1 -0.5 1.5 1.0 -1.6 -0.4 0.3 0.4 -1.3 3.5 4.9
Corporate tax rate 40% 84% 64% -105% 47% 67% 34% 34% 34% 34% 34% 34% 34%
EBITDA 12.5 8.9 5.7 13.2 15.6
Note: EBITDA = OP + equity method profits + depreciation expenses. E = Mizuho Securities estimates. Source: Mizuho Securities Equity Research
Figure 69. Profit by segment (¥b)
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Smelting & refining 5.7 0.0 0.0 -0.9 1.9 1.1 -1.7 -0.6 0.3 0.1 -1.9 0.7 1.1
Mineral resources -0.3 -0.3 0.3 -0.0 -0.8 -0.8 -0.3 -0.5 -0.3 -0.0 -1.2 2.7 4.4
Electric materials 1.1 0.2 0.2 0.2 0.2 0.9 0.2 0.2 0.2 0.2 0.9 0.9 0.9
Environmental recycling 1.0 0.0 0.1 0.0 0.1 0.3 0.1 0.1 0.1 0.1 0.6 0.6 0.6
Other 1.0 0.3 0.3 0.2 0.6 1.4 0.2 0.2 0.2 0.2 1.0 0.8 0.8
Consolidated 8.5 0.4 0.9 -0.5 2.0 2.8 -1.5 -0.5 0.6 0.7 -0.6 5.7 7.8
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Base metal smelting industry 38
Mizuho Securities Co., Ltd.
3 September 2012
![Page 39: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/39.jpg)
Figure 70. Consolidated balance sheet (¥b)
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
Cash and deposits 12.7 16.6 17.0 17.0 17.0
Other short-term assets 49.3 50.9 44.1 44.0 44.6
Current assets 62.1 67.5 61.1 61.0 61.6
Fixed assets 45.9 51.9 58.0 60.0 60.0
Other long-term assets 33.1 30.5 32.0 32.0 32.0
Total assets 141.0 149.8 151.1 153.0 153.6
Interest-bearing debt 44.4 61.1 64.5 63.5 59.9
Other debt 36.6 27.8 28.2 28.5 28.7
Shareholders' equity 52.2 52.3 50.0 52.6 56.6
Other comprehensive income 7.9 8.6 8.4 8.4 8.4
Net assets 60.1 60.9 58.4 61.0 65.0
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Figure 71. Consolidated cash flow statements (¥b)
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
NP before tax 12.5 3.0 -2.0 5.3 7.5
Depreciation 4.2 6.1 6.3 7.5 7.8
Change in working capital -1.7 -9.3 7.5 -1.7 -3.2
Operating cash flow 15.0 -0.2 11.9 11.2 12.1
Investment cash flow -24.1 -11.0 -13.9 -9.2 -7.5
Free cash flows -9.1 -11.2 -2.0 2.0 4.6
Financing cash flow 9.4 15.2 2.4 -2.0 -4.6
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Figure 72. Valuations and financial indicators
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
Common shares (m) 136 136 136 136 136
Per share:
Dividends (¥) 7.0 7.0 7.0 7.0 7.0
Dividend payout ratio 13% 95% - 27% 19%
EPS (¥) 56 7 -10 26 36
BPS (¥) 443 448 430 449 479
PER (x) - - - 10.3 7.3
PBR (x) - - 0.6 0.6 0.6
ROA 5% 1% -1% 2% 3%
ROE 13% 2% -2% 6% 8%
Net D/E 53% 73% 81% 76% 66%
Note: Financial analysis indicators based on term-end balance sheets. ROA based on NP. Share prices as of 31 August close. E = Mizuho Securities estimates.
Source: Mizuho Securities Equity Research
Base metal smelting industry 39
Mizuho Securities Co., Ltd.
