CNMC GOLDMINE: Severely undervalued gold producer

Excerpts from analyst's report

KGI Fraser analyst: Renfred Tay

CNMC's goldmine in Sokor, Kelantan. Photo: CompanyCNMC Goldmine (CNMC) is a low-cost gold producer located in Kelantan, Malaysia. Gold production has been rising over the years while production cost per ounce has been falling. We believe the company is deeply undervalued for the reasons below; even as we take an agnostic view on gold price.    Proven track record. CNMC has dispelled earlier doubts about its execution ability in raising its annual gold production to 31.2 oz in FY15 from just 3.1 oz in FY11.

Lowest cost gold producer with rising profits. CNMC sold gold at an average realised price of US$1,156/oz in 1Q16 at an all‐in‐sustaining cost of US$474/oz (compared to the 4Q15 world average of US$832/oz), providing itself a sustainable margin buffer should gold price takes a drastic fall.

Its FY13‐15 performance illustrates this point – larger production scale boosted efficiency, and helped its core profits surge from US$3.1m to US$13.6m, despite the fall in its average realised gold price to US$1,169/oz from US$1,314/oz, during the same period. At the current gold price of US$1,282/oz, which is 10% higher than the average levels recorded in FY15, coupled with a 20% increase in production capacity starting in 2Q16, we expect CNMC to report even higher profits this year.  

♦ Purchasing 2nd concession to be catalyst

"With negligible debt, cash holdings swelled from just US$2.7m in FY12 to US$26.2m in 1Q16. We believe CNMC is ready to reinvest. "In FY11, CNMC raised only US$7.3m from its IPO to kick start the development of the Sokor concession. We believe it has the means to acquire another project with internal funding. A brownfield project that is based in Kelantan would be ideal, in our view." -- Renfred Tay (photo)

Rising dividends. CNMC started paying dividends in FY13 and has raised it every year. For the past two years, the company has also been making three dividend payments a year and we expect this trend to continue, barring any major unforeseen circumstances.

For FY16F, we expect CNMC to pay dividends that at least equals FY15’s total payout of 0.945 Scts.  

Huge valuation gap. Judging from the sensitivity analysis of CNMC’s DCF value, which is based on conservative assumptions, CNMC’s current trading price mirrors a gold price of at most US$1,070/oz.

This implies that there is a huge valuation gap that needs to be closed. We believe that there is much headroom for CNMC’s valuation to run before the movements of its stock price can be justified by changes in gold prices.

Our TP is set at S$0.48, based on its leading justified P/E of 9.3x, which is still at a 61% discount to its junior gold mining peers. With an upside of 43% to our TP, we rate CNMC as a strong BUY