CNMC Goldmine Holdings

Transcription

1 Singapore Company Guide Version 3 Bloomberg: CNMC SP Reuters: CNMC.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 18 May 2017 HOLD (Downgrade from BUY) Last Traded Price ( 17 May 2017): S$0.30 (STI : 3,224.10) Price Target 12-mth: S$0.31 (4% upside) (Prev S$0.60) Analyst Singapore Research Team equityresearch@dbs.com Paul YONG CFA paulyong@dbs.com What s New 1Q17 earnings below expectations as lower ore grades weighed on gold production and sales, leading to core losses, excluding unrealized forex gains. Embarking on several initiatives to boost longerterm profitability, but negatives outweigh positives for now Steep 98%/55% cuts in FY17F/18F earnings on low ore grade production coupled with higher operating cost Downgrade to HOLD, TP cut to S$0.31. We are suspending coverage on the stock Price Relative S$ Relative Index May-13 May-14 May-15 May-16 May-17 Forecasts and Valuation FY Dec (US$ m) 2015A 2016A 2017F 2018F Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) (12.9) (14.8) (96.6) 1,784.4 EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) (13) (15) (97) 1,784 Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): (97) (55) Consensus EPS (S cts): Other Broker Recs: B: 4 S: 0 H: 0 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Earnings under pressure Downgrade to HOLD with TP cut to S$0.31; Steep cuts to FY17F/18F earnings of 98%/55% on low ore grades. 1Q17 earnings was below expectations as lower ore grades weighed on gold production and sales. 1Q17 net profit was US$54,834, helped by unrealised forex gains of US$0.31m; excluding this, CNMC would have recorded a second consecutive quarter of losses. Until a sustainable improvement in ore grades can be delivered, we lower our gold output estimates, and combined with a higher operating cost base, we cut FY17F/18F earnings by 98%/55% to US$0.3m/US$5.7m. Hence, we arrive at a lower TP of S$0.31, based on a blend valuation of DCF (WACC of 10.7%, terminal growth of 1%) and 14x FY18F PE. We are suspending coverage on the stock due to lack of earnings visibility. Embarking on several initiatives to boost longer-term profitability... To mitigate current challenges and raise longer-term growth prospects, CNMC has implemented several initiatives such as 1) expansion of its mining asset portfolio recent acquisitions include Pulai Mining and KelGold Mining, and 2) the setting up of a new carbon-in-leach (CIL) plant at Sokor which could raise total processing capacity by 15% to c.1.38m tonnes p.a. by end but negatives outweigh positives for now. While the completion of the new CIL plant later this year could add to output, we believe that near-term earnings performance could further worsen before potentially getter better. Persistently lower ore grades and a growing cost base especially as CNMC ramps up exploration work at the new Pulai and KelGold sites which are unlikely to contribute to earnings anytime soon is putting pressure on the near-term earnings outlook. Valuation: Downgrade to HOLD with lower TP of S$0.31, based on blended valuation. After cutting earnings estimates for FY17F/18F, we arrive at a lower TP of S$0.31 based on a blended valuation using DCF (which assumes WACC of 10.7% and terminal growth of 1%) and PE (pegged to larger peers average of 14x) metrics. Key Risks to Our View: Susceptibility to volatility in gold prices and mining conditions. As price takers, gold miners are generally susceptible to volatility in gold prices. Their output may also be hampered in the event of unfavourable weather conditions. Every US$10/oz decrease in gold prices could lower FY17F earnings by 1.7%. At A Glance Issued Capital (m shrs) 407 Mkt. Cap (S$m/US$m) 120 / 86.1 Major Shareholders (%) Innovation China Limited 26.3 Messiah Limited 13.0 Ng Eng Tiong 9.8 Free Float (%) m Avg. Daily Val (US$m) 0.82 ICB Industry : Basic Materials / Mining ed: JS / sa:jc, PY

