Excerpts from analyst's report
NRA Capital analyst: Liu Jinshu
Investment thesis remains intact. CNMC surprised the market last week following the stop-work order received on 19 July. This stop-work order has since been lifted. We are of the view that the fundamentals of the company remain intact. |
Our valuation only reflects the value of the Sokor mine based on an average gold price of US$1,200/oz. Further upside will stem from the acquisition of 51% of Pulai Mining Sdn. Bhd. (PMSB).
Given the haste with which the stop-work order has been lifted, disruption to production remains minimal and our forecasts of US$16.5m of full year PATMI remains intact.
2Q results outlook remain positive. CNMC has also announced that it produced a record 9,807.4oz of fine gold during 2Q16 or 24.5% higher than that of 2Q15. This brings half year production to 17,079oz or 48% of our full year forecast of 35,613oz. Likely, 2Q average selling price (ASP) will be above our full year estimate of US$1,200/oz.
Large Scale Operation Status. The company has clarified that the stop work order was made in connection with the State Government’s review of CNMC’s application for Large Scale Operation status which will allow for the mining of unlimited amounts of ore from Sokor. Upon approval, CNMC will be able to further expand operations at Sokor to meet our longer term forecasts of up to 57,309oz by 2018.
|♦ Expect further upside|
|"What makes CNMC stand out is that the PMSB mine is located near the Sokor mine, thus facilitating operational synergies and lower execution risk.
"Hence, we can expect further upside even though the current Sokor mine has been priced into CNMC’s share price. The risk is that CNMC may have to pay higher royalty+tribute after 2018 to extend Sokor’s lease, which is reasonable to provide for long term operating certainty, bearing in mind that other mines in Malaysia are paying higher royalty+tribute of e.g. 5%+5%, as opposed to CNMC’s 5%+3%."
-- Liu Jinshu (photo)
Stop-work order likely to be procedural. We are also relieved that the stop work order has been lifted within one week. It shows that the company is not infringe of any regulation and that the impact on the company’s 3Q performance will likely be limited – other than some costs to resume operations.
We also highlight that CNMC has been transparent in disclosing the circumstances about the stop-work order and that the relevant announcements have been reviewed by CNMC’s sponsor who may have sighted the source documentation.
Current valuation excludes new mine. We are mindful that CNMC has been trading above our valuation of S$0.430. However, we do not think that CNMC is overvalued at S$0.440 and maintain our Overweight rating (average return/low risk). CNMC’s current share price implies an ASP of about US$1,250/oz – which is still lower than the current gold price of US$1,319/oz.
Full report here.