New Stock Outlook: Will the price increase of main products slow down, prompting Zhihui Mining to shift towards underground mining to increase production and compensate for the price?

In recent years, with the resurgence of global economic and trade environment and the deep interweaving of complexity and uncertainty, prices of risk assets have generally declined. Among them, zinc, as a variety with weak fundamentals, has shown a downward trend in its operating range under the expectation of economic recession. Taking the price of zinc concentrate as an example, a third-party organization predicts that the average price of zinc concentrate this year will be around 18,601 yuan/ton, compared to 19,020 yuan/ton in the same period last year. Looking ahead to 2026-2028, influenced by supply and demand relationships, the domestic price of zinc concentrate is expected to show a trend of minor increase followed by a decline, ranging from 18,904 yuan/ton in 2026 to 18,848 yuan/ton in 2028. GMTEight noted that recently, Tibet Zhixiong Mining Co., Ltd. (hereinafter referred to as "Zhixiong Mining"), which is engaged in the exploration, mining, production, and sales of zinc, lead, and copper concentrates, submitted an application for listing on the Main Board of the Hong Kong Stock Exchange. The prospectus shows that Zhixiong Mining's mining operations are located in Rongduo Township, Jalai County, Nagqu City, Tibet. From 2022 to 2024, based on the average annual production of zinc concentrate, lead concentrate, and copper concentrate, Zhixiong Mining ranks second, third, and fifth in Tibet, respectively. Aiming to fulfill its dream of listing on the Hong Kong Stock Exchange, it is worth noting that Zhixiong Mining's stability in the past seems to be less than ideal. Especially in 2024, the company's revenue and profit indicators experienced varying degrees of decline. The negative growth in performance may have an impact on Zhixiong Mining's prospects for going public, which is worth paying attention to. Pause in production disrupts growth momentum? Zhixiong Mining's operating history can be traced back to 2013. Since its establishment, the company has always utilized the unique geological conditions and abundant mineral resources in Tibet, and has obtained government support for various favorable measures implemented in the mining industry in the region. Over the years, Zhixiong Mining's revenue has mainly been contributed by zinc concentrate, lead concentrate, and copper concentrate. From 2022 to 2024, the company's revenues were 482 million yuan, 546 million yuan, and 301 million yuan. During this period, zinc concentrate has always been the largest source of revenue for Zhixiong Mining, accounting for 61.4%, 50.1%, and 71.6% in 2022, 2023, and 2024, respectively. During the same period, the lead concentrate business contributed revenues of 160 million yuan, 223 million yuan, and 71.512 million yuan, accounting for 33.2%, 40.8%, and 23.7%, respectively; while copper concentrate achieved revenues of 25.859 million yuan, 49.602 million yuan, and 14.111 million yuan, accounting for 5.4%, 9.1%, and 4.7%, respectively. It is evident that Zhixiong Mining's major business revenues in 2024 have shrunk to varying degrees compared to the previous year. According to the company's disclosure, this is mainly because in that year, two production lines of the selection plant of Zhixiong Mining were temporarily suspended for upgrade, leading to a decrease in the number of days of ore selection at the plant. The data shows that in 2024, Zhixiong Mining's total concentrate sales volume was 16,176 tons, compared to 37,135 tons in the previous year. The revenue in 2024 failed to continue its growth momentum, and in the same year, Zhixiong Mining's profit indicators also experienced negative growth. The financial report shows that in 2024, Zhixiong Mining's gross profit was 104 million yuan, compared to 218 million yuan in the previous year. In terms of gross profit margin, in 2024, Zhixiong Mining's gross profit margin was 34.7%, a decrease of 5.2 percentage points from the previous year. Further analysis shows that the sharp drop in the lead concentrate gross profit margin was the main reason affecting the overall profit capability of the company in that year, which was due to factors such as decreased ore grade, increased unit production cost due to reduced ore and selection volume. The gross profit margin of lead concentrate of Zhixiong Mining dropped from 49% in the previous year to 37.6%. Zhixiong Mining's net profit attributable to shareholders in 2024 was 55.854 million yuan, which represents a significant decrease compared to 155 million yuan in 2023 and 118 million yuan in 2022. Underground mining contributing to incremental growth? According to the prospectus, Zhixiong Mining's operations are mainly based on the Monyaa Mining, which includes an open-pit mine, an underground mining project under development, a base camp comprehensive facility, a selection plant, and two tailings ponds. The open-pit mine has been in commercial operation since 2007, while the underground mine is located about 3 kilometers east of the open-pit mine, and is expected to enter commercial operation in the second half of this year. By the end of 2024, the total ore reserves of the open-pit mine of Zhixiong Mining were 1.548 million tons, with average grades of 4.89% zinc, 0.65% lead, 0.1% copper, and 9.62 grams/ton silver. At the same time, the total ore reserves of the underground mining project of Zhixiong Mining were 10.626 million tons, with average grades of 4.15% zinc, 2.99% lead, 0.21% copper, and 35.05 grams/ton silver. It is reported that after the completion of the underground mining project, the Monyaa Mining of Zhixiong Mining will be able to supply a total of 400,000 tons of ore annually for concentrate production at the selection plant. It is not difficult to see the differences in resource endowment, and it is expected that the subsequent commercial operation of Zhixiong Mining's underground mining project will have a significantly positive impact on the company's scale. However, as mentioned at the beginning, currently affected by multiple unfavorable factors such as global macroeconomic and market sentiment, prices of risk assets are generally under pressure. In 2024, the average sales prices of zinc concentrate, lead concentrate, and copper concentrate of Zhixiong Mining were 17,510 yuan/ton, 19,496 yuan/ton, and 77,109 yuan/ton respectively, representing an increase of 50.6%, 12%, and 22.8% compared to the previous year. Considering that the price of zinc concentrate may fluctuate narrowly from this year to 2028, it also suggests that Zhixiong Mining may find it difficult to replicate the significant increase in the price of zinc concentrate under its umbrella last year. In addition, the prices of lead concentrate and copper concentrate are expected to fluctuate narrowly in the next few years, with the price of lead concentrate expected to increase slightly from 16,678 yuan/ton in 2025 to 16,825 yuan/ton in 2028, and the price of copper concentrate expected to increase from 71,998 yuan/ton in 2025 to 73,986 yuan/ton in 2028. The upward trend in the prices of main products is expected to slow down, which may also indicate that Zhixiong Mining's main""content just got cut off, therefore I actually don't know what happened afterward.The highlight is the commercialization progress and its impact of the underground mining project.However, it should be noted that due to geological conditions, underground operations are generally more difficult and complex than surface operations. Underground mining also produces more waste and tailings, increasing uncontrollable risks. Therefore, it may take more time to verify how much profit underground mining projects of Smart Mining can bring to the company. In the future, it remains to be seen whether Smart Mining, whose performance growth momentum has been interrupted, can quickly turn the tide and even capture the hearts of Hong Kong stock market investors with its fundamentals. GMTEight will continue to keep an eye on this.