3 September 2012
![Page 40: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/40.jpg)
Sumitomo Metal Mining (5713) New sprouts augur the rise of a new major Japanese base metal company
Investment ratings and valuation
We determined our ¥1,060 price objective for Sumitomo Metal Mining by applying a
PBR of approximately roughly 0.9x to our FY3/13 BPS forecast of ¥1,249. Since the
company’s share price tends to be correlated with market price trends (mainly
copper and nickel prices), we have set our price objective with reference to our
short- to medium-term market forecasts. As our price objective is 31% above the
current share price, we are initiating our coverage with a Buy rating.
Investment thesis
The company has a number of strong growth options within the resource business,
and we expect to see it emerge as a major base metal supplier. In the copper mining
business, we expect to see the company’s equity stake in mining production volume
grow by 80% as new and expanded projects make an increasing contribution. We
also expect to see a 50% increase in production volume in the nickel business as
new and expanded projects start to contribute. We expect this volume growth to act
as a key driver of relative share price performance, and since we expect
fundamentals to remain relatively tight in the short to medium term, we believe the
company’s high exposure to the copper business will be beneficial given the key
characteristics of the share price.
Earnings outlook
We forecast FY3/13 RP of ¥75.0b (down 31% YoY). This is below the company’s
full-year RP forecast (¥92.0b) but in line with the IFIS consensus forecast (¥74.4b).
We expect the main reasons for the ¥33.8b YoY reduction in profits to be a negative
impact of around ¥30.0b from the nickel price and ¥10.0b from the copper price,
partly made up for by positive impacts of roughly ¥3.0b from higher gold prices,
¥2.0b from improvement at VNC, and ¥1.0b from forex changes.
The reason we expect profits to be ¥17b below company forecasts is that we expect
an inventory valuation difference of around ¥7b, a ¥6b negative from lower
assumptions for copper prices, a ¥2b negative from deterioration at VNC, a ¥1b
impact from lower assumptions for gold prices and a forex translation loss.
We forecast FY3/14 RP of ¥82.0b (up 9% YoY). This is just below the IFIS
consensus (¥86.9b). The reason we expect a ¥7.0b YoY increase in profits is that
we expect improvements of around ¥6.0b in inventory valuation profits and losses,
around ¥3.0b from profit improvement at VNC, around ¥3.0b in the materials
business, ¥3.0b in forex translation gains, and ¥3.0b on the back of higher volumes
in the overseas mining operations. These positives should make up for a ¥6.0b
negative impact from lower nickel prices, a ¥4.0b impact from lower gold prices, and
a ¥1.0b impact from lower copper prices.
Base metal smelting industry 40
Mizuho Securities Co., Ltd.
3 September 2012
![Page 41: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/41.jpg)
Share price catalysts and risks
There are three main catalysts: 1) the emergence of supply constraints, such as a
deterioration in the grade of copper ore and supply issues; 2) a reduction in supply
owing to problems with commissioning new nickel projects; and 3) the
transformation of the company into a major base metal supplier as a result of
volume growth in the high-grade resource field. The main risks are an unexpected
fall in market prices and failure to implement segment business development plans.
Focus points and summary
Market exposure and trends
Share price performance at the base metals companies tends to be closely
correlated with price movements in the resources in which each company has the
highest weighting. Accordingly, movements in base metals prices and the
fundamentals in these markets tend to have a major impact on share price
performance. An examination of the performance relative to TOPIX indicates that the
share price of Sumitomo Metal Mining tends to be more closely correlated with
copper and gold prices than those of its competitors, and also closely correlated to
the nickel price. At Pacific Metals, the share price is more closely correlated to nickel
prices than those of any of its competitors, while at Toho Zinc the share price is
closely correlated with zinc prices. These correlations are in line with the differences
in the structure of the business at each company.
Figure 73. Relative share price performance of base metals companies against TOPIX and correlation with metal prices (2005 onwards)
Pacific Metals Toho Zinc Sumitomo Metal Mining
Copper 0.3 0.2 0.6
Nickel 0.8 0.7 0.7
Zinc 0.6 0.9 0.5
Gold -0.1 -0.4 0.2
¥/US$ 0.4 0.6 0.1
Source: Mizuho Securities Equity Research, from Bloomberg data
Over the short to medium term, we are most optimistic about copper prices, followed
by zinc and nickel, while for the long term we are most optimistic about zinc,
followed by copper and nickel. The reason for our short- to medium-term
preferences is that the short-term supply/demand balance for copper is the tightest,
at close to equilibrium, while the balance for nickel is currently the slackest. An
examination of the current physical premium also shows that zinc is relatively strong,
closely followed by copper. However, there is only a small physical premium for zinc,
and we believe this supports our view. Our long-term forecasts are based on our
forecasts for the long-term equilibrium price.
