Surprisingly, Warren Buffett's Berkshire Hathaway has invested in gold.  It bought about 21 million shares of gold miner Barrick Gold for US$563 million, according to a regulatory filing on Aug. 14. The purchase points to an optimistic outlook for gold. Are Singapore listco CNMC Goldmine's shares looking undervalued? Doesn't look like it, according to this article by ALA Advisors.

A back-of-the-envelope calculation estimates CNMC to be worth 41.5 cents (S$169m fair value).

That's 36% upside from last week’s close of S$0.305, based on 15% discount rate (or 34.6 cents, 13.4% upside @ 20% discount rate), assuming a selling price of US$1,944 per ounce.

Even at US$1,800 per ounce selling price, CNMC’s shares are still worth 33.7 cents @ 15% discount rate, and this excludes upside from mining the zinc, lead and feldspar resources in its concessions!

mine11.15CNMC gold mine in the Malaysian state of Kelantan. Photo: Company
The Covid-19 pandemic has shown the management’s determination to minimise losses to shareholders with aggressive cost cutting measures.

Management remuneration was slashed by 50%!

Since raising US$7.3m in its IPO in October 2011, the Company has never raised any money from the market.

Instead, it returned about US$13.1m to shareholders via dividends and share buybacks.

Operationally, it increased net cash from US$5m as at 31 December 2011 to US$10m as at 30 June 2020. 

And it expanded gold reserves from 68,500 ounces as at 30 June 2011 (160,000 ounces as at 31 December 2012) to 204,000 ounces as at 31 December 2019.

1H 2020 results show strong commitment by management to reduce costs, minimize losses 

1) First half 2020 revenue fell by 48.6% to US$10.5m as production fell by 60% to 6,221.87 ounces. The reduced production was due to the Covid-19 pandemic.

a. Most of underground mining crew could not return after flying back to China on 3 Feb 2020 for the Chinese New Year holidays.

b. Mining was fully halted from 18 March 2020 to 5 May 2020.

2) Company sharply reduced operating expenses by US$4.7m or 28% year-on-year during 1H 2020.

a. Employee benefits expenses fell by 28% while key management remuneration was slashed by 50% year-on-year.

b. In all, reduced site & factory expenses, labour costs, rental, and lease expenses led to about US$3.6m of cost savings.

c. Cost savings would have been higher if not for US$665k of unrealised forex losses on Malaysian Ringgit kept in banks. The MYR depreciated against the USD in 1H 2020.

3) Net loss attributable to shareholders was thus kept at S$0.9m in 1H 2020. The company would have almost broke even if not for forex translation losses.

• Outlook – Focus on high grade ore and return of mining crew will turn CNMC around in 2H20 

1) Company is working with the authorities to bring back underground mining crew. Expect first batch to return by end of August, followed by the rest in September 2020. Underground mining to ramp up from mid-September onwards following 14-day quarantine.

2) Company will in the interim focus on recently discovered better grade ore for open pit mining.

3) Expect 2H20 production of 11,000 ounces of gold.

a. 1H 2020 average monthly production was 1,383 ounces (6,222 ounces divided by 4.5 productive months in 1H20).

b. Expect monthly production of 1,300 – 1,400 ounces in July and August, 1,600 ounces in September, 2,000 ounces in October and 2,400 ounces per month in November and December. (2019 average monthly production was 2,345 ounces).

c. Full year 2020 – 17,222 ounces, 39% less than 28,136 of 2019.

4) Looking to commence feldspar production from November 2020. The Company had about 23.7m tonnes of inferred feldspar resources with an average grade of 6.8% sodium oxide and 2.8% potassium oxide. Feldspar is used to make glass and ceramics.

• CNMC is worth S$0.415 at today’s gold price of US$1,944 per ounce

1) Company’s total expenses amounted to US$32.95m in 2019 or US$1,171 per ounce of costs, including depreciation and amortisation (thus future capex is also factored in). Reported all-in costs, as per World Gold Council guidelines, was US$1,166 per ounce. 1H 2020’s costs per ounce is not reflective of company’s cost structure due to downtime.

2) If Company were to mine all its gold reserves and sell them at today’s gold price of US$1,944 per ounce, the operating margin works back to US$587 per ounce (US$1,944 – US$1,171, less 24% corporate tax).

3) As of 31 December 2019, the Company’s attributable gold reserves amount to 165,000 ounces, 5,000 ounces of measured resources and 248,000 ounces of indicated resources (total of 418,000 ounces of reserves, measured and indicated resources).

a. There is also 319,000 ounces of inferred gold resources, 29,430 tonnes of lead resources, 35,090 tonnes of zinc resources and 2,500 tonnes of sodium oxide and potassium oxide resources (feldspar). We ignore these resources for simplicity and to be prudent lest we factor in resources that are not economically feasible to mine.

4) As the Company will probably take time to mine the full 418,000 ounces of gold, the operating after-tax margin of US$478 per ounce has to be discounted backwards by a factor of 50% (@ 15% discount rate) to US$294.8 per ounce (or a factor of 42% @ 20% discount rate to US$246.3).

a. A cash flow of one dollar per year over a period of ten years (S$10 in total) has a present value of S$5.02 (50.2%) when discounted by 15% per annum.

b. Present value is S$4.19 (41.9%) when discounted by 20% per annum.

c. Implicit remaining mine life of 10 years or 41,800 tonnes of output per year eventually.

5) Therefore, the Company has an approximate fair value of S$168.84m or S$0.414 (round to S$0.415) per share based on a discount rate of 15% (US$294.8 margin per ounce x 418,000 ounces of gold x 1.37 USD SGD rate).

a. Fair value of S$141.04m or S$0.346 per share @ 20% discount rate (US$246.3 margin per ounce x 418,000 ounces x 1.37 USD SGD rate).

b. Fair value of S$137.4m or S$0.337 per share @ 15% discount rate and average selling price of US$1,800 per ounce (US$239.9 margin).

c. Fair value of S$114.77m or S$0.282 per share @ 20% discount rate and average selling price of US$1,800 per ounce (US$200.41 margin per ounce).

However, this scenario may be too prudent (discount rate has to be lower if selling price is reduced to remove gold price volatility risk).

d. High minimum discount rate of 15% offsets cost inflation over time.

This article was originally published on ALA Advisors' website. 

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