Merdeka Copper Gold (MDKA IJ)

Lowering our FY24-25F estimates on higher interest expenses; possible upside for TB Copper

 

  • We slash our FY24-25F net profit estimates by -74%/-62% to reflect higher-than-expected interest expenses and the 1Q24 net loss.
  • The mgmt expects Wetar to only breakeven in FY24 despite posting a positive cash margin in 1Q24. This implies higher costs in 2Q24 onwards.
  • We maintain our Buy rating with an unchanged TP of Rp3,100 on upside potential from growth projects, but prefer its subsidiary MBMA.

 

Cutting our FY24-25F estimates on higher-than-expected 1Q24 interest exp.

MDKA recorded a 1Q24 net loss of -US$15.2mn reflecting higher-than-expected interest expenses from its US$1.5bn debt. On the operating front, 1Q24 revenue was inline as it reached 25%/24% of our FY24F/consensus estimates at US$541mn, +0.8% qoq. Against this backdrop, we raise our FY24-25 interest expenses estimate to US$102mn/83mn (compared to US$61mn/52mn) and lower our net profit estimates by -74% and -62%, respectively (our operating assumptions are unchanged as the 1Q24 deliveries were in-line with expectations).

 

Wetar copper: higher indicative costs but revenue upside from sales to AIM

Following a 1Q24 net loss of -US$1.1mn in Wetar, the management indicated that the mine may only breakeven this year, despite posting its first positive cash margin in over five quarters. We believe the management’s expectation implies rising costs for the remaining quarters as the company provided guidance of costs of US$3.25-4.0/lb (c.US$7.1k-8.8k/ton) vs the 1Q cost of US$2.7/lb (c.US$5.8k/ton). However, Wetar anticipates additional sales volume from selling 1Mtpa of ore to the AIM project, potentially generating c.US$15mn annually (vs. Wetar’s FY23 revenue of US$115mn).

 

Better prospects for TB copper from possible open-pit mining

MDKA aims to enhance TB copper's economic viability by exploring open-pit production opportunities in the first five years of operation, through reduction of upfront capital requirements and cashflow generation for its sub-level cave (SLC) project. Meanwhile, SLC and block cave have reportedly seen positive drilling results that resulted in a conversion of >300Mt (+71%) of inferred resources to indicated resources in Mar24 (containing 4.5Mt of copper and 16Moz of gold).

 

Maintain Buy rating with an unchanged TP of Rp3,100

Despite our lower FY24-25 estimates, we maintain our Buy rating on MDKA with an unchanged TP of Rp3,100 as we see upside from its key growth projects and as the higher interest rate in 1Q24 has been reflected in our WACC assumption (cost of debt: 5.9%, cost of equity: 10.5%). However, we continue to prefer its subsidiary MBMA due to lower interest risk. Key risks include a higher cash cost, lower ASP, and project delays.

 

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