CNMC Goldmine Holdings - DBS Research 2016-11-17: Au-gmenting growth via M&A

CNMC Goldmine Holdings - DBS Vickers 2016-11-17: Au-gmenting growth via M&A CNMC GOLDMINE HOLDINGS LIMITED 5TP.SI

CNMC Goldmine Holdings - Au-gmenting growth via M&A

  • Initiate with BUY; TP of S$0.65 based on blend of DCF (WACC of 10.7%, terminal growth of 1%) and 14x FY17F PE.
  • Kelantan-based miner attractive as a less-risky, gold proxy with low production cost.
  • Flagship Sokor project already in production and highly cash generative while proposed acquisition of 51% stake in Pulai Mining could propel earnings growth for CNMC.
  • Growing net cash of US$33.4m can be readily deployed to finance further M&A opportunities.



Competitive low-cost miner attractive as a less-risky leveraged gold play. 

  • Principally engaged in the exploration and mining of gold and the processing of mined ores into gold dores, CNMC is projected to grow its gold production at a 7% CAGR, from 31,206 ounces in FY15 to 38,728 ounces by FY18F. 
  • Supported by well-run operations, steady cash flow generation and competitive cash costs, CNMC is our preferred leveraged play on gold.


Acquisition of 51% stake in Pulai Mining could propel earnings growth. 

  • CNMC recently announced plans to acquire a 51% stake in Kelantan-based gold miner, Pulai Mining. Given the group’s success in Sokor, we think that CNMC will be well able to expound on its familiarity and expertise to accelerate the exploration process and production. If successful, the potential monetisation of in-ground resources at Pulai could propel earnings outlook for the group.


Growing net cash of US$33.4m as at 3Q16 can be readily deployed to finance other acquisitions. 

  • Beyond the Pulai concession, we believe that CNMC could still be on the lookout for acquisitions to accelerate growth opportunities for the group. 
  • Supported by strong cash generation, this could be readily funded using CNMC’s strong net cash position – which has nearly tripled from US$12.1m at end-FY14 to US$33.4m in 3Q16.


Valuation

  • Our 12-month TP of S$0.65 is based on a blend of DCF (WACC of 10.7% terminal growth of 1%) and 14x FY17F PE. 
  • Given the volatile nature of gold prices and its potential impact on near-term earnings, we base our TP on a blend of DCF (which assumes WACC of 10.7% and terminal growth of 1%) and PE (at larger peers’ average of 14x FY17F PE) metrics, which we believe better reflect CNMC’s superior cash flow generation, already competitive cash costs and steadily growing gold production.
  • Assuming a 30% payout, a prospective yield of 3% is also on offer.


Key Risks to Our View

  • Susceptibility to volatility in gold prices and mining conditions.
  • As price takers, gold miners are generally susceptible to volatility in gold prices. Their output may also be hampered in the event of unfavourable weather conditions. Each US$10/oz decrease in gold prices could lower FY17F earnings by 1.7%.




Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-17
DBS Vickers SGX Stock Analyst Report BUY Initiate BUY 0.65 Same 0.65




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