CNMC Goldmine Holdings Limited - Tayrona Financial 2020-01-20: To Shine Brighter On Higher Gold Price


CNMC Goldmine Holdings Limited - To Shine Brighter On Higher Gold Price

Underground mining to drive growth in 2020

  • CNMC Goldmine (SGX:5TP) managed to deliver these gains despite delays to the commencement of underground mining. The Company encountered weak rock masses and underground water during mining, and it expects to commence high-grade gold ore extraction in 2020. Open pit mining at Rixen and other deposits remain unaffected. That said, we now can expect high-grade gold ore mining to be a major growth driver for 2020, whereby ore holding at least 3 – 4g/t will be mined. We forecast gold production of 30,500oz for FY19.

Production of silver, lead and zinc to commence in 2021.

  • Likewise, the Company is preparing additional documentation for the construction of a flotation plant to produce silver, lead and zinc. Hence, the production of non-gold metals is now expected to commence in 2021. Other catalysts include the planned installation of a power line to reduce diesel costs and the renewal/extension of its pioneer tax status, which would exempt the Company’s gold production from Malaysia corporate tax.

Gold fair value estimated at US$1,454/oz to US$1,587/oz.

  • In this update, we revised our model for CNMC Goldmine and now expect the Company to report net profit attributable to shareholders of US$5.75m for FY19 and US$10.1m for FY20. We also updated our model for gold. We now value gold at US$1,519/oz (95% confidence interval of US$1,454/oz – US$1,587/oz) from US$1,420/oz previously and have assumed an average selling price of US$1,450/oz (lower end of the confidence interval) across the forecast horizon of FY20 to FY25, from less than US$1,400/oz previously.

Beneficiary of higher selling prices.

  • Year-on-year, CNMC Goldmine’s average selling price grew by 24.1% to US$1,495/oz in 3Q19. The higher selling price more than offset slowing production as the commencement of underground mining was delayed to 2020. Given that daily average gold price rose by 0.6% in 4Q19 (from 3Q19), we expect the company to continue to benefit from higher year-on-year selling prices in the fourth quarter. We expect production to remain flat quarter-on-quarter as the commencement of underground mining was delayed to 2020.

Heap leaching recovery to improve under continuous leaching.

  • Looking ahead, we expect heap leaching production volume to improve in 2020 on the back of an anticipated second permanent heap leaching pad that will boost the Company’s total heap leaching capacity to six million metric tonnes of ore. For forecasting purpose, we expect approximately 2 million metric tonnes of ore to be leached in 2020, to produce approximately 11,154 ounces of gold, versus an estimated 8,600 for FY19. The actual reported heap leaching production for 2018 was 9,742 ounces. Under the permanent heap leaching processing method, mined ore is being leached continuously to increase recovery.
  • In our updated model, we expect recovery to improve from 34.1% in 2018 to 50% in 2020, 60% in 2022 and 70% in 2023. Annual ore mined for heap leaching is estimated to be about 2.5 million tonnes. However, we also assume that ore grades should improve from 0.31g/t in 2018 to 0.5g/t by 2021. This is to bring the mined ore grades closer to the reported average of 1.3g/t for reserves and 1.5g/t for resources at Rixen’s.
  • In all, heap leaching is expected yield 149,304 ounces of gold from 2019 to 2025, inclusive, or equivalent to 22% of the estimated reserves of 85k oz and resources of 574k oz for Rixen as at 31 December 2018.

CIL and vat leaching output to increase by 30% in 2020 on commencement of underground mining.

  • Based on the Independent Qualified Persons’ Report as at 31 December 2018, we inferred that approximately 145,800 tonnes of ore at an average grade of 1.79g/t was fed into the vat leaching plant to produce about 3,100 oz of gold at an average recovery of 37% in 2018. 141,500 tonnes of ore at an average grade of 4.66 g/t was fed into the CIL plant to produce 18,640oz of gold at an average recovery of 88% in 2018.
  • Using these data, we assumed that 150,000 tonnes of ore was processed using vat leaching and another 150,000 tonnes of ore was processed using the CIL plant in 2019. For 2020F to 2025F, we assume 150,000 tonnes of ore per annum will be processed via vat leaching and 180,000 – 360,000 tonnes of ore per year will be processed via the CIL plant, with ore being fed from Manson’s Lode in 2021. We assume that underground mining will yield about 30,000 tonnes of ore in 2020.

High gold price may yield further upside.

  • In our model for CNMC Goldmine, we have assumed an average selling price of US$1,450/oz from 2020F to 2025F – around the lower limit of our 95% confidence interval estimate for the fair value of gold. In our last report on gold miners “Do Gold Miners Deserve A Relook?” dated 12 March 2019, we had projected a fair value of US$1,420/oz with a confidence interval of US$1,376/oz to US$1,478/oz. Gold has since appreciated from US$1,293/oz to US$1,552/oz as at 4 January 2020. At that time, our thesis was that the Federal Reserve would end quantitative tightening and that future monetary policy would be such that real interest rates would stay flat or drop, thus leading to higher gold prices. Based on our update model for gold, we derived a fair value of US$1,519/oz with a 95% confidence interval of US$1,454/oz to US$1,587/oz.
  • If we had assumed a gold price of US$1,519/oz, our valuation of CNMC Goldmine would have increased by about 2.5 cents per share. However, we decided to assume a more prudent gold price assumption of US$1,450/oz to lend stability to our valuation of CNMC Goldmine. Moreover, the updated average selling price assumption is already US$100/oz than the prior assumption of US$1,350 and the updated valuation still provides healthy upside from the Company’s current share price.

Increased money supply justifies higher gold price since early 2019.

  • The increase in M2 money supply by more than 7%, from US$14.4 trillion as at end February 2019 to US$15.5 trillion as at end December 2019, explained for almost the entire increase in projected fair value from US$1,420 previously to US$1,519 today. Other factors such as higher oil price (from US$56.59 previously) also pushed the model gold price higher.

Model issues and weaknesses.

  • Our model provides an estimate of the fair value of gold conditional upon the prevailing value of the inputs such as unemployment rate. Changes in the values of the inputs will affect the model output. Using data from July 1983 to December 2011 for model estimation, actual gold price was within the 95th confidence interval 74% of the time from January 2012 to December 2018. However, out-of-sample performance dropped when we extended the in-sample period to December 2018 – actual gold prices were within the 95th confidence interval for only five months of 2019. Gold prices were consistently lower than the model estimates for five consecutive months – January to May 2019, before rising to within the confidence interval. In August and October 2019, gold traded above the confidence interval. Hence, there are can be periods of sustained over or under performance by gold price against our model.

Valuation revised to S$0.395 per share on higher gold price.

Key risks.

  • Execution risk. Our view may be impaired if the Company fails to commence underground mining in 2020. The Company is planning a second permanent heap leach pad, which should also raise output for 2020.

Liu Jinshu Tayrona Financial Research | 2020-01-20