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1、,Analyst,Contact,Liu Li,Sector:Non-ferrous metal,Jan 25 2013OverweightYe PeipeiA0230210060002Tel:021-Tel:021-Add.：99,East Nanjing Rd.ShanghaiTel:（8621）23297818SWS Research Co.,Ltd.http:/,Optimistic On Molybdenum Prices,Top Pick isJuducheng Molybdenum-Molybdenum in-depth researchInvestment rating and
2、 valuation:we upgrade the industry rating to Overweight andtake Jinduicheng Molybdenum as top pick.Meanwhile we lift its earnings forecast andits rating to BUY.Under our price assumptions(RMB 1632/ton,RMB 2000/ton andRMB 2200/ton from 2012-2014),we lift its EPS from formerly RMB 0.16/share,RMB0.19/s
3、hare and RMB 0.22/share to RMB 0.16/share,RMB 0.31/share and RMB0.40/share in 2012-2014,corresponding to closing price of RMB 11.9 on January 15,2013 with PE at 74x,38x and 30 x respectively.Base on continual upside ofmolybdenum price due to improving supply from 2013-2014,Jinduicheng Molybdenum its
4、elf produces 17,000/17,000 tons.Opinions vs market consensus:The market may believe molybdenum price surge isunsustainable.But in our view,structure of rebalance between supply&demand willhelp molybdenum price to go up continually.With the recovery of iron&steel demandsince 4Q12,molybdenum demand is
5、 expected to be in a growth track again.In termsof supply,as its price is still higher than average cost of high-cost primary mine,suspended mines is unlikely to resume production in short term,so supply&demandreturns to balanced state again.But in a long-term,mounting iron&steel demand andrising mo
6、lybdenum contained in steel/ton will enable molybdenum consumption toreturn growth track again.The supply will be difficult to increase considerably underthe constraint of policy and geographic condition,relatively high concentration levelensure the transmission of molybdenum price to downstream.We
7、expect supply&demand equilibrium will remain in 2013.Molybdenum price is expected to return to anaverage level of RMB 2730/ton in next two years,but from short-term perspective,lower-than-marginal-cost molybdenum price is expected to see sustainable surge in arecently intensive high bidding season f
8、or steel plants(it has soared 20%in recenttwo weeks).2.The market may believe high PE will curb price upside of JinduichengMolybdenum,but we think high attention to molybdenum will fully reflect on its shareprice.Its PE is lower than historical average of 78x.In history,several surgesoccurred when P
9、E was far higher than 78x.Corresponding to significant increase ofiron ore,coking coal and similar products,Jinduicheng Molybdenum has not factoredin positive performance of substantial rise of molybdenum price.We believe lowattention is the major reason for the Companys share price insensitive to m
10、ountingmolybdenum price.With continual slide of molybdenum price,since May 2011,itschange-hand rate dropped to a very low level.Recently it is even below 0.5%.Historically,the Companys share price was highly resilient to molybdenum pricewhen change-hand rate was relatively high.Therefore,we believe
11、improving attentionwill help the Company to show a supplementary upside because of positive news,stimulation.Average resilience of the Companys share price to molybdenum priceupside is 5.9(if molybdenum price goes up 10%,share price surges 59%onaverage).Catalysts of share price performance:molybdenu
12、m price goes up continually,militaryindustry and other emerging sectors bring about incremental demand.Assumption of core risk:higher-than-expected incremental mining supply in 2013,iron&steel output falls short of expectations.The company does not hold any equities or derivatives of the listed comp
13、any mentioned in this report(“target”),but then we shall provide financial advisory services subject to therelevant laws and regulations.Any affiliates of the company may hold equities of the target,which may exceed 1 percent of issued shares,subject to the relevant laws and regulations.The company
14、may also provide investment banking services to the target.The Company fulfills its duty of disclosure within its sphere of knowledge.The clients may for relevant disclosure materials or log into under disclosure column for further information.The clients shall have a,1,Jan 2013,Sector Research,Tabl
15、e of contents1.Molybdenum:Represents Future Chinese Advantages In SmallMetals.41.1 China Has Advantage In Molybdenum,Has Strong PricingCapability.51.2 Terminal Demand Has Huge Room,Metal Represents TheFuture.72.Steel Demand Recovers,Supply Is Limited,Supply/DemandReturns To Balance.112.1 Steel Busin
16、ess Rebound Allows Molybdenum Consumption ToReturn To Growth Channel.112.2 Long-term Supply Growth Constraints,Hard For High-CostCapacity To Resume In Short-run.142.3 Return To Balance After Several Years,Support MolybdenumPrices Returning To Reasonable Levels.183.Jinduicheng Molybdenum:Earnings Imp
17、rovement and a focuson share price.213.1 Competitive advantages in resources,costs and deepprocessing.213.2 Corporate earnings have great elasticity,rising molybdenumprices will gradually lower PE.233.3 Share price shows great resilience to molybdenum price,improved market focus will stimulate share
18、 price.244.Investment suggestion:Molybdenum Industry Optimistic,Jinduicheng Molybdenum is top pick.27,Please refer to Important Disclosures on last page,SWS Research,2,Jan 2013,Sector Research,Graphs and TablesGraph 1:molybdenum price is highly elastic in history,compressed by anemic demand for most
19、 of the past four years.5Graph 2:Molybdenum industrial and production process.5Graph 3:Worldwide molybdenum reserve distribution chart.6Graph 4：Worldwide molybdenum resources distribution chart.6Graph 5:Worldwide molybdenum ouptut distribution in 2011.6Graph 7:Output has surged in China since 2007.6
20、Graph 8:Demand of molybdenum industry chain.7Graph 9:80%of primary consumption used by steel.8Graph 10:Terminal consumption mainly in energy,infrastructure,and transportation.8Table 1：China nuclear power development during 12th Five YearPlan period will consumes 3,000 tons of molybdenum.10Table 2：Co
21、ntent of molybdenum per ton of steel rises incessantly,still a gap exists with the global average.12Table 3：Steel industry update will increase molybdenum contentper ton.13Graph 11:Year-on-year growth in steel ouput accelerated in the 4thquarter.13Graph 12:Proportion of associated ore fell in trend.