2 WHAT S NEW Unrealised forex gains aside, CNMC would have otherwise been unprofitable in 1Q17. CNMC posted its third consecutive decline in quarterly revenues to US$4.73m (- 48.3% y-o-y) as slightly higher average gold prices realised over the quarter was more than offset by lower grades of mined ores. All-in cash costs doubled y-o-y from US$487/oz in 1Q16 to US$983/oz in 1Q17 as operating costs were spread over substantially lower gold output of 3,670 oz (- 49.5% y-o-y). 1Q17 net profit came in at US$54,834, which was held by unrealised forex gains of US$0.31m barring which, would have resulted in a second consecutive quarter of losses for CNMC. New processing facility and recent string of acquisitions could drive longer-term profitability. Apart from the recent expansion of its mining asset portfolio to include Pulai Mining and KelGold Mining, CNMC also disclosed that it is in the process of setting up a new CIL processing plant at Sokor, which is aimed at improving gold recovery. According to CNMC, this method of extraction is expected to deliver gold recovery rates of up to 95% (vs 65% for existing heap leaching facilities). When complete, total production capacity is expected to be raised to 1.38m tonnes p.a. by end-2017, from 1.2m currently. But likely to get worse before potentially getting better. While there are these new initiatives to raise the group s longer-term productivity and earnings profile, we believe that near-term performance could further worsen before potentially getter better later on given 1) persistently low ore grades and, a 2) growing cost base. As costs continue to creep up under the new (higher) royalty fee compensation structure and on a ramp-up in exploratory and mining activities at the new Pulai and KelGold sites - which are unlikely to contribute to earnings anytime soon - we expect near-term earnings potential to remain under pressure. Steep cuts to FY17F/18F earnings. Until a sustainable improvement in ore grades can be delivered, we remain cautious on bottom-line performance and cut FY17F/FY18F earnings by 98%/ 55% from US$10.6m/US$12.7m to US$0.3m/US$5.7m. Downgrade to HOLD; TP cut to S$0.31. After cutting our earnings estimates, we arrive at a lower TP of S$0.31, based on a blend of DCF (WACC of 10.7%, terminal growth of 1%) and 14x FY18F PE. We are suspending coverage on the stock. Quarterly / Interim Income Statement (US$m) FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq Revenue (43.8) (8.9) Cost of Goods Sold Gross Profit (43.8) (8.9) Other Oper. (Exp)/Inc (2.7) (7.5) (4.7) 73.1 (36.8) Operating Profit 5.66 (2.3) 0.0 (100.3) (99.2) Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (15.6) Exceptional Gain/(Loss) Pre-tax Profit 5.85 (2.1) 0.20 (96.6) nm Tax (0.3) (0.1) (0.1) (48.3) (1.1) Minority Interest (1.1) nm Net Profit 4.55 (1.9) 0.05 (98.8) nm Net profit bef Except (1.9) 0.05 (98.8) nm EBITDA 5.66 (2.3) 0.0 nm 99.2 Margins (%) Gross Margins Opg Profit Margins 67.4 (44.6) (0.4) Net Profit Margins 54.2 (37.3) 1.2 Source of all data: Company, DBS Bank Page 2

3 Revised Forecasts and Key Assumptions Currency US$ FY Dec (US$m) FY13 FY14 FY15 FY16 FY17F FY18F Revenue: Gold Mining Total Revenue % chg in forecast (44%) (30.7%) Gold Resources and Production: Gold Resources (ounces) 465, , , , , ,000 % chg in forecast (12.4%) (18.6%) (22.2%) Fine Gold Production (ounces) 12,649 26,122 31,206 27,404 18,690 26,160 % chg in forecast (44%) (30.7%) Implied Average Gold Price (US$) 1,314 1,271 1,169 1,265 1,230 1,260 Operating Expenses: Changes in Inventories (0.1) (0.1) 0.3 (0.2) Amortisation and Depreciation (1.8) (3.1) (4.0) (4.5) (5.2) (5.2) Contractor Expenses (0.0) Employees' Compensation (1.2) (2.5) (2.7) (3.1) (3.0) (3.2) Key Management Remuneration (1.5) (2.0) (2.5) (3.0) (3.2) (3.4) Marketing and Publicity Expenses (0.1) (0.1) (0.2) (0.3) (0.2) (0.2) Office and Administrative Expenses (0.3) (0.3) (0.3) (0.4) (0.3) (0.3) Professional Fees (0.7) (0.6) (0.6) (0.5) (1.0) (1.0) Rental Expense on Operating Lease (0.3) (0.5) (0.9) (0.9) (1.0) (1.0) Royalty Fee Expenses (1.3) (2.5) (2.7) (3.1) (3.2) (4.5) % of Revenue 8% 8% 7% 10% 14% 14% Site and Factory Expenses (3.5) (5.5) (5.8) (5.6) (6.0) (6.3) Travelling and Transportation Expenses (0.2) (0.2) (0.2) (0.3) (0.3) (0.3) Other Expenses (0.4) (1.0) (3.1) (1.6) (0.5) (0.4) Total Operating Expense (11.4) (18.5) (22.6) (23.4) (23.7) (25.7) Effective Tax Rate 34% -3% 7% 6% 6% 15% Growth (%) Revenue 100% 10% (5) (34%) 43% Operating Expenses 62% 22% 3.5% 1.3% 8.4% Margins (%) EBIT 31% 45% 33% (3%) 24% Lower gold production estimates as lower ore grades seen over the last three quarters likely to persist. Operating costs to continue creeping up despite lower gold output as CNMC ramps up on exploratory work, weighing on near-term profitability. Profitability in FY17F likely supported by interest income earned on CNMC s strong net cash position of US$24.2m as at end-1q17 Source: Company, DBS Bank Page 3

