New stock preview | Jiaxin International: Burning more than 1.3 billion in capital expenditure for 4 years, tungsten mine "giant" goes to Hong Kong to "replenish blood"

Tungsten is a rare material with excellent features such as high melting point, high density, high hardness, high wear resistance, and stable chemical performance. Tungsten products are commonly used in various fields such as mechanical manufacturing, electric power resources, and national defense industries. In the first half of 2024, the price of tungsten was driven by macroeconomic factors and fundamentals. The domestic tungsten price showed an upward trend, with an overall shift towards higher prices. According to data from Antaike, the average price of domestic black tungsten concentrate (65%WO3) was 134,400 yuan/ton in the period from January to June 2024, a 13.04% increase compared to the same period in 2023. Against this backdrop, G-RESOURCES Investment Limited, a tungsten mining company rooted in Kazakhstan, also known as Jiaxin International, submitted an application for listing on the main board of the Hong Kong Stock Exchange, with CICC as its exclusive sponsor. Possessing the world's fourth-largest tungsten mine, the commercial production is expected in 2025 The prospectus shows that Jiaxin International is a tungsten mining company based in Kazakhstan, focusing on the development of the Bakuta tungsten mine. The Bakuta tungsten mine is located in southeastern Kazakhstan, about 180 kilometers east of Almaty and 160 kilometers west of the Chinese border. According to Frost & Sullivan data, as of June 30, 2024, the Bakuta tungsten mine is the world's largest open-pit tungsten mine with a total estimated resource of tungsten trioxide (WO3), and also the world's fourth-largest tungsten mine in terms of WO3 resource volume (including open-pit and underground tungsten mines), with the largest designed tungsten mining capacity in a single tungsten mine. During the reporting period, Jiaxin International mainly focused on preparing for the commercial production of the Bakuta tungsten mine project. It is expected that the project will enter a trial production phase in the fourth quarter of 2024 to test and fine-tune the processing flow, with a target mining and mineral processing capacity of 600,000 tons of tungsten ore in 2024. Commercial production is expected to commence in the first quarter of 2025, with a target annual mining and mineral processing capacity of 3.3 million tons of tungsten ore in 2025. As of August 9, 2024, the company only had one mine (the Bakuta tungsten mine), and its recent revenue depends on this mine. According to an independent technical report as of June 30, 2024, based on the JORC rules, Jiaxin International's estimated mineral resource at the Bakuta tungsten mine is approximately 110 million tons of ore containing 0.211% WO3 (equivalent to 233,200 tons of WO3), including 98.5 million tons of measured resources (0.209% WO3) and 11.9 million tons of inferred resources (0.228% WO3). As of the same date, based on the guidelines of the JORC rules, the proven ore reserves at the Bakuta tungsten mine are 708 million tons of ore with an average grade of 0.205% WO3, equivalent to 145,400 tons of WO3. Jiaxin International plans to integrate the ore sorting system into the existing mining process by 2027, increasing the target annual mining and mineral processing capacity of tungsten ore to 495,000 tons, and further constructing a deep processing plant to produce high-quality ammonium paratungstate (APT) and tungsten carbide (WC). The company also plans to explore more opportunities to invest in non-ferrous metal resources in Central Asia. In July 2023, it signed a memorandum of understanding with the relevant authorities in Kazakhstan to explore potential cooperation in other new areas in the future. Financially, the Bakuta tungsten mine project was in the exploration and development phase during the entire reporting period, and therefore, Jiaxin International did not recognize any revenue. For the years ending in 2021, 2022, 2023, and September 30, 2024, the company reported losses of 26.117 million Hong Kong dollars, 94.45 million Hong Kong dollars, 80.129 million Hong Kong dollars, and 64.969 million Hong Kong dollars. Global tungsten demand gap expected to widen According to Frost & Sullivan reports, global tungsten reserves increased from around 3.3 million tons in 2018 to 4.4 million tons in 2023, with a compound annual growth rate of 5.9%. In 2023, global tungsten production was 78,000 tons, and global tungsten consumption was approximately 124.1 million tons, resulting in a gap of 46.1 million tons, reflecting the scarcity of tungsten resources and strong demand. Looking ahead, with the continuous increase in downstream market demand for tungsten, such as the photovoltaic (PV) industry which also consumes a large amount of tungsten, it is expected that tungsten consumption will reach 151.1 million tons by 2028, with a compound annual growth rate of 4%. In 2023, China was the country with the largest tungsten reserves, accounting for over 50% of global tungsten reserves. To protect its national reserves, the Chinese Ministry of Natural Resources issues annual tungsten mining quotas. Chinese tungsten production decreased from 65,000 tons in 2018 to 63,400 tons in 2023, with a compound annual growth rate of -0.5%. The market expects domestic tungsten production to reach 55,400 tons by 2028, with a compound annual growth rate of -2.7% from 2023 to 2028. Frost & Sullivan believes that due to restrictions on Chinese tungsten exports and the large gap between tungsten production and consumption, there may be strong growth in the demand for tungsten exports from Kazakhstan. Jiaxin International faces high capital expenditures It should be noted that while Jiaxin International is expected to benefit from the growth in global tungsten demand in the future, in order to achieve the "planned usable state" of its tungsten mining projects and maintain normal operation, the company is still facing high capital costs and operational costs. According to the prospectus, Jiaxin International has incurred capital costs for the Bakuta tungsten mine project since 2020. The total capital costs incurred from 2020 to June 2024 amounted to 1.329 billion yuan. The initial development of the Bakuta tungsten mine project, followed by the elevation of the tailings dam and the closure of the mine, are expected to incur a total estimated capital cost of 2.613 billion yuan, with a projected capital unit cost for the entire mine service life of 36 yuan/ton of ore and 14,600 yuan/ton of concentrate. As for operating costs, the total operating cash cost for the Bakuta tungsten mine project in 2025 is estimated to be 570 million yuan, with a unit operating cash cost of 197 yuan per ton of ore and 80,900 yuan per ton of concentrate. By 2027, due to the expected target production of 4.95 million tons per year at the Bakuta tungsten mine project, and the installation of a second-phase commercial production ore sorting system, the total estimated operating cash cost from 2027 onwards is expected to increase.The total investment will reach 673 million RMB, and the operating cash cost per ton of ore is expected to decrease significantly to 134 RMB and the concentrate is expected to decrease to 61,100 RMB per ton.The prospectus shows that as of June 30, 2024, Jiaxin International had cash and cash equivalents of 173 million Hong Kong dollars, a significant decrease from the end of 2023. Jiaxin International stated in the prospectus that the company mainly relies on bank loans and internal funds to provide capital expenditures. The future working capital, payment of other payables, and repayment of outstanding debt will depend mainly on whether the company can generate sufficient cash flow from its operations and obtain adequate external financing. Jiaxin International also pointed out that due to the company's past net losses and limited funds, it cannot guarantee that it will be able to generate sufficient cash flow from operations in the future, or may not be able to provide funding for the company's operations at all. The company may need to seek additional financing through equity or debt financing, or may be forced to reduce or delay capital expenditures, thus the company may not be able to implement development plans as planned.