CNMC Goldmine Holdings - DBS Research 2017-05-18: Earnings Under Pressure

CNMC Goldmine Holdings - DBS Vickers 2017-05-18: Earnings Under Pressure CNMC GOLDMINE HOLDINGS LIMITED 5TP.SI

CNMC Goldmine Holdings - Earnings Under Pressure

  • 1Q17 earnings below expectations as lower ore grades weighed on gold production and sales; excluding unrealised forex gains of US$0.31m, CNMC would have otherwise had an unprofitable quarter.
  • Embarking on several initiatives to boost longerterm profitability, but negatives outweigh positives for now.
  • Steep 98%/55% cuts in FY17F/18F earnings on low ore grade production coupled with higher operating cost. 
  • Downgrade to HOLD, TP cut to S$0.31.



Downgrade to HOLD with TP cut to S$0.31; Steep cuts to FY17F/18F earnings of 98%/55% on low ore grades. 

  • 1Q17 earnings was below expectations as lower ore grades weighed on gold production and sales. 1Q17 net profit was US$54,834, helped by unrealised forex gains of US$0.31m; excluding this, CNMC would have recorded a second consecutive quarter of losses.
  • Until a sustainable improvement in ore grades can be delivered, we lower our gold output estimates, and combined with a higher operating cost base, we cut FY17F/18F earnings by 98%/55% to US$0.3m/US$5.7m. Hence, we arrive at a lower TP of S$0.31, based on a blend valuation of DCF (WACC of 10.7%, terminal growth of 1%) and 14x FY18F PE. 
  • We are suspending coverage on the stock due to lack of earnings visibility.

Embarking on several initiatives to boost longer-term profitability...

  • To mitigate current challenges and raise longer-term growth prospects, CNMC has implemented several initiatives such as 
    1. expansion of its mining asset portfolio – recent acquisitions include Pulai Mining and KelGold Mining, and 
    2. the setting up of a new carbon-in-leach (CIL) plant at Sokor which could raise total processing capacity by 15% to c.1.38m tonnes p.a. by end-2017.


…but negatives outweigh positives for now. 

  • While the completion of the new CIL plant later this year could add to output, we believe that near-term earnings performance could further worsen before potentially getter better.
  • Persistently lower ore grades and a growing cost base – especially as CNMC ramps up exploration work at the new Pulai and KelGold sites which are unlikely to contribute to earnings anytime soon – is putting pressure on the near-term earnings outlook.


Valuation

  • Downgrade to HOLD with lower TP of S$0.31, based on blended valuation. 
  • After cutting earnings estimates for FY17F/18F, we arrive at a lower TP of S$0.31 based on a blended valuation using DCF (which assumes WACC of 10.7% and terminal growth of 1%) and PE (pegged to larger peers’ average of 14x) metrics.


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. Every US$10/oz decrease in gold prices could lower FY17F earnings by 1.7%.


WHAT’S NEW


Unrealised forex gains aside, CNMC would have otherwise been unprofitable in 1Q17.

  • CNMC posted its third consecutive decline in quarterly revenues to US$4.73m (- 48.3% y-o-y) as slightly higher average gold prices realised over the quarter was more than offset by lower grades of mined ores. All-in cash costs doubled y-o-y from US$487/oz in 1Q16 to US$983/oz in 1Q17 as operating costs were spread over substantially lower gold output of 3,670 oz (- 49.5% y-o-y).
  • 1Q17 net profit came in at US$54,834, which was held by unrealised forex gains of US$0.31m – barring which, would have resulted in a second consecutive quarter of losses for CNMC.

New processing facility and recent string of acquisitions could drive longer-term profitability. 

  • Apart from the recent expansion of its mining asset portfolio to include Pulai Mining and KelGold Mining, CNMC also disclosed that it is in the process of setting up a new CIL processing plant at Sokor, which is aimed at improving gold recovery.
  • According to CNMC, this method of extraction is expected to deliver gold recovery rates of up to 95% (vs 65% for existing heap leaching facilities). When complete, total production capacity is expected to be raised to 1.38m tonnes p.a. by end-2017, from 1.2m currently.

But likely to get worse before potentially getting better.

  • While there are these new initiatives to raise the group’s longer-term productivity and earnings profile, we believe that near-term performance could further worsen before potentially getter better later on given 1) persistently low ore grades and, a 2) growing cost base.
  • As costs continue to creep up under the new (higher) royalty fee compensation structure and on a ramp-up in exploratory and mining activities at the new Pulai and KelGold sites - which are unlikely to contribute to earnings anytime soon - we expect near-term earnings potential to remain under pressure.

Steep cuts to FY17F/18F earnings. 

  • Until a sustainable improvement in ore grades can be delivered, we remain cautious on bottom-line performance and cut FY17F/FY18F earnings by 98%/ 55% from US$10.6m/US$12.7m to US$0.3m/US$5.7m.

Downgrade to HOLD; TP cut to S$0.31. 

  • After cutting our earnings estimates, we arrive at a lower TP of S$0.31, based on a blend of DCF (WACC of 10.7%, terminal growth of 1%) and 14x FY18F PE. We are suspending coverage on the stock.




Singapore Research DBS Vickers | Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-18
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.31 Down 0.600



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