4 CRITICAL DATA POINTS TO WATCH Critical Factors Positive on medium-term gold prices. In 2016, CNMC had an implied average gold price of US$1,265/oz. With gold prices having rebounded from below US$1,150/oz in December to above US$1,230/oz currently, we have assumed that average prices will go up slightly to US$1,230 in FY17F and US$1,260/oz in FY18F on higher investment demand, which is largely in line with industry estimates. Separately, our sensitivity analysis suggests that every US$10/oz decrease in gold prices could lower FY17F earnings by c.1.7% Gold Resources (Ounces) Fine Gold Production (Ounces) Fine gold production to decline in FY17F as lower ore grades persist. CNMC s gold production continued to suffer as the lower ore grades continue to persist for the third consecutive quarter in 1Q17. Until there is a sustainable improvement in delivery of ore grades, we remain cautious on the production rates ahead and now assume a 31.8% decline in annual production for FY17F However, the commissioning of a new CIL facility with daily processing capacity of 5000 tonnes, has higher recovery rates (of up to 95% vs 65% for existing heap leaching facilities). This would raise effective processing capacity from 1.2m p.a. to 1.38m p.a. by end-2017, should provide some relief only in FY18F. Higher operating costs to weigh on near-term earnings potential. But, we expect costs to continue creeping up under the new royalty fee compensation structure (at 14% of revenue vs 8% previously) and as CNMC ramps up on exploratory and mining activities at the new Pulai and KelGold sites, - which are unlikely to contribute to earnings anytime soon, further compounding pressures on near-term profitability Implied Average Gold Price (US$) Royalty Fees as % of Sales Capacity Expenditure (US$ m) Source: Company, DBS Bank Page 4

5 Balance Sheet: Strong balance sheet. Already cash-generative, CNMC s strong balance sheet, backed by net cash of US$24.2m as at end- 1Q17, provides a buffer against near-term volatility in commodity prices, and can be readily deployed to finance the acquisition and/or development of mines, should suitable opportunities arise. Share Price Drivers: Success in Pulai and/or KelGold could propel earnings growth. Further down the road, should CNMC be successful in discovering new gold veins, and if the concentration of newfound gold proves to be commercially viable for extraction, contributions from Pulai and/or KelGold could then propel the group s earnings growth. We have yet to incorporate potential contributions from Pulai or KelGold in our forecasts. Key Risks: Susceptibility to volatility in gold prices and mining conditions. As price takers, gold miners are generally susceptible to volatility in gold prices. Their output may also be hampered by unfavourable weather conditions. Every US$10/oz decrease in gold prices could lower FY17F earnings by 1.7%. Leverage & Asset Turnover (x) Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure US$m Capital Expenditure (-) 60.0% 50.0% 40.0% 30.0% ROE (%) No guarantees of commercially viable concentrations of gold at new sites. There are no guarantees that the group will be successful in uncovering gold deposits that are commercially viable for extraction and sale in its new acquisitions. As such, we have not factored in upside from Pulai or KelGold in our forecasts and valuations. Company Background Limited (CNMC SP), together with its subsidiaries, is principally engaged in the business of exploration, mining of gold and the processing of mined ores into gold dores. It is currently focused on the development of its flagship Sokor Gold Field Project, and has recently completed the acquisition of a 51% stake in Pulai Mining Sdn. Bhd, and 100% of KelGold Mining Sdn Bhd. 20.0% 10.0% 0.0% Forward PE Band (x) (x) sd: 127.4x +1sd: 77.8x 35.9 Avg: 28.1x May-13 May-14 May-15 May-16 May-17 1sd: 21.6x PB Band (x) (x) sd: 6.9x +1sd: 5.32x Avg: 3.75x 2.5 1sd: 2.18x sd: 0.6x May-13 May-14 May-15 May-16 May-17 Source: Company, DBS Bank Page 5