Tendency for relative share
price performance to be
closely correlated with market
prices
Short- to medium-term
preferences: copper, zinc,
and nickel, in that order
Base metal smelting industry 41
Mizuho Securities Co., Ltd.
3 September 2012
![Page 42: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/42.jpg)
Figure 74. Copper prices and the copper premium
0
100
200
300
400
500
Jan 2010 Jan 2011 Jan 2012
0
20
40
60
80
100
120
140
160
Copper price Copper premium (Shanghai) (RHS)
Copper premium (US) (RHS) Copper premium (Europe) (RHS)
($/MT)(¢/lb)
Source: Mizuho Securities Equity Research, from Bloomberg data
Figure 75. Zinc prices and the zinc premium
0
20
40
60
80
100
120
140
Jan 2010 Jan 2011 Jan 2012Zinc price (¢/lb)Zinc premium (Shanghai) (monthly average) ($/MT)Zinc premium (Rotterdam) ($/MT)Zinc premium (New Orleans) ($/MT)Zinc premium (Shanghai) ($/MT)
Source: Mizuho Securities Equity Research, from Bloomberg data
Figure 76. Nickel prices and the nickel premium
0
2
4
6
8
10
12
14
Jan 2010 Jan 2011 Jan 2012
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Nickel price ($/lb) Nickel premium (Europe) ($/MT)
Nickel premium (Shanghai) ($/MT) Nickel premium (US) ($/lb) (RHS) Source: Mizuho Securities Equity Research, from Bloomberg data
Figure 77. Gold prices ($/oz)
1,000
1,500
2,000
Jan 2010 Jan 2011 Jan 2012 Source: Mizuho Securities Equity Research, from Bloomberg data
The key characteristic of Sumitomo Metal Mining’s share price is that when copper
prices are rising, it is possible to target a PBR of close to 1x, but when nickel prices
are falling the lower bound of the valuation range tends to be a PBR of around 0.5x.
The correlation of the share price with the gold price is lower than with either copper
or nickel prices, and for the past few years since 2010 we have not observed any
marked correlation.
Accordingly, since the share price has recently fallen in line with the reduction in the
nickel price, the PBR now looks relatively undervalued compared to the current level
of the copper price. We expect nickel prices to bottom out at around the current level,
and if there is no further fall in the nickel price we believe there is scope to move to a
valuation based on the copper price. For these reasons, we set a valuation PBR of
roughly 0.9x.
For reference, the company is currently trading at a PBR of 0.6x, and we believe
that the difference between this and our theoretical PBR based on the relationship
between ROE and the current level signals significant upside for Sumitomo Metal
Mining’s shares. We determined our theoretical PBR using a cost of capital of 8.5%
(assuming a risk free rate of 1.3%, an equity risk premium of 6.0%, and a beta of
1.2), set against an ROE forecast of 8% for both FY313 and FY3/14.
As the nickel price bottoms
we expect valuations to move
in line with copper prices
Base metal smelting industry 42
Mizuho Securities Co., Ltd.
