HOLD - COL Financial · 10/17/2017 · Mining company share prices rally due to rising mineral prices. ... 8% by 2018 and 12% by 2020. EVs use a Nickel-Cobalt-Aluminum (NCA) chemistry

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Metal prices rally, regulatory issues remain

TUE 17 OCT 2017

KYLE JEMMRIC VELASCORESEARCH [email protected]

HOLDNICKEL ASIA CORPORATION

PHP7.60

HOLDPHILEX MINING CORPORATION

PHP10.10

We are upgrading our FV estimates for NIKL and PX to Php7.60/sh and Php10.10/sh, respectively. Shares of mining companies rallied recently due to higher metal prices in the world market, particularly nickel and copper. Additionally, the weaker peso favors miners as revenues are dollar denominated. Both factors have led us to increase our estimates for NIKL and PX. However, we are retaining our HOLD recommendation for both companies given the inherent risks that the miners face. Regulatory concerns still loom the industry and the president has mentioned that he might impose higher excise taxes for miners, and this would significantly hurt the profits of the mining companies.

Mining company share prices rally due to rising mineral prices. Share prices of mining companies have gone up during the past few months as a result of rising mineral prices in the world market. Stronger global demand brought about by the improving economic landscape has allowed base metal prices to rise. In particular, prices of nickel and copper jumped significantly since the start of the year. Nickel prices increased by as much as 28% to a high of US$6.00/lb from its low of US$4.68/lb last June 2017, while copper prices rose by as much as 28% to US$3.10/lb year to date. This has allowed the 1H17 earnings of mining companies to recover and beat our estimates.

Increasing earnings forecasts. In light of the continuous increase in metal prices and the weaker peso, we are increasing our revenue forecast for NIKL and PX. For NIKL, we are increasing our full-year average assumption for nickel prices by 6.2% to US$5.2/lb in 2017 and by 13.4% to US$6.00/lb by 2018. On the other hand, we are also increasing our negotiated contract prices by 22.7% to US$25.4/WMT and US$27.44 for 2017 and 2018, respectively. Consequently, our earnings forecast for the nickel miner increased by 61% to Php3.5Bil in 2017 and by 49.2% to Php4.3Bil in 2018. As for PX, we increased our full year assumption for average copper prices by 23% to US$2.70/lb (although we are retaining our gold price assumption at US$1,270/oz). Our earnings forecast for PX increased by 31.7% to Php2.1Bil for 2017 and by 33.1% to Php2.0Bil for 2018.

Upgrading FV estimates, maintaining HOLD. In light of our higher earnings forecast, we are upgrading our fair value estimate for both NIKL and PX. For NIKL, we are increasing our FV estimate by 38% to Php7.60/sh. Meanwhile, we are increasing our FV estimate for PX by 17% to Php10.10/sh. Despite the huge increase in our FV estimates, we are still maintaining our HOLD recommendation for both stocks as the positives has already been priced in. Moreover, the local mining sector currently faces numerous regulatory risks.

Downside risk: Regulatory overhang still looms. Despite having an attractive outlook due to higher metal prices, mining companies still face regulatory issues. Recall that earlier this year, former DENR secretary Gina Lopez ordered the closure of 21 mining operations in several areas of the country, noting that the mines were ruining nearby watersheds. Additionally, she imposed a ban on open-pit mining. The orders are still effective up to this date even though a new DENR chair is in place. If strictly imposed, both NIKL and PX will be affected by the previous secretary’s orders.

MINING SECTOR I METAL PRICES RALLY, REGULATORY ISSUES REMAIN

TUE 17 OCT 2017

COL Financial Group, Inc. 2

Mining company share prices rally due to rising mineral prices

Share prices of mining companies have gone up during the past few months as a result of rising mineral prices in the world market. Stronger global demand brought about by the improving economic landscape has allowed base metal prices to rise. In particular, prices of nickel and copper jumped significantly since the start of the year. Nickel prices increased by as much as 28% to a high of US$6.00/lb from its low of US$4.68/lb last June 2017, while copper prices rose by as much as 28% to US$3.10/lb year to date. This has allowed the 1H17 earnings of mining companies to recover and beat our estimates.