6 Key Assumptions FY Dec Gold Resources (Ounces) 506, , , , ,000 Fine Gold Production 26,122 31,206 27,404 18,690 26,160 Implied Average Gold 1,271 1,169 1,265 1,230 1,260 Royalty Fees as % of Sales Capacity Expenditure (US$ Income Statement (US$m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc (18.4) (22.5) (23.4) (23.6) (25.2) Operating Profit (0.6) 7.76 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax 0.49 (1.0) (0.8) 0.0 (1.3) Minority Interest (3.1) (2.8) (2.4) (0.1) (1.7) Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) (4.9) (33.7) 43.4 EBITDA Gth (%) (11.9) (71.1) Opg Profit Gth (%) (5.5) (19.1) (105.2) (1,430.8) Net Profit Gth (Pre-ex) (%) (12.9) (14.8) (96.6) 1,784.4 Margins & Ratio Gross Margins (%) Opg Profit Margin (%) (2.5) 23.6 Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Bank Page 6

7 Quarterly / Interim Income Statement (US$m) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc (2.7) (6.9) (6.2) (7.5) (4.7) Operating Profit (2.3) 0.0 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit (2.1) 0.20 Tax (0.3) (0.1) (0.3) (0.1) (0.1) Minority Interest (1.1) (1.2) (0.5) Net Profit (1.9) 0.05 Net profit bef Except (1.9) 0.05 EBITDA (2.3) 0.0 Growth Revenue Gth (%) (9.6) 50.2 (33.0) (38.7) (8.9) EBITDA Gth (%) (60.9) nm 99.2 Opg Profit Gth (%) (60.9) (203.4) (99.2) Net Profit Gth (Pre-ex) (%) (62.5) (209.7) (102.8) Margins Gross Margins (%) Opg Profit Margins (%) (44.6) (0.4) Net Profit Margins (%) (37.3) 1.2 Balance Sheet (US$m) FY Dec Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity Minority Interests Total Cap. & Liab Non-Cash Wkg. Capital (2.8) (2.6) (2.4) (3.4) (4.5) Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) (393.7) (281.8) (233.5) (215.6) (231.4) Inventory Turn (avg days) (113.3) (76.5) (61.6) (61.6) (75.8) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) , ,276.3 Z-Score (X) Source: Company, DBS Bank Page 7

8 Cash Flow Statement (US$m) FY Dec Pre-Tax Profit Dep. & Amort Tax Paid (0.3) (0.3) (0.4) (0.1) 0.0 Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (0.5) (0.9) (1.1) 1.03 (0.2) Other Operating CF Net Operating CF Capital Exp.(net) (2.1) (1.3) (0.9) (9.0) (7.0) Other Invts.(net) (2.8) (2.9) (5.5) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (4.9) (4.2) (6.4) (9.0) (7.0) Div Paid (1.6) (2.9) (3.9) (0.1) (2.4) Chg in Gross Debt (0.3) Capital Issues 0.0 (0.1) Other Financing CF (0.1) (0.1) (0.1) Net Financing CF (2.1) (3.1) (3.9) (0.1) (2.4) Currency Adjustments (0.9) (3.2) (1.8) Chg in Cash (2.6) 4.31 Opg CFPS (S cts) Free CFPS (S cts) (0.8) 2.29 Source: Company, DBS Bank Target Price & Ratings History S$ S.No. Date of Report Closing Price 12-mth Target Price Rating 1: 16 Nov BUY 2: 24 Feb BUY May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Note : Share price and Target price are adjusted for corporate actions. Source: DBS Bank Analyst: Singapore Research Team Paul YONG Page 8

9 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 18 May :51:00 (SGT) Dissemination Date: 18 May :49:18 (SGT) Sources for all charts and tables are DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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12 United Kingdom This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai United States Other jurisdictions This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box , 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore Tel equityresearch@dbs.com Company Regn. No E Page 12