Central Asia Metals - Update
September 26th 2019
Well Positioned For A Tough Environment
Before considering how CAML performed over the H1 2019 period, it might be worth examining the backdrop in terms of commodity prices. For the six months under review to 30th June 2019, all three of its commodities came under price pressure. Compared to H1 2018, the realised prices it received fell: Copper 7%, Zinc 18% and Lead 22%. The impact was mitigated slightly with a rise in payable sales: Copper and Zinc rising 7% and 5% respectively while Lead remained flat. Its income for the period was derived from the production of Copper (45%), Zinc (25%) and Lead (30%).
Revenue Under Pressure But Margins Maintained
Its revenue fell by 12.2% to US$89.9 million compared to H1 2018 with Earnings Per Share from continuing operations down by 6% to 15.42 cents. However, its EBITDA margins were maintained at 63% despite the lower commodity price environment. It's also worth mentioning that the US$35.5 million in free cash flow that was generated in the period included a final deferred payment of US$6.5 million for the SASA acquisition. For the third successive year, it paid an interim dividend of 6.5p. That makes a seven-year dividend streak during which it has returned 91.2p to investors plus share buy-backs. And, as per its earlier guidance, it's looking at returning between 30% and 50% of its free cash flow to investors. It may also be worth bearing in mind that over the six years to the end of 2018, its free cash flow has increased by a compounded growth rate of just over 