NIKL’s 1H17 revenues jumped 42% y/y to Php7.8Bil, accounting for 53% of our full year estimates. Average realized nickel price during the period was US$4.40/lb, 12.2% higher compared to the US$3.92/lb average realized nickel price during the same period last year. Meanwhile, PX’s 1H17 revenues reached Php4.8Bil. Although this was flat y/y, revenues beat our estimates, accounting for 55% of our full year forecast. The outperformance was mainly a result of the increase in average realized price for copper. Average realized copper price increased by 23.8% to US$2.65/lb from US$2.14/lb during the same period last year.

Exhibit 1: 1H17 realized prices

source: NIKL, PX, COL estimates

Nickel prices rise on stronger economic growth and EV production boom

From a low of US$4.50/lb, nickel prices have increased by as much as 33% to as high as US$6.00/lb this year. Prices rose due to higher demand brought about by the recovery in China’s industrial demand and in anticipation of an electric vehicle (EV) boom.

During the first half of the year, China’s economy started to pick up once more as global economic conditions improved. China’s economy grew 6.9% during the first half of the year, an uptick from last year’s 6.7% expansion. This marks the first time China’s growth rate accelerated from the preceding year since 2010. As a result of the faster growth, the manufacturing and industrial sectors also began to pick up and the country’s stainless steel production likewise ramped up at a significant pace. China is expected to produce an estimated 36mt of stainless steel during the year, up 5.9% y/y. With nickel being a primary component of stainless steel, demand for the metal likewise increased.

Old New % ChangeAverage contract price (US$/WMT) 18.24 25.88 41.9Average LME price (US$/lb) 3.92 4.40 12.2Average copper prices (US$/oz) 2.14 2.65 23.8Average gold prices (US$/oz) 1,263 1,258 -0.4

NIKL

PX


TUE 17 OCT 2017


In addition to increased demand from China, the anticipation of an EV production boom also pushed up nickel prices. Investors are anticipating a boom in EVs as developed countries are starting to create regulations that would push automakers to build more EVs. For example, by 2018, China wants 8% of all automobile produced to be EVs. California also has a similar target for the share of EV production - 8% by 2018 and 12% by 2020. EVs use a Nickel-Cobalt-Aluminum (NCA) chemistry which uses a cathode that is 80% nickel in their batteries. The resulting boom in the demand for EV batteries as a result of increased production of EVs is expected to act as a tailwind for nickel prices in the next few years.

Exhibit 2: Nickel prices

Source: Bloomberg

Copper prices on a continuous uptrend due to Chinese economic recovery and tight supply

Copper prices have been on a continuous uptrend since last year, reaching a high of US$3.16/lb this month, up 44% y/y. The strong uptrend of copper price was mainly driven by the acceleration in Chinese manufacturing and the tight supply situation brought about by strikes in Chilean mines.

China remains one of the top importers of copper and its demand heavily affects prices in the world market

This year, China factories grew at the fastest pace in over five years as output prices and demand improve to the highest level. For example, China’s Purchasing Managers’ Index or PMI (an indicator of economic health of the manufacturing sector) reached 52.4 in September, up from 51.7 in August and well above the 50-point mark that separates growth from contraction on a monthly basis. This marked the 14th straight month of expansion for China’s manufacturing industry and the highest reading since April 2012.

3.5

4

4.5

5

5.5

6

6.5

1/4/2016 4/4/2016 7/4/2016 10/4/2016 1/4/2017 4/4/2017 7/4/2017 10/4/2017

Nickel


TUE 17 OCT 2017


Moreover, supply tightened when workers in Chile’s Escondida mine went on strike last March 2017. Note that Chile accounts for around 30% of total global copper supply. The strike lasted for approximately two months and cut copper production by an estimated 127,000 mt. This significantly reduced world copper inventories.

Exhibit 3: Copper prices

Source: Bloomberg

Weaker peso, favorable for mining firms

Bulk of the revenues of the miners is US dollar denominated while costs are mostly denominated in Philippine peso. As a result, the weakening of the peso will allow miners to enjoy additional FX gains. Since the start of the year, the peso has depreciated by 4% to US$1:00:Php50.87. The weak peso is another reason why mining companies were able to deliver strong 1H17 results.

Increasing earnings forecasts

In light of the continuous increase in metal prices and the weaker peso, we are increasing our revenue forecast for NIKL and PX.

