CNMC Goldmine Holdings - DBS Research 2017-02-24: Prospects still positive

CNMC Goldmine Holdings - DBS Vickers 2017-02-24: Prospects still positive CNMC GOLDMINE HOLDINGS LIMITED 5TP.SI

CNMC Goldmine Holdings - Prospects still positive

  • Suffers loss of US$2.2m in 4Q16 on a combination of unrealised foreign exchange losses and lower ore grades.
  • Notwithstanding 4Q hiccup, we remain positive on CNMC’s outlook.
  • Higher dividend payout of 1.134 Scts (+20% y-o-y) proposed for FY16 despite lower earnings.
  • Maintain BUY with slightly lower TP of S$0.60.



Maintain BUY with lower TP of S$0.60 on lower gold price and production assumptions. 

  • Apart from the minor setback in 4Q16, we remain optimistic in the earnings outlook for the group, especially since gold price has rebounded above US$1,200/oz since end-January 2017 and production has normalised from the lower ore grade and temporary stop work order - a pre-requisite for the extension of CNMC’s mining license, which was completed in 2016. 
  • After revising our gold price (in line with industry estimates) and production assumptions, we cut FY17F/18F earnings by 11%/10%, resulting in a lower TP of S$0.60.


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

  • Given higher production capacity from the addition of the upgraded vat leaching facility in April 2016, and increase in exploratory and mining activity, CNMC’s gold production is projected to recover in FY17F and grow 13% y-o-y to 37,741 ounces in FY18F. 
  • Plans to bring on additional production capacity at Sokor, which will likely be firmed up by end-2017, could provide further upside. 
  • Supported by well-run operations, steady cash flow generation and competitive cash costs, CNMC is our preferred leveraged play on gold.


Supported by growing net cash of US$26.9m as at 4Q16, M&As 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 inground resources at Pulai could propel the long-term earnings outlook for CNMC.
  • CNMC is still on the lookout for acquisitions and can potentially tap on its strong net cash of US$26.9m to accelerate growth.


Valuation

  • Maintain BUY with lower TP of S$0.60, based on DCF 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 3.9% is also on offer, which is decent – especially for a gold miner.


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/ 2017-02-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.60 Down 0.650





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