CNMC Goldmine Holdings - DBS Research 2017-01-16: 4Q16 hiccup a minor blip

CNMC GOLDMINE HOLDINGS LIMITED 5TP.SI

CNMC Goldmine Holdings - 4Q16 hiccup a minor blip

CNMC Goldmine Holdings (CNMC) expects to report net loss for upcoming 4Q16 results.
Losses due to unrealised forex losses and decline in revenue from lower ore grades.
Beyond this blip, we remain optimistic of CNMC’s earnings outlook in 2017.
Maintain BUY; TP of S$0.65.

CNMC announced that it expects to report a net loss for 4Q16, mainly due to:
1. Net unrealised foreign exchange losses as a result of the depreciation of the Malaysian Ringgit against the USD, and
2. Decline in revenue as a result of lower ore grades.
Despite the loss in 4Q16, CNMC expects to remain profitable in FY16E.

CNMC reports in USD but keeps its cash in Ringgit as its current mining operations are all based in Malaysia, which exposes the group to fluctuations in the USD against the Ringgit.
Assuming CNMC’s net cash balance in Ringgit terms (which we project to be MYR138.1m) remains unchanged between 3Q and 4Q16, we estimate that the strengthening of the USD against the Ringgit from 4.1251 on 30 Sep to 4.4845 on 31 Dec will likely lead to an unrealised loss of c.US$2.7m.
Over the longer term, with gold priced in USD and operational costs mainly incurred in Ringgit, CNMC remains a potential beneficiary if the USD stabilises at a higher level against the Ringgit.

Apart from lower ore grades, we believe that the monsoon season which typically enters the Kelantan region in 4Q also played a role as it likely hampered mining activity for miners in the region, including CNMC.
While there are no guarantees in mining, we note that higher-grade ores generally lie deeper underground and with CNMC still mining relatively close to the surface, we think that with time, the group would potentially gain access to the higher-grade ores.

Apart from the minor setback in 4Q16, we remain optimistic in the earnings outlook for the group and note that while gold price retreated below US$1150/oz in Dec, it has since rebounded to above US$1200/oz currently.
Maintain BUY with TP of S$0.65, which is based on a blended valuation of DCF (WACC of 10.7%, terminal growth of 1%) and 14x FY17F PE.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-01-16

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