We are adjusting our average FX assumption to US$1.00:Php50.00 for 2017, and to US$1.00:Php51.00 for 2018 onwards from an average of US$1.00:Php48.00 previously.

For NIKL, we are increasing our full-year average assumption for nickel prices by 6.2% to US$5.2/lb in 2017 and by 13.4% to US$6.00/lb by 2018. On the other hand, we are also increasing our negotiated contract prices by 22.7% to US$25.4/WMT and US$27.44 for 2017 and 2018, respectively. These prices are based on the current prices of nickel in the London Metal Exchange and NIKL’s realized contract prices. Coupled with the weaker peso assumption, our revenue forecast increased by 9.6% to Php16.1Bil in 2017 and 9.5% to Php17.4Bil in 2018.

1.5

2

2.5

3

1/4/2016 4/4/2016 7/4/2016 10/4/2016 1/4/2017 4/4/2017 7/4/2017 10/4/2017

Copper


TUE 17 OCT 2017


Exhibit 4: NIKL - Summary of changes in assumptions

source: COL estimates

Our higher revenue forecast in turn increased our EBTDA forecast for NIKL by 23.5% to Php7.4Bil in 2017 and by 21.6% to Php8.4Bil in 2018. Consequently, our earnings forecast for the nickel miner increased by 61% to Php3.5Bil in 2017 and by 49.2% to Php4.3Bil in 2018.

Exhibit 5: NIKL - Summary of forecast changes


As for PX, we increased our full year assumption for average copper prices by 23% to US$2.70/lb (although we are retaining our gold price assumption at US$1,270/oz). These are based on the current price levels of copper and Bloomberg’s median consensus price forecast for gold. As a result, our copper revenue forecast increased by 22.7% to Php4.7Bil in 2017 and by 22.7% to Php4.7Bil in 2018. On the other hand, our gold revenue forecast slightly increased by 0.8% to Php6.5Bil for both 2017 and 2018.

Exhibit 6: PX - Summary of revenue forecast changes


Following the increase in our revenues forecast, our EBITDA estimate is now higher by 19.3% to Php4.4Bil for 2017 and also by 19.3% to Php4.4Bil in 2018. Our earnings forecast for PX increased by 31.7% to Php2.1Bil for 2017 and by 33.1% to Php2.0Bil for 2018.

Old New Old NewAverage contract price (US$/WMT) 20.70 25.40 22.7 22.37 27.44 22.7LME price (US$/lb) 4.90 5.20 6.2 5.29 6.00 13.4

2017E % Change 2018E % Change

Old New Old NewRevenues 14,712 16,123 9.6 15,853 17,362 9.5EBITDA 5,972 7,378 23.5 6,880 8,367 21.6

EBITDA margin (%) 40.6 45.8 - 43.4 48.2 -Net income 2,178 3,506 61.0 2,859 4,267 49.2

Net margin (%) 14.8 21.7 - 18.0 24.6 -

% Changein Php Mil

2017E % Change 2018E

Old New Old NewGold price ($/oz) 1,270 1,280 0.8 1,270 1,280 0.8

Gold revenues (Php Mil) 6,404 6,454 0.8 6,404 6,454 0.8Copper price ($/lb) 2.20 2.70 22.7 2.20 2.70 22.7

Copper revenues (Php Mil) 3,850 4,725 22.7 3,850 4,725 22.7

2018E % Change2017E % Change


TUE 17 OCT 2017


Exhibit 7: PX - Summary of forecast changes


Upgrading FV estimates, maintaining HOLD

In light of our higher earnings forecast, we are upgrading our fair value estimate for both NIKL and PX. For NIKL, we are increasing our FV estimate by 38% to Php7.60/sh. Meanwhile, we are increasing our FV estimate for PX by 17% to Php10.10/sh. Despite the huge increase in our FV estimates, we are still maintaining our HOLD recommendation for both stocks as the positives has already been priced in. Moreover, the local mining sector currently faces numerous regulatory risks.

Sensitivity analysis and risks

Upside risk: Further increase in metal prices

While we estimate that nickel, copper and gold prices will average at US$5.20/lb, US$2.70/lb and US$1,280/oz this year, further increases in prices would provide additional upside to NIKL and PX. Possible catalysts for this include stronger demand for nickel and copper as a result of a stronger global economy. Meanwhile, increasing geo political risks or higher than expected inflation would push up gold prices, benefiting PX.

