Intrinsic Value S$0.80
Previous Close S$0.240
Reiterates Outperform Outlook on CNMC
CNMC Goldmine Holdings Limited announced in Dec 2013 that
a) it has formed a joint venture with the Perak state government to explore tin mining and
b) it will be paying its maiden dividend of 0.1 S cents per share on 20 Jan 2014. We reiterate our highly positive outlook on CNMC on the back of increased production following the completion of leaching pad 2 in Sep 2013.
Maintain Increase Exposure.
Reiterates Record Gold Pour in Nov: We recall that CNMC successfully commissioned its second gold de-absorption plant in Nov 2013, following record gold pours of 2,131oz (or 66.3kg) of gold dore bars from the new plant. In contrast, the company produced 81.5kg (or 2,620oz) of gold dore bars in Oct 2013. The new plant tripled overall gold de-absorption capacity to 3 t. per cycle to match the 2014 1m t. of ore heap leaching capacity.
Gold Prices Remain above Model Input: Spot gold currently trades at US$1252/oz, which remains above the input gold price of US$1200/oz which we applied towards our forecasts and valuation of CNMC. We are unfazed by lower gold prices, as falling unit costs and higher production are expected to more than offset price declines. Moreover, the decline in gold prices seemed to have slowed since 3Q 2013 (down 2.7% from end 3Q 2013 to 14 Jan 2014). CNMC reported an impressive low all-in sustaining cost of US$566/oz in 3Q 2013. We remain optimistic about CNMC’s 4Q 2013 results and 2014 outlook.
Venture into Tin Mining: The JV with the Perak state government owned Menteri Besar Incorporated (Perak) reflects CNMC’s long term strategic planning to develop other resources, whilst leveraging on its experience and infrastructure in Malaysia. For instance, the Kelantan CNMC office can support both the Sokor and Darul Ridzuan sites, thus reaping further synergies. From the technical perspective, there are similarities in how gold and tin ore are processed for their respective metals. We like the cooperation with the Perak state government, following CNMC’s relationship with the Kelantan state government. This venture, if successful, will be evidence of the company’s ability to grow beyond its current Sokor concession into a major mining company in Malaysia.
Exploration to Commence in Perak: A plot of land in Darul Ridzuan, Perak, of approximately 700 acres or 2.8km2, has been identified and the JV will engage in further exploration work, most likely commencing from later in 1Q 2014, to determine the economic viability of the tin resources, if any.
We understand that the Perak state government has been looking to develop its mining resources and we reckon that CNMC’s success in Kelantan has helped the company to secure the deal. Nonetheless, contribution towards CNMC’s financial performance will most likely take some time as this JV is still in its early stages of development.
Maiden Dividend: Another positive development is CNMC’s decision to give out its maiden dividend, which is a signal of stability and confidence in future production and cash flows. We expect CNMC to fund future exploration activities in Kelantan and Perak from cash flow generated from gold sales, while reserving some cash for shareholders.