Production to Jump in 2H 2013
Intrinsic Value S$0.800
Prev Closing S$0.270
CNMC Goldmine Holdings Limited (CNMC) reported 2Q FY13 revenue of US$2.2m, or about three times 1Q FY13 revenue. As a result, the company reported US$0.1m of net profit for 2Q FY13, reversing the loss of US$0.7m for 1Q FY13. Growth was driven by a rebound in production from 685 ounces in 1Q FY13 to 1,388 ounces in 2Q FY13. With the completion of the second leach yard, CNMC expects to produce about 9,650 to 11,250 ounces of gold dore in 2H 2013. Maintain Increase Exposure.
Ramping Up of Utilization: The increase in production compared to 1Q FY13 came about due to the full operation of the 100,000mtpm heap leach. 1Q FY13 revenue came in lower than expected as CNMC diverted manpower to a) perform maintenance work on the first leach yard, b) construct the second leach yard and c) stockpile ore, among other site works. Utilization of the first leach yard was higher in 2Q FY13.
2Q FY12 production was already comparable to that of 2Q FY13 as CNMC had exported ore bearing gold and base metals, for overseas processing, in 2Q FY12. It stopped exporting ore in 2012 to focus on expanding local production facilities and reap economies of scale.
The Second Leach Yard is Even Larger: The second leach yard, with a capacity of 140,000mt per leaching cycle, has already been stacked with ore and is thus able to start contributing within 3Q FY13. A third leach yard with 70,000mt per leaching cycle of capacity is due to be completed in 4Q FY13 and will allow CNMC to start 2014 with the capacity to process about 1m mt of ore (or about 32,150 to 48,225 ounces of gold @ 1 to 1.5g/ton gold grade).
Our View: We are optimistic that CNMC will report stronger performance in 2H 2013 as the key growth drivers are now in place and that the first leach yard is now fully operating. We now estimate production to be 12,000 ounces in 2013 and 30,000 ounces in 2014. We maintain our rating and valuation on CNMC in this update as we have previously priced in much of these developments. CNMC closed at S$0.270 on 19 August 2013.
Expect Increase in Production: The anticipated increase in production in 2H 2013 comes on the back of a statement by the company published on 7 August 2013. In the statement, the company clarified that it is “cautiously” confident that it can achieve mining and production outputs of 400,000 to 500,000 tonnes of ore and 300 to 350 kg of gold dore bars respectively, subject to favourable weather conditions. With the 2Q 2013 results announcement, the company again explained that it had completed the construction of the second leach yard and that a third leach yard is underway. As such, expectations of higher production are justified.
Will Low Gold Prices Hurt CNMC? The fall in gold price from more than US$1,600 per ounce to the current US$1,300/US$1,400 range did not affect our valuation of CNMC as we had earlier discounted the high gold prices and valued CNMC’s future gold output based on a subjective gold price of US$1,350 per ounce.
In this update, we do not adjust the assumed gold price in our model as gold prices are currently not significantly lower than our assumption. Moreover, upside for CNMC at this juncture stems from its anticipated fast increase in production rather than from gold prices, unlike mature gold mines with more stable production levels.
Under the current model, we would have valued CNMC at S$1.158 per share had we assumed gold prices of US$1,600 per ounce. On the other hand, our model would have yielded a valuation of S$0.658 based on an assumed gold price of US$1,250 per ounce.
Thus far, CNMC has managed to keep its selling price above US$1,600 in 2H FY13. In our updated model, we continue to assume average selling prices of US$1,350 as we expect more than 80% of full year production to occur in 2H 2013.
Production Costs Have Fallen: Since falling to a low of US$547 per ounce in 3Q 2012, estimated production costs have risen to US$2,283 per ounce in 1Q 2013. Higher unit costs were due to the absence of income from byproducts silver, lead and zinc to offset costs and lower production in 1Q 2013 resulting in each ounce of production bearing a higher proportion of overheads. Based on 2Q 2013’s production of 1,388 ounces, we estimate production costs to be about US$1,517 per ounce, lower than that of the prior two quarters. We expect production costs to decline further to US$900 per ounce for the whole of 2013 and to US$650 per ounce for 2014, which should result in higher operating margins for CNMC.
Forecasts and Valuation: Based on the updated parameters, we yielded forecast revenue and PATMI of US$16.2m and US$3.8m for FY13F, compared to US$36.9m and US$8.4m in our previous update. We slowed the expected annual production growth over FY14F to FY17F, but rolled our spreadsheet forward to include an additional year of forecasts FY18F. We extended the explicit forecast period as the slower production rate leaves more of the same ore to be extracted in later periods. As a result of these adjustments, our valuation of CNMC was maintained at S$0.800.
Publish date: 21/08/13