For example, if nickel prices increased to an average of US$7.00/lb and average contract prices increased to US$38.9/WMT, our FV estimate for NIKL would increase to Php12.80/sh. This represents an upside of 84% from NIKL’s current price of Php6.97/sh.

Exhibit 8: NIKL - FV estimate sensitivity analysis


Old New Old NewNet revenues 8,808 10,389 17.9 8,808 10,389 17.9EBITDA 3,710 4,426 19.3 3,711 4,428 19.3

EBITDA margin (%) 42.1 42.6 - 42.1 42.6 -Core income 1,581 2,082 31.7 1,515 2,017 33.1

Core net margin (%) 18.0 20.0 - 17.2 19.4 -

in Php Mil2018E % Change2017E % Change

4.00 4.50 5.20 6.00 6.50 7.0017.6 4.4 4.8 5.3 5.9 6.2 6.620.3 5.2 5.5 6.0 6.6 7.0 7.422.9 5.9 6.3 6.8 7.4 7.8 8.10.0 6.7 7.1 7.6 8.2 8.6 8.9

28.3 7.5 7.9 8.4 9.0 9.3 9.730.9 8.3 8.6 9.1 9.7 10.1 10.533.6 9.0 9.4 9.9 10.5 10.9 11.236.3 9.8 10.2 10.7 11.3 11.7 12.038.9 10.6 11.0 11.5 12.1 12.4 12.8

LME nickel price (US$ per lb)

Cont

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pri

ce

(US$

/WM

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TUE 17 OCT 2017


Likewise, if gold prices reach an average of US$1,400/oz and copper prices increase to US$2.90/lb, our FV estimate would increase to Php13.00/sh. This represents an upside of 48% from PX’s current price of Php8.78/sh.

Exhibit 9: PX - FV estimate sensitivity analysis


Downside risk: Increased excise tax

During President Duterte’s 2nd State of the Nations Address (SONA), he firmly stated the he wants miners to stop exporting unprocessed mineral resources and that he would impose more taxes on the industry if they won’t follow the rulings of the DENR. In 2014, a bill was drafted to increase taxes on mining companies. In the draft bill, companies will either have to pay 10% tax on gross revenues or 45% to 55% tax on adjusted mining revenues plus a percentage of windfall profit, whichever leads to higher earnings for the government. Currently, mining companies only pay an excise tax of 2%.

If taxes were to increase following the 2014 drafted bill, we estimate NIKL’s earnings to decline by 25.7% to Php2.6Bil in 2017 and by 22.8% to Php3.3Bil in 2018. Meanwhile, we estimate PX’s net income to drop by 29.3% to Php1.5Bil in 2017 and by 30.3% to Php1.4Bil in 2018. Exhibit 10: NIKL - Sensitivity to excise taxes


10.1 2.50 2.60 2.70 2.80 2.901,100 6.50 7.20 7.90 8.60 9.201,200 7.80 8.40 9.10 9.80 10.501,280 8.80 9.40 10.10 10.80 11.501,400 10.20 10.90 11.60 12.30 13.001,500 11.50 12.20 12.80 13.50 14.201,600 12.70 13.40 14.10 14.80 15.40

Copper prices (US$ per lb)

Gol

d pr

ices

(U

S$ p

er o

z)

Old New Old NewRevenues 16,123 16,123 0.0 17,362 17,362 0.0EBITDA 7,378 6,088 (17.5) 8,367 8,367 0.0

EBITDA margin (%) 45.8 37.8 - 48.2 48.2 -EBIT 5,863.1 4,573.2 (22.0) 6,961.8 6,961.8 0.0

EBIT margin (%) 36.4 28.4 - 40.1 40.1 -Net income 3,506 2,604 (25.7) 4,267 3,295 (22.8)

Net margin (%) 21.7 16.2 - 24.6 19.0 -

in Php Mil2017E % Change 2018E % Change


TUE 17 OCT 2017


Exhibit 11: PX - Sensitivity to excise taxes


Downside risk: Regulatory overhang still looms

Despite having an attractive outlook due to higher metal prices, mining companies still face regulatory issues. Recall that earlier this year, former DENR secretary Gina Lopez ordered the closure of 21 mining operations in several areas of the country, noting that the mines were ruining nearby watersheds. Additionally, she imposed a ban on open-pit mining. The orders are still effective up to this date even though a new DENR chair is in place. If strictly imposed, both NIKL and PX will be affected by the previous secretary’s orders.