22、14Table 4：Growth in associated molybdenum mines slowed becauseof copper concentrate mines.15Table 5：Policies limiting entry and controlling supply,greaterintegration efforts.15Table 6：Threshold of smelting capacity raised,concentration riseyear by year.16Table 7:Current price still below operation c
23、ost at high costprimary mines.17Table 8:Overseas mines new projects were delayed.18Table 9:Supply/demand improved,from excess supply to weakbalance.19Graph 13:Molybdenum prices may revert to average amidbalanced supply/demand.20Graph 14：Higher steel price sent molybdenum price rapidly higher.21Graph
24、 15：High level oil price drives molybdenum price.21,Please refer to Important Disclosures on last page,SWS Research,3,Jan 2013,Sector Research,Table 10：Global leader in resources and resource grade.21Table 11：Proportion of deep processing gradually rising.22Table 12:Jinduicheng Molybdenum earnings e
25、lasticity table.23Table 13:Table of comparable PE ratios.24Graph 16:High correlation between molybdenum and iron oreprices.25Graph 17:Shandong Jinling Mining share price gained 64%recently.25Graph 18:High correlation between molybdenum and coke coalprices.25Graph 19:Shanxi Coal share price gained 35
26、%recently.25Graph 20:Surge in share price of Jinduicheng Molybdenumhistorically occurred when PE was high.26Graph 21:Lack of market attention results in share price becominginsensitive to positive news.26Graph 22:The average move in share price to molybdenum pricehas been as great as six times since
27、 2009.27,Please refer to Important Disclosures on last page,SWS Research,4,Jan 2013,Sector Research,1.Molybdenum:Represents Future ChineseAdvantages In Small MetalsMolybdenum,a type of precious and rare high-melting metals,is animportant strategic material,and a crucial alloy used to produce alloy s
28、teel,stainless steel,heat-resistant steel,and alloy cast iron.Molybdenum andits related alloys are characterized by good thermal conductivity,electricalconductivity,low thermal expansion coefficient,heat resistance,abrasionresistance,corrosion resistance,and chemical stability.Molybdenum metals are
29、primarily used for steel production.Secondly,they are used in the energy,infrastructure,transportation,aviation,airline,and defense sectors.Molybdenum metals are also widely applied inemerging fields such as nuclear power,photovoltaic,LCD,sensors anddefense materials.Thus,it is being regarded as“a m
30、etal that reflective ofthe future”.Chinese reserves of molybdenum account for 42%of the global aggregate,while output was 40%of the worldwide total in 2012.In addition,Chinesemolybdenum mines are mainly primary ore with high grade and lowimpurity substances.Thus,China has strong ability in pricing t
31、his metal.Molybdenum prices were highly elastic historically.Have hovered at newlow levels because of demand pressures since October 2008.In 2004 and2005,when there were expectations of possible government policieslimiting entry and steel demand was booming,molybdenum prices surgedand had remained a
32、t high levels since amid a balanced supply/demand,relationship,once reaching as high as 6,250 yuan per ton.,Ignited by,skyrocketing prices,mines accelerated production capacity growth,andprices remained at high levels of 4,000 yuan per ton for most of the timefrom 2006 to 2008 because of strong dema
33、nd.The financial crisis swiftlysent steel output sharply lower and molybdenum prices plunged inOctober 2008,once falling as low as 1,450 yuan per ton.Despite a slightrebound in 2009 and 2010 on account of demand,the extent of thedemand recovery was insufficient,causing excessive supply,sending thepr
34、ice of molybdenum in a downward tunnel since 2009.Average price in2012 hit 1,632 yuan per ton,which was drastically lower than the averageprice of 2,730 yuan from 2004 till the present time.It was also lower thanthe cost of producing high-cost primary ore at 1,800 yuan per ton.Theuninterrupted drop
35、in prices in recent years has basically helped completethe process of active capacity disposal and inventory liquidation,storingup energy for a rally in prices.,Please refer to Important Disclosures on last page,SWS Research,5,Jan 2013,Sector Research,Graph 1:molybdenum price is highly elastic in hi
36、story,compressed by anemic demand for most ofthe past four years.Source:SWS Research;Bloomberg;1.1 China Has Advantage In Molybdenum,Has Strong PricingCapabilityLike other types of resources,molybdenum resources are the mainindustry barriers.Thus,profitability for the sector mainly lies in theresour
