The author is an analyst at NH Investment & Securities. He can be contacted at [email protected] — Ed.
Metal prices are adjusting to monetary tightness in the United States, Covid-19 lockdowns in China and the Russian-Ukrainian war. For Korea Zinc, the investment points focus on activities that promise to drive EVs, including creating stable earnings, strong shareholder returns, entering new growth businesses and expanding the business. environmentally friendly energy use.
Expectations for EV growth remain valid despite metal price adjustment
While respecting a buy rating, we are lowering our TP on Korean zinc (010130.KS) by 11.5%, from 780,000 W to 690,000 W. Our new TP corresponds to a P/E 2022E of 16 .5x and a P/B of 1.6x (ROE of 10.1%). Reflecting the metal price adjustments taking place in May, we are cutting our 2022 and 2023 EPS forecasts by 8.6% and 13.0%, respectively. In calculating our TP, we take into account concerns about the economic slowdown due to the prolonged impacts of the Covid-19 lockdowns in China and the aggressive monetary tightening in the United States.
Although we are reducing our TP, we maintain our positive outlook for the company’s electric vehicle growth. Despite past changes in the macroeconomic environment, Korea Zinc continued to generate stable earnings while remaining active in returning to shareholders via dividends (2022E DY of 3.6%). Following its planned production of copper foil for electric vehicles from October 2022, the company is expected to continue its growth by entering the activities of rechargeable battery precursors and recycling of used batteries. Korea Zinc’s conversion to environmentally friendly energy use through the renewable energy and hydrogen business also represents a solid long-term investment point.
The impacts of an unfavorable macroeconomic environment and falling metal prices will be limited; TC profits up
We have reduced our metal price assumptions for 2022E corporate earnings by 5.0% for zinc, 6.1% for lead and 4.5% for silver. Affected by: 1) the aggressive monetary policy of the US Fed (rise in key rates + quantitative tightening); 2) Covid-19 lockdowns in China; and 3) the Russian-Ukrainian war situation, market interest has expanded from supply chain disruptions to concerns about economic recession, and metal prices have entered an adjustment phase. Increased financial market volatility is also weighing on metal prices.
On April 19, the price of zinc climbed to US$4,563/tonne, the highest level since December 2006. From May 3, it then fell below US$4,000/tonne, and on May 18 , the price stood at US$3,629/tonne, having fallen 20.5% from the peak. Zinc price adjustment is expected to impact Korea Zinc earnings in 2Q22 and 3Q22. It is noted that zinc prices affect the headquarters (produces 640,000 tonnes of zinc in 2021), the Australian subsidiary SMC (210,000 tonnes) and Zinc Oxide Corporation (49,000 tonnes of crude zinc oxide (HZO)). For reference, a zinc price fluctuation of USD 100/tonne is likely to move the global annual PO by about 20 billion W.
Against a backdrop of rising electricity costs resulting from an overall rise in energy prices, bottlenecks at zinc smelters in Europe and North America are expected to persist for some time. However, restrictions on metallic zinc production are both supporting zinc prices and driving growth in treatment charge (TC) revenues. On May 18, the spot TC for zinc concentrate rose to 245 USD/tonne (vs. 83 USD/tonne at the end of 2021).