NIKL’s Hinatuan mine accounted for around 15% of NIKL’s earnings in FY2016 and has a remaining mine life of about three to five years. Given this, the impact of the Hinatuan mine’s suspension would reduce our FV estimate by 7% to Php6.70/sh.

Meanwhile, PX would stand to lose more as its upcoming Silangan mine accounts for bulk (around 80%) of PX’s value. As such, it would stand to lose significantly if the former secretary’s unfavorable orders were strictly enforced. PX already submitted and disclosed its reply to the DENR secretary’s show cause order. Under the reply, it stated that PX complies with all the regulations imposed by the DENR. PX still remains positive on its Silangan mine project, and even stated that its Definitive Feasibility Study (DFS) is on track to finish within the year. However, with the strong anti-mining stance of the government and the order that prohibits open-pit mining, the Silingan mine could face delays in its operations.

Old New Old NewNet revenues 10,389 10,389 0.0 10,389 10,389 0.0EBITDA 4,426 3,595 (18.8) 4,628 4,628 0.0

EBITDA margin (%) 42.6 34.6 - 44.5 44.5 -EBIT 2,934 2,103 (28.3) 3,040 3,040 0.0

EBIT margin (%) 28.2 20.2 29.3 29.3Core income 2,082 1,472 (29.3) 2,157 2,128 (1.3)

Core net margin (%) 20.0 14.2 - 20.8 20.5 -

in Php Mil2017E % Change 2018E % Change


TUE 17 OCT 2017


Nickel Asia Corporation (NIKL)

Nickel Asia Corporation (NIKL) primarily engages in the business of mining of all kinds of ore, metals and minerals and in the business of generation, transmission, distribution and supply of electricity to cities and other localities. The Company exports saprolite and limonite ore to customers in Japan, China and Australia. The Company owns four operating mines, namely: Rio Tuba, Taganito, Cagdianao and Taganaan sites, all of which are located in the southern half of the country. Apart from which, the Company has five properties in various stages of exploration for nickel.

COMPANY BACKGROUND

INCOME STATEMENT (IN PHPMIL)

FY14 FY15 FY16 FY17E FY18E FY19ERevenues 24,746 15,432 14,123 16,123 17,362 18,628 % Growth 122.7% -37.6% -8.5% 14.2% 7.7% 7.3%EBITDA 15,674 6,344 5,769 7,378 8,367 9,437 % Growth 225.8% -59.5% -9.1% 27.9% 13.4% 12.8%EBIT 14,300 4,904 4,072 5,863 6,962 8,122 % Growth 303.1% -65.7% -17.0% 44.0% 18.7% 16.7%EPS 1.13 0.27 0.26 0.46 0.56 0.67 % Growth 318.5% -76.1% -4.2% 78.4% 21.7% 18.5%

FY14 FY15 FY16 FY17E FY18E FY19ECash & Equivalents 13,562 7,073 9,797 11,432 11,971 12,161 Trade Receivables 1,431 962 893 1,018 1,100 1,183 Inventories 2,863 3,211 3,026 3,035 3,035 3,023 Other Current Assets 2,755 5,431 5,431 5,431 5,431 5,431 PPE 6,599 9,074 7,895 7,299 6,811 6,414 Other Non-Current Assets 7,973 15,894 16,533 17,502 18,309 19,372 Total Assets 35,184 41,646 43,575 45,717 46,658 47,584 Accounts Payable 1,483 7,126 6,590 6,779 6,813 6,821 ST Debts - 180 - - - - Other Current Liabilities 632 408 413 413 413 413 LT Debts 1,313 3,358 3,233 3,109 2,984 2,860 Other Non-Current Liabilities 854 1,162 1,163 1,158 1,153 1,148 Total Liabilities 4,282 12,233 11,399 11,459 11,363 11,242 Total Equity 30,902 29,413 32,176 34,259 35,295 36,342 Total Liabilities & Equity 35,184 41,646 43,575 45,717 46,658 47,584

BALANCE SHEET (IN PHPMIL)

CASHFLOW STATEMENT (IN PHPMIL)