3 September 2012
![Page 43: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/43.jpg)
Figure 78. Copper prices and PBR at Sumitomo Metal Mining
0
100
200
300
400
500
Jan 2010 Jan 2011 Jan 2012
0.0
0.5
1.0
1.5
Copper PBR (RHS)
(¢/lb) (x)
Source: Mizuho Securities Equity Research, from Bloomberg data
Figure 79. Nickel prices and PBR at Sumitomo Metal Mining
0
200
400
600
800
1,000
1,200
1,400
Jan 2010 Jan 2011 Jan 2012
0.0
0.5
1.0
1.5
Nickel PBR (RHS)
(¢/lb) (x)
Source: Mizuho Securities Equity Research, from Bloomberg data
Figure 80. Gold prices and PBR at Sumitomo Metal Mining
1,000
1,500
2,000
Jan 2010 Jan 2011 Jan 2012
0.0
0.5
1.0
1.5
Gold PBR (RHS)
($/oz) (x)
Source: Mizuho Securities Equity Research, from Bloomberg data
Signs that a new Japanese base metals major is emerging
Copper mining business
In 2011 Sumitomo Metal Mining had an equity copper production volume of around
125,000MT, second among the Japanese companies only to Mitsubishi, which
acquired a 24.5% stake in Anglo American Sur in the same year for $5.39b.
However, gaining a place within the top 15 producers worldwide requires interests of
more than 200,000MT, and currently there is still a significant gap between
Sumitomo Metal Mining and the base metals majors. However, the company has a
number of growth options, including the expansion of the Morenci mine (in which it
has a 12.0% stake) in 2014, the start-up of the Sierra Gorda mine (in which it has a
31.5% stake) in 2014, and the expansion of the Cerro Verde mine (in which it has a
16.8% stake) in 2016. Accordingly, over the next five years we expect it to expand its
equity copper production volume to 230,000MT. If the company realizes its growth
options, we expect to see it emerge as one of the base metals majors.
Realization of growth options
could push company into
ranks of global copper majors
in terms of share of
production volume
Base metal smelting industry 43
Mizuho Securities Co., Ltd.
3 September 2012
![Page 44: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/44.jpg)
Figure 81. Copper mining production share by company (2011)
KGHM3% Antofagasta
3%Teck Resources2%
Vale2% Norilsk Nickel
2%
Anglo American4%
GrupoMexico*5%
Rio Tinto5%
Xstrata5%
BHPB6%
Freeport8%
CODELCO11%
Kazakhmys2%
First Quantum2%
Barrick Gold1%
Others39%
Source: Mizuho Securities Equity Research, from JOGMEC, Bloomberg and
company data
Figure 82. Sumitomo Metal Mining: copper mining production allocation by volume (thou MT)
0
50
100
150
200
250
2011 Morenci expansion Sierra Gorda Cerro Verdeexpansion
Existing Morenci expansion Sierra Gorda Cerro Verde expansion Source: Mizuho Securities Equity Research, from various company data
Figure 83. Japanese companies: copper mining production allocation by volume (thou MT)
2011 Actual 2017 E
1 Mitsubishi* 138 1 Mitsubishi 271
2 SMM 125 2 SMM 230
3 JX 94 3 Marubeni 213
4 Marubeni 93 4 JX 162
5 MMS 70 5 Mitsui 130
6 Mitsui 59 6 MMS 115
7 Sumitomo 59 7 Sumitomo 93
8 Mitsubishi Materials 69 8 Mitsubishi Materials 69
9 Nittetsu Mining 15 9 Nittetsu Mining 15
10 Sojitz 8 10 Sojitz 8
11 Furukawa Metals 6 11 Furukawa Metals 6
12 Dowa Holdings 4 12 Dowa Holdings 4
Japan total 740 Japan total 1,317
Note: *Includes Mitsubishi’s 25% stake in annual production at Anglo American Sur. E = Mizuho Securities estimates. Source: Mizuho Securities Equity Research, from various company data
Nickel business
We estimate that in 2011 Sumitomo Metal Mining had an equity nickel production
volume of around 63,000MT, including electrical nickel, ferronickel, nickel matte, and
other products. This scale of production already puts it among the major companies
in the world. In terms of technology, we believe the company’s strong know-how
related to the wet smelting method is also an important factor in the potential future
growth of the nickel business. For producing electrical nickel, the company uses the
matte chlorine leaching electrowinning (MCLE) method. Since unexploited nickel
reserves worldwide are increasingly of lower quality, there is increasing demand for
commercial production of nickel from low-grade ores which could not previously be
processed, using the high pressure acid leaching process (HPAL) method, a form of
wet smelting. The company has already achieved high productivity at Coral Bay
Nickel (in which it has a 54% stake) through the use of HPAL technology, and
excluding the impact of the drought, it has also achieved a more or less vertical
start-up curve for the second line, which commenced operation in 2009.