37、ces sector.This is equivalent to saying that the highest end of theindustry chain will capitalize on the alpha returns brought by a rise in theprices of molybdenum.In addition,downstream processing sectors,whichare highly sophisticated sectors with great technology barriers,willsimultaneously also b
38、enefit from a relatively high gross profit margin.Graph 2:Molybdenum industrial and production processSource:SWS Research,Please refer to Important Disclosures on last page,SWS Research,6,Jan 2013,Sector Research,Molybdenum resources are mainly located in China,the U.S.,and Chile.The three countries
39、 accounted for 81%of global reserves.With the mostreserves,Chinese mines are mainly primary ore with high grade and lowimpurity substances.At present,small mines across the country sufferedfrom severe illegal exploration.The implementation of industry entrystandards may increase leading firms pricin
40、g capabilities.,Graph 3:Worldwide molybdenum reserve distribution chartSource:USGS;SWS Research,Graph 4：Worldwide molybdenum resources distribution chartSource:USGS;SWS Research,Corresponding to reserves,the output of China,the U.S.,and Chileaccounted for 37%,26%,and 15%of global output,respectively
41、.In recentyears,growth in global output of molybdenum mainly stemmed from China.China outpaced the U.S.to become the largest supplier of molybdenumglobally in 2007.Except for China,other countries have seen their outputgrowth stagnant since 2005.,Graph 5:Worldwide molybdenum ouptut distribution in20
42、11Source:USGS;SWS ResearchPlease refer to Important Disclosures on last page,Graph 7:Output has surged in China since 2007Source:USGS;SWS ResearchSWS Research,of,7,Jan 2013,Sector Research,1.2 Terminal Demand Has Huge Room,Metal Represents TheFuture.,The,main products of molybdenum,include,roasted,m
43、olybdenum,concentrate,(containing 59%,molybdenum),ferro,molybdenum,ammonium molybdenum,and molybdenum metal,the first of which isobtained by roasting molybdenum concentrate(containing 45%ofmolybdenum)and is mainly used in producing stainless steel,alloy steel,tool steel,high-speed steel and cast iro
44、n.Ferro molybdenum(containing,60%,of,molybdenum),could,be,attainable,by,restoring,roasted,molybdenum concentrate with its main applications in iron casting andsteel making.Ammonium molybdenum(containing 67%of molybdenum),as a typical molybdenum chemical product,is obtained by ammoniatingroasting mol
45、ybdenum concentrate and is used as petrochemical catalysts,anti-corrosive additives,and biological trace elements.Molybdenummetals(containing more than 99%of molybdenum)is obtained viaprocessing ammonium molybdate,with applications in super-alloys,electronic goods,and molybdenum metal-related produc
46、ts.Graph 8:Demand of molybdenum industry chainSource:“China Molybdenum Industry”;SWS ResearchDemand most directly affected by the steel sector.As for the differentindustries,80%of global primary molybdenum consumption is used in thesteel industry in the form of ferro-molybdenum and roasted molybdenu
47、m,Please refer to Important Disclosures on last page,SWS Research,8,Jan 2013,Sector Research,concentrate,with another 14%used in the chemical sector in the form ofammonium molybdate.The remaining 6%of global molybdenum is appliedin molybdenum metal-related products.Therefore,consumption ofmolybdenum
48、 is greatly affected by the steel sector.In recent years,anemic demand for steel and the low prices and quantity are to blame forthe difficulty of seeing higher molybdenum consumption and higher prices.Benefit from the 3rd industrial revolution and new urbanization in China.Taking a look at terminal
49、 demand,molybdenum is mainly used in theenergy,infrastructure,transportation,and aviation/defense sectors,whichare the clear beneficiaries of the 3rd global industrial revolution and newurbanization in China.They are expected to push molybdenumconsumption back into the rapid growth tunnel within the
50、 next one to twodecades.,Graph 9:80%of primary consumption used by steel,Graph,10:,Terminal,consumption,mainly,in,energy,infrastructure,and transportation,Source:CRU;SWS Research,Source:CRU;SWS ResearchMolybdenum is widely utilized in emerging industries,considered“metalreflective of the future”（1）P