FY14 FY15 FY16 FY17E FY18E FY19ENet Income 11,286 2,707 2,719 4,639 5,595 6,595 Depreciation & Amortization 1,373 1,440 1,697 1,515 1,405 1,316 Other Non-Cash Exp (Gains) (814) 420 414 (569) (807) (1,063) Decrease (Increase) in Working Cap (690) 292 (281) 55 (48) (63)Operating Cash Flow 11,155 4,858 4,548 5,639 6,146 6,785Capex (1,557) (3,909) (600) (1,000) (1,000) (1,000)Other Investments (779) (5,377) (318) (318) 82 82Investing Cash Flow (2,336) (9,286) (918) (1,318) (918) (918)Proceeds (Payment) Debts (116) 1,985 (298) (130) (130) (130)Payment of Cash Dividends (5,503) (4,304) (608) (2,556) (4,558) (5,547)Others 30 124 (1) (1) (1) (1)Financing Cash Flow (5,588) (2,195) (906) (2,686) (4,688) (5,677)Change in Cash 3,231 (6,622) 2,724 1,635 539 190

REVENUE BREAKDOWN

96.1%

3.9%

Sale of nickel Others

96.1%

3.9%

Sale of nickel Others


TUE 17 OCT 2017


Nickel prices rally to help boost earningsNickel price is currently on an uptrend mainly due to increased demand from China and EV production boom. Demand for nickel from China has significantly increased due to an uptick in the country’s economic growth. The manufacturing and the industrial sector’s demand for stainless steel increased. Since nickel is a primary raw material to produce stainless steel, we can expect demand for the metal to likewise increase. Additionally, the anticipation of an EV production boom also pushed up nickel prices. Investors are anticipating a boom in EVs as developed countries are starting to create regulations that would push automakers to build more EVs. The resulting boom in the demand for EV batteries as a result of increased production of EVs is expected to act as a tailwind for nickel prices in the next few years. With the increased nickel price, the company’s revenues will also be able to pick up and help earnings to grow moving forward.

Regulatory issues continues to make the industry bleakDENR secretary, Gina Lopez announced the closure of 21 mining operations in several areas in the country, noting that the mines were ruining nearby watersheds. Afterwhich, the secretary issued an order to cancel 75 mineral production sharing agreements (MPSA) for mining sites that are near watersheds. Although the commission on appointments rejected the appointment of Gina Lopez as the DENR secretary, the suspension on several mines and the cancellation of MPSA remains in effect. In addition, President Duterte mentioned in his SONA last July that he would impose more taxes on the mining industry. With the said developments, the outlook of the local mining industry remains cautious in the foreseeable future.

INVESTMENT THESIS: KEY RATIOS

FY14 FY15 FY16 FY17E FY18E FY19EEBITDA Margin (%) 63.3% 41.1% 40.8% 45.8% 48.2% 50.7%NPM (%) 34.6% 13.2% 13.9% 21.7% 24.6% 27.1%Current Ratio (X) 8.44 1.46 1.96 2.15 2.23 2.26Days Receivable 21.72 23.74 24.00 24.00 24.00 24.00Days Inventory 195.10 186.66 187.00 187.00 187.00 187.00Days Payable 85.72 361.63 362.00 362.00 362.00 362.00Asset T/O (%) 70.3% 37.1% 32.4% 35.3% 37.2% 39.1%


TUE 17 OCT 2017


Valuation Methodology

Risk premium 5.0%Risk free rate 5.0%Beta 1.10Cost of equity 10.5%Cost of debt 2.1%Tax rate 30.0%WACC 8.8%

Enterprise value 45,869Less: (Net debt) / net cash 12,229Equity value 58,098Number of outstanding shares (Mil) 7,603Equity value per share 7.60

VALUATION ASSUMPTIONS

RELATIVE VALUATION

17E 18E 17E 18EPhilex Mining Corp. 21.0 20.3 25.7% 3.6%Oceanagold Corp. 12.5 12.2 9.3% 3.2%Atlas Consolidated Mining 22.7 29.4 n/a -22.7%HudBay Minerals Inc. 18.5 11.2 n/a 65.1%Zijin Mining Group Co Ltd 14.3 12.2 83.0% 17.0%Minera Frisco SAB de CV 6.8 15.6 n/a n/aNickel Asia Corp. 15.1 12.4 78.4% 0.6%Median ex-NIKL 16.4 13.9 25.7% 3.6%

P/E EPS Growth


TUE 17 OCT 2017


Philex Mining Corporation (PX)

Philex Mining Corp. (PX) is a mining company engaged in the exploration, development, and production of metallic minerals and petroleum. Most of the company’s revenues come from the sale of copper and gold concentrates. It currently operates the Padcal mine in Benguet, whose mine life is expected to last until the year 2022. PX is currently engaged in exploration efforts in Padcal in order to extend its mine life. The company is also gearing up to develop the Silangan mine, which is expected to be the company’s next operating mine. The Silangan project is currently on hold due to regulatory issues

COMPANY BACKGROUND

REVENUE BREAKDOWN

INCOME STATEMENT (IN PHPMIL)

FY14 FY15 FY16 FY17E FY18E FY19ERevenues 10,048 8,525 9,378 10,389 10,389 10,389 % Growth 2.5% -15.2% 10.0% 10.8% 0.0% 0.0%EBITDA 3,324 2,770 3,661 4,426 4,428 4,433 % Growth 14.1% -16.7% 32.2% 20.9% 0.0% 0.1%EBIT 1,633 1,201 2,478 2,934 2,840 2,457 % Growth 11.5% -26.5% 106.3% 18.4% -3.2% -13.5%Core EPS 0.23 0.18 0.34 0.42 0.41 0.35 % Growth -25.7% -19.4% 83.0% 25.7% -3.2% -13.2%

FY14 FY15 FY16 FY17E FY18E FY19ECash & Equivalents 5,232 1,009 1,985 2,117 3,392 3,563 Trade Receivables 1,056 897 990 1,082 1,082 1,082 Inventories 1,858 1,887 1,756 1,786 1,813 1,923 Other Current Assets 1,385 1,479 1,522 1,662 1,662 1,662 PPE 7,139 6,828 6,689 6,434 6,066 5,590 Other Non-Current Assets 27,971 31,450 32,995 34,559 36,139 36,139 Total Assets 44,640 43,549 45,938 47,639 50,154 49,958 Accounts Payable 1,796 1,448 1,371 1,404 1,423 1,502 ST Debts 4,308 3,318 3,318 3,318 3,318 3,318 Other Current Liabilities 1,419 949 949 949 949 949 LT Debts 5,947 6,259 7,259 7,259 8,259 9,259 Other Non-Current Liabilities 4,128 4,291 4,291 4,291 4,291 4,291 Total Liabilities 17,599 16,265 17,188 17,220 18,240 19,318 Total Equity 27,042 27,284 28,750 30,418 31,914 30,640 Total Liabilities & Equity 44,640 43,549 45,938 47,639 50,154 49,958

BALANCE SHEET (IN PHPMIL)

CASHFLOW STATEMENT (IN PHPMIL)

FY14 FY15 FY16 FY17E FY18E FY19ENet Income 1,054 1,142 2,306 2,975 2,881 2,500 Depreciation & Amortization 1,691 1,568 1,393 1,492 1,587 1,976 Other Non-Cash Exp (Gains) (413) (618) (692) (892) (864) (750) Interest Expense (Income) 354 0 0 0 0 0Decrease (Increase) in Working Cap (899) (626) (82) (229) (8) (31)Operating Cash Flow 1,788 1,466 2,925 3,345 3,596 3,695Capex (2,354) (1,390) (1,500) (1,500) (1,500) (1,500)Other Investments (3,108) (3,019) (1,300) (1,300) (1,300) 0Investing Cash Flow (5,462) (4,408) (2,800) (2,800) (2,800) (1,500)Proceeds (Payment) Debts (4,935) (4,192) 1,000 0 1,000 1,000Payment of Cash Dividends (367) (108) (148) (413) (521) (3,025)Others 10,127 3,016 0 0 0 0Financing Cash Flow 4,825 (1,284) 852 (413) 479 (2,025)Change in Cash 1,151 (4,227) 977 131 1,276 170

58.0%

41.2%

0.8%

Gold Copper Silver

58.0%

41.2%

0.8%

Gold Copper Silver


TUE 17 OCT 2017


Coppery prices on acontinuous uptrend due to Chinese economic recoveryCopper prices have been on a continuous uptrend since last year, reaching a high of US$3.16/lb this month, up 44% y/y. The strong uptrend of copper price was mainly driven by the acceleration in Chinese manufacturing and the tight supply situation brought about by strikes in Chilean mines. China remains one of the top importers of copper and its demand heavily affects prices in the world market. This year, China factories grew at the fastest pace in over five years as output prices and demand improve to the highest level. For example, China’s Purchasing Managers’ Index or PMI (an indicator of economic health of the manufacturing sector) reached 52.4 in September, up from 51.7 in August and well above the 50-point mark that separates growth from contraction on a monthly basis. This marked the 14th straight month of expansion for China’s manufacturing industry and the highest reading since April 2012.