Emerging as one of global
nickel majors by leveraging
advantages of wet nickel
smelting technology
Base metal smelting industry 44
Mizuho Securities Co., Ltd.
3 September 2012
![Page 45: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/45.jpg)
Future growth options include the company’s second HPAL plant at Taganito (in
which it has a 62.5% stake) in 2013, expansion of PT Inco (20.1% stake) in 2013,
and the move to full production at VNC (previously Goro, 11.0% stake). As a result,
we believe the company’s equity nickel production could potentially rise to around
90,000MT in the future. In the Solomon Islands, where the company is currently
promoting mining operations, it now appears to be close to starting extraction, and
we believe this could provide further upside to nickel mining growth. Over the long
term, we expect Sumitomo Metal Mining to become one of the global nickel majors.
Figure 84. Nickel mining production share by company (2011)
Others28%
Nickel Asia Corp*1%
St. Miniere duSud Pacifique*
1%Votorantim*
1%
Norilsk Nickel17%
Vale13%
BHPB8%
PT Antam*7%
Xstrata6%
SMM3%
SurigaoIntegrated
Resources*3%
Pacific Metals2%
Anglo American2%
Glencore2%
Eramet3%
Jinchuan*3%
Note: * indicates 2009 production Source: Mizuho Securities Equity Research, from company and JOGMEC data
Figure 85. Sumitomo Metal Mining: nickel mining production volume (thou MT)
0
20
40
60
80
100
2011 Taganito PT Incoexpansion
ENi 65ktexpansion
VNC (Goro)
2011 Taganito PT Inco expansion ENi 65kt expansion VNC (Goro) Source: Mizuho Securities Equity Research, from various company data
Figure 86. Japanese companies: nickel mining production volumes (thou MT)
2011 Actual 2017 E
1 SMM 63 1 SMM 92
2 Pacific Metals 31 2 Pacific Metals 38
3 Mitsui 16 3 Mitsui 33
4 Nippon Yakin* 9 4 Mitsubishi 18
5 Sojitz 4 5 Sumitomo 17
6 6 Nippon Yakin* 9
7 7 Sojitz** 4
8
Japan total 123 Japan total 210
Note: * indicates 2010 results, ** indicates 2011 results; E = Mizuho Securities estimates; production volumes for Japanese companies are for shares of pure nickel production including smelting but exclude NAC’s share of production at Sumitomo Metal Mining; figures for Hyuga Smelting are sales volume for its interests.
Source: Mizuho Securities Equity Research, from various company materials
Base metal smelting industry 45
Mizuho Securities Co., Ltd.
