CNMC Goldmine - DBS Research 2016-06-15: Small Mid Cap Explorations

CNMC Goldmine - DBS Research 2016-06-15: Small Mid Cap Explorations CNMC GOLDMINE HOLDINGS LIMITED 5TP.SI 

CNMC Goldmine (CNMC SP)

  • CNMC Goldmine (CNMC) is principally engaged in the exploration to production stages of gold dorés. At 6x T12M PE, the group trades at c.66% discount to larger peers’ valuation of 19x T12M PE. 
  • Despite its smaller size, the stock appears inexpensive given CNMC’s higher margins, consistent, above- average income-generation capability and growth prospects. 
  • The share price could re-rate as gold exploration and production efforts are accelerated, as earnings are delivered, and with clarity on the concession renewal.

  • Headquartered in Singapore, CNMC Goldmine Holdings Limited began operations in 2006 and is principally engaged in the exploration and mining of gold and the processing of mined ores into gold dorés. It commenced trading on 28 Oct 2011, and is the first gold producer to be listed on SGX’s Catalist Board.
  • CNMC is currently focused on developing its 10 km2 “Sokor Gold Field Project” in the State of Kelantan, Malaysia, in which CNMC holds a majority stake of 81%. According to the group, minority stakes are owned by the Kelantan government and royal family.

    The relevant mining licences for this project were awarded in 2008 on a 10+21 year basis, and are due to expire in 2018. Having met the criteria for a 21-year extension into 2039, the group does not expect any major obstacles to its slated licence renewal in 2018. We also understand that relevant documents have been submitted to the relevant government agencies ahead of time, and are in the final stages of review.
  • As top-line performance is a function of volume and prevailing gold prices, CNMC’s revenue growth at 63% CAGR from US$5.1m in FY11 to US$36.5m in FY15 was largely led by substantial growth in the group’s fine gold production (98% CAGR from 2,037 ounces in FY11 to 31,206 ounces in FY15), but partly offset by the decline in gold prices – which had come off from a high of up to US$1,900/ounce in 2011 to an average of US$1,160/ounce in 2015.

    Net profit has also expanded significantly, from a net loss of US$5.1m in its year of listing to US$13.4m in FY15.
  • The group does not speculate nor hedge its exposure to gold price movements, and sells its gold dorés to a licensed gold buyer in Kelantan at a slight premium to the spot rate. Instead, CNMC focuses on driving profitability through production increases and keeping all-in production costs low.

    On a global scale, CNMC is ranked among the lowest cost producers of gold. As at 1Q16, CNMC achieved a record low all-in cost of production of US$487/ounce, from US$616/ounce a year ago. When making comparisons, it is useful to note that the reporting of gold production costs tends to be inconsistent across miners. “All-in sustaining” cost has historically been the predominant metric used in cash reporting, but the “all-in” cost metric – which includes exploration costs, provides a more prudent and accurate representation of the true cost of producing gold over the mining lifecycle (from exploration to closure).
  • We believe that the group’s success in delivering all-in cost improvements thus far can be largely attributed to:
    1. Economies of scale from higher gold production levels
    2. Low diesel prices
    3. Weaker Ringgit, in which the bulk of CNMC’s costs are denominated, and
    4. Superior style of mineralisation, which affects both production rates and leaching costs.
  • Steady growth in the gold reserve at Sukor from 410,000 ounces in FY12 to 618,000 ounces in FY15 implies that ongoing exploration efforts have more than compensated for the extraction of in-ground gold resources, which together with the higher annual leaching capacity of 1.2m tonnes of ore (from 1m tonnes in FY15), provides support for expectations of robust growth in gold production ahead.

    The group’s gold (and other mineral resource) estimates are prepared by an independent resources and reserves estimation consultant, Optiro Pty Ltd.
  • Going forward, in addition to further increases to leaching capacity (from 1.2m tonnes currently), organic growth in gold production will likely be led by enhancements to the gold recovery process and acceleration of exploration efforts.
  • In addition to organic growth, supported by its strong operating cash flow-generation capability, we believe that CNMC’s healthy net cash balance of c.US$26.1m (or 6 Scts per share) as at end-1Q16, can be readily deployed to finance the acquisition and development of other mines in Malaysia, other parts of Southeast Asia and Australasia, should suitable opportunities arise.
  • Management hopes to expound on their familiarity with and experiences in the Malaysian mining industry, and will likely give priority to brownfield opportunities within Malaysia, which should allow the group to grow quickly.
  • Key risks: 
    1. Failure to extend/renew mining licence prior to expiry in 2018. However, we believe this is unlikely given the size of CNMC’s contribution to the Kelantan government’s total revenue, which we estimate to be 2.8% for 2015; 
    2. Risk of significant, adverse changes to underlying agreements post-extension/renewal of mining licence, i.e. increase in the payment of royalties to the Kelantan government, from 8% of CNMC’s revenue currently; 
    3. Failure to secure a 5-year extension to its pioneer tax status upon expiry in 2018; 
    4. Risk of unfavourable government policy changes; and 
    5. Risk of gold prices falling below CNMC’s “all-in” costs.
  • Valuation at 6x T12M PE represents a c.66% discount to larger peers’ 19x T12M PE. Despite its smaller size, the stock appears inexpensive at current valuation given its higher margins and above-average income-generation capability. Further, we believe that the share price could re-rate as the group accelerates on its gold exploration and production efforts, as earnings are delivered, and with more clarity on the concession renewal.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-06-15
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