Regulatory issues continues to make the industry bleakDENR secretary, Gina Lopez announced the closure of 21 mining operations in several areas in the country, noting that the mines were ruining nearby watersheds. Afterwhich, the secretary issued an order to cancel 75 mineral production sharing agreements (MPSA) for mining sites that are near watersheds, including PX’s Silangan mine. Although the commission on appointments rejected the appointment of Gina Lopez as the DENR secretary, the suspension on several mines and the cancellation of MPSA remains in effect. In addition, President Duterte mentioned in his SONA last July that he would impose more taxes on the mining industry. With the said developments, the outlook of the local mining industry remains cautious in the foreseeable future.

INVESTMENT THESIS: KEY RATIOS

FY14 FY15 FY16 FY17E FY18E FY19EEBITDA Margin (%) 33.1% 32.5% 39.0% 42.6% 42.6% 42.7%NPM (%) 11.2% 10.6% 17.7% 20.0% 19.4% 16.8%Current Ratio (X) 1.08 0.66 0.84 0.88 1.11 1.14Days Receivable 38.35 38.43 38.00 38.00 38.00 38.00Days Inventory 97.39 110.03 105.00 105.00 105.00 105.00Days Payable 82.89 76.77 75.00 75.00 75.00 75.00Asset T/O (%) 22.5% 19.6% 20.4% 21.8% 20.7% 20.8%ROAE (%) 4.4% 3.7% 6.5% 7.7% 7.1% 6.1%


TUE 17 OCT 2017


Valuation Methodology

Risk premium 5.0%Risk free rate 5.0%Beta 1.30Cost of equity 11.5%Cost of debt 5.3%Tax rate 30.0%WACC 8.4%

Enterprise value 58,690Less: (Net debt) / net cash -8,591Equity value 50,098Number of outstanding shares (Mil) 4,940Equity value per share 10.10

VALUATION ASSUMPTIONS

RELATIVE VALUATION

17E 18E 17E 18ENickel Asia Corp. 15.1 12.4 78.4% 0.6%Oceanagold Corp. 12.5 12.2 9.3% 3.2%Atlas Consolidated Mining 22.7 29.4 n/a -22.7%HudBay Minerals Inc. 18.5 11.2 n/a 65.1%Zijin Mining Group Co Ltd 14.3 12.2 83.0% 17.0%Minera Frisco SAB de CV 6.8 15.6 n/a n/aPhilex Mining Corp. 21.0 20.3 25.7% 3.6%Median ex-PX 14.7 12.3 78.4% 3.2%

P/E EPS Growth


TUE 17 OCT 2017


APRIL LYNN TAN, CFAVP & HEAD OF [email protected]

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFADEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH [email protected] [email protected] [email protected]

FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENGRESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST [email protected] [email protected] [email protected]

KYLE JEMMRIC VELASCO JOHN MARTIN LUCIANO ADRIAN ALEXANDER YURESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST [email protected] [email protected] [email protected]

COL FINANCIAL GROUP, INC.2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITYPHILIPPINES 1605 TEL NO. +632 636-5411FAX NO. +632 635-4632WEBSITE: www.colfinancial.com

IMPORTANT RATING DEFINITIONS

IMPORTANT DISCLAIMER

BUYStocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to

12 months.

HOLDStocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor

or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve

months.

SELLWe dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.

Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be

incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change

without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/

or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade

them in ways different from those discussed in this report.

COL RESEARCH TEAM

Documents

HOLD - COL Financial · 10/17/2017 · Mining company share prices rally due to rising mineral prices. ... 8% by 2018 and 12% by 2020. EVs use a Nickel-Cobalt-Aluminum (NCA) chemistry