3 September 2012
![Page 46: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/46.jpg)
Figure 87. Assumptions underlying our earnings forecasts
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Copper ¢/lb 3.5 4.4 4.2 4.1 3.5 4.1 3.8 3.6 3.4 3.4 3.6 3.5 3.3
Nickel ¢/lb 10.8 12.6 11.5 10.4 8.6 10.8 9.2 8.0 7.4 7.4 8.0 7.5 7.5
Zinc ¢/lb 1.0 1.1 1.1 1.1 0.9 1.1 1.0 1.0 0.8 0.8 0.9 0.9 1.0
Lead ¢/lb 1.0 1.2 1.2 1.2 1.0 1.1 1.0 1.0 0.8 0.8 0.9 0.9 1.0
Gold $/oz 1,226 1,388 1,508 1,662 1,683 1,560 1,691 1,612 1,600 1,600 1,626 1,550 1,450
Silver $/oz 20 32 38 38 32 35 33 29 28 28 30 28 27
Forex ¥/US$ 86 82 78 77 79 79 80 80 80 80 80 80 80
Source: Mizuho Securities Equity Research
Figure 88. Consolidated profit/loss statements (¥b)
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Sales 864 213 221 208 206 848 205 180 163 187 737 765 774
GP 139 38 28 28 38 132 31 26 29 31 117 117 121
SG&A expenses 43 10 11 11 12 44 11 11 11 11 44 44 44
OP 96 28 17 17 26 88 20 15 18 20 73 73 77
Dividend income 2 1 0 1 2 3 1 0 1 1 2 2 2
Equity-method gain/loss 35 11 11 4 -3 23 3 1 -0 1 5 10 16
Interest -2 -0 -1 -1 -0 -2 -1 -1 -1 -1 -3 -4 -4
Non-operating profit -7 -2 -4 -0 2 -4 -3 0 0 0 -3 0 0
RP 124 38 24 20 27 109 21 15 17 21 75 82 92
Extraordinary income & loss -0 0 -12 -5 -4 -21 -0 0 0 0 -0 0 0
Pretax profit 123 38 12 16 23 88 21 15 17 21 75 82 92
Corporate tax 31 7 -1 5 8 19 4 4 4 5 17 17 18
Minority interest gain 9 4 2 1 -3 3 0 0 0 0 2 2 2
NP 84 26 11 9 18 65 17 11 13 15 56 63 73
Corporate tax rate 25% 20% -10% 34% 34% 22% 17% 24% 25% 24% 22% 21% 20%
EBITDA 165 143 112 123 137
Note: EBITDA = OP + equity method products + depreciation expenses. E = Mizuho Securities estimates. Source: Mizuho Securities Equity Research
Figure 89. Segment profits (¥b)
FY3/11 FY3/12 FY3/13 FY3/14E FY3/15E
1Q 2Q 3Q 4Q Full-year 1Q 2Q E 3Q E 4Q E Full-year E
Mineral resources 70 23 24 16 18 81 20 15 14 14 63 62 58
Smelting & Refining 50 15 3 1 7 26 -0 -4 -2 0 -6 1 14
Materials 5 1 -1 -1 0 -0 -0 1 1 2 3 6 8
Other -2 -2 -2 5 1 3 2 4 4 5 14 13 12
Consolidated 124 38 24 20 27 109 21 15 17 21 75 82 92
Assumptions for NP by product
Copper 44 13 15 10 9 46 11 9 8 8 35 36 37
Nickel 58 15 10 10 7 41 4 1 0 1 7 7 18
Gold 42 12 14 12 13 52 16 13 13 13 54 48 44
Other -20 -3 -14 -11 -1 -30 -11 -8 -3 -1 -21 -10 -7
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Base metal smelting industry 46
Mizuho Securities Co., Ltd.
3 September 2012
![Page 47: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/47.jpg)
Figure 90. Consolidated balance sheet (¥b)
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
Cash and deposits 92 76 80 85 85
Other current assets 381 423 401 384 384
Current assets 473 499 481 469 469
Fixed assets 265 290 330 363 396
Other long-term assets 315 356 392 430 468
Total assets 1,052 1,146 1,203 1,262 1,332
Interest-bearing debt 211 266 280 290 300
Other liabilities 157 154 151 152 156
Shareholders' equity 682 730 770 818 874
Other comprehensive income -52 -70 -68 -68 -68
Minority interest 54 66 70 70 70
Net assets 684 726 772 820 876
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Figure 91. Consolidated cash flow statements (¥b)
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
NP before tax 123 88 75 82 92
Depreciation 35 31 34 40 44
Change in working capital -56 26 4 -2 -20
Operating cash flow 102 145 113 120 116
Investment cash flow -76 -136 -108 -109 -110
Free cash flows 27 9 4 11 6
Financing cash flow 7 50 -1 -6 -6
Note: E = Mizuho Securities estimates Source: Mizuho Securities Equity Research
Figure 92. Valuations and financial indicators
FY3/11 FY3/12 FY3/13E FY3/14E FY3/15E
Common shares (m) 562 562 562 562 562
Common shares (m) (diluted) 613 611 611 611 611
Per share:
Dividends (¥) 32 28 28 28 28
Dividend payout ratio 23% 26% 31% 27% 23%
EPS (¥) (diluted basis) 137 107 92 103 120
BPS (¥) 1,121 1,173 1,249 1,334 1,434
PER (x) - - 8.8 7.8 6.8
PBR (x) - - 0.6 0.6 0.6
ROA 8% 6% 5% 5% 5%
ROE 13% 10% 8% 8% 9%
Net D/E 19% 29% 28% 27% 27%
Note: Financial analysis indicators based on term-end balance sheets. ROA based on net profits. Share prices as of 31 August close. E = Mizuho Securities estimates.
Source: Mizuho Securities Equity Research
Base metal smelting industry 47
Mizuho Securities Co., Ltd.
3 September 2012
![Page 48: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/48.jpg)
| Companies Mentioned in this Report
Code Company Name Rating Share Price 8/31
5541 Pacific Metals Neutral ¥2515707 Toho Zinc Neutral ¥2655713 Sumitomo Metal Mining Buy ¥808Note: NR = Not RatedSource: Mizuho Securities Equity Research
Important Disclosure Information
■ Mizuho Securities Co., Ltd. and / or its affiliate(s) received compensation in the past 12 months, or expects to receive or intends to seek compensationin the next 3 months for investment banking services from: Pacific Metals, Toho Zinc, Sumitomo Metal Mining.
Base metal smelting industry 48
Mizuho Securities Co., Ltd.
3 September 2012
![Page 49: Base metal smelting industry akifumi.hayashi@mizuho-sc.com ...pg.jrj.com.cn/acc/Res/CN_RES/INDUS/2012/9/3/781ab19a-84b5-447… · as the main factors determining share price performance](https://reader031.vdocuments.mx/reader031/viewer/2022040405/5e9a375e9f71b818dd51cfc3/html5/thumbnails/49.jpg)
Mizuho Securities RatingsMizuho Securities investment ratings are based on the following definitions.
Ratings and price objectives are based on returns expected over the next 6 -12 months.Buy : Stocks for which our price objective, as of the date it is set, exceeds the share price by 10% or more and which are not classified
as "Underperform" under the guidelines for distribution of ratings detailed below.Neutral : Stocks for which our price objective, as of the date it is set, is within 10% of the share price (either above or below) and which are
not classified as "Underperform" under the guidelines for distribution of ratings detailed below.Underperform : Stocks for which our price objective, as of the date it is set, falls below the share price by 10% or more or stocks classified as
"Underperform" under the guidelines for distribution of ratings detailed below.RS : Rating Suspended - rating and price objective temporarily suspended.NR : No rating - not covered, and therefore not assigned a rating.Guidelines for distribution of ratings: When fewer than 10% of the companies within a defined coverage universe (composed of companies withcommon attributes, covered by one or more analysts) have "Underperform" ratings, "Underperform" ratings are applied to 10% of the companies,rounded to the nearest whole number, beginning with those with the lowest implied upside. (These relative distribution guidelines apply only whenthe coverage universe is composed of six or more companies. There may be periods when the number of companies with “Underperform” ratingstemporarily does not meet these guidelines.)
Information can be found on the Mizuho Securities Equity Research website (MizuhoResearchWEB™) under “Disclosure Data” as to the proportion of all research ratings published duringthe last quarter that were in rating categories “Buy”, “Neutral”, and “Underperform”, and information on the proportion of companies within each category to which Mizuho Securities providedinvestment banking services during the last 12 months.
Analyst Certification The research analyst(s) listed on the cover page of this report certifies(y) that the views expressed in this research report accurately reflect analyst's(s') personal views about the subjectsecurity(ies) and issuer(s) and that no part of his/her/their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or views expressed in thisresearch report.
DisclaimerThis report has been prepared by Mizuho Securities Co., Ltd. (‘Mizuho Securities’) solely for the purpose of supplying information to the clients of Mizuho Securities and/or its affiliates towhom it is distributed. This report is not, and should not be construed as, a recommendation, solicitation or offer to buy or sell any securities or related financial products.This report has been prepared by Mizuho Securities solely from publicly available information. The information contained herein is believed to be reliable but has not been independentlyverified. Mizuho Securities makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy, completeness or appropriateness of such information.Information contained herein may not be current due to, among other things, changes in the financial markets or economic environment. Opinions reflected in this report are subject tochange without notice.This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. The report has been prepared without regard to the individual financialcircumstances, needs or objectives of persons who receive it. The securities and investments related to the securities discussed in this report may not be suitable for all investors. Readersshould independently evaluate particular investments and strategies, and seek the advice of a financial adviser before making any investment or entering into any transaction in relationto the securities mentioned in this report.Mizuho Securities accepts no legal responsibility from any investor who directly or indirectly receives this material. The final investment decision must be made by the investor and theresponsibility for the investment must be taken by the investor.Past performance should not be taken as an indication or guarantee of future performance. Unless otherwise attributed, forecasts of future performance represent analysts’ estimates basedon factors they consider relevant. Actual performance may vary. Consequently, no express or implied warranty can be made regarding future performance.Any references in this report to Mizuho Financial Group (‘MHFG’) and/or its affiliates are based only on publicly available information. The authors of this report are prohibited from usingor even obtaining any insider information. As a subsidiary of MHFG, Mizuho Securities does not, as a matter of corporate policy, cover MHFG for investment recommendation purposes.Mizuho Securities or other companies affiliated with MHFG may deal in securities referred to in this report, or derivatives of such securities or other securities issued by companies mentionedin this report, for its own account or the accounts of others, enter into transactions contrary to any recommendations contained herein, and may supply a wide range of financial services tothe issuers of such securities and to their affiliates. Mizuho Securities is prohibited under Article 135 of the Corporation Law from dealing in the shares of MHFG for its own account.United Kingdom/European Economic Area: This report is distributed in the United Kingdom by Mizuho International plc (MHI), Bracken House, One Friday Street, LondonEC4M 9JA, a member of MHFG. MHI is authorized and regulated by the Financial Services Authority and is a member of the London Stock Exchange. For the avoidance of doubt thisreport is not intended for retail clients. This report may be distributed in other member states of the European Economic Area. Details of organizational and administrative controls for theprevention and avoidance of conflicts of interest can be found at https://uk.mizuho-sc.com.United States: Mizuho Securities USA Inc., a member of MHFG, 320 Park Avenue, New York, NY 10022, USA, contact number +1-212-209-9300, distributes this report in the United Statesand takes responsibility for it. Any transactions by US investors resulting from the information contained in this report may be effected only through Mizuho Securities USA Inc. InterestedUS investors should contact their Mizuho Securities USA Inc. sales representative.Japan: This report is distributed in Japan by Mizuho Securities Co., Ltd., a member of MHFG, Otemachi First Square Otemachi 1-chome, Chiyoda-ku, Tokyo 100-0004, Japan. RegisteredFinancial Instruments Firm, No. 94 (Kinsho), issued by the Director, Kanto Local Finance Bureau. Member of Japan Securities Dealers Association, the Japan Investment AdvisersAssociation, Financial Futures Association of Japan, and the Type II Financial Instruments Firms Association.Asia ex-Japan: This report is being distributed in Asia ex-Japan by Mizuho Securities Asia Limited, 12th Floor, Chater House, 8 Connaught Road, Central, Hong Kong, S.A.R., The People'sRepublic of China.© Mizuho Securities Co., Ltd. All Rights Reserved 2012. This document may not be altered, reproduced or redistributed, or passed on to any other party, in whole or in part, without theprior written consent of Mizuho Securities Co., Ltd.Mizuho Securities charges a commission on equity transactions up to a maximum of 1.20750% of the contract amount, tax included. The minimum commission isJPY2,625, tax included.The value of equities may go down or up as prices fluctuate. Owners of equities may suffer losses on the original value of their purchases.
Equity Research
Otemachi First Square, 5-1 Otemachi 1-chome
Chiyoda-ku, Tokyo 100-0004, Japan
Base metal smelting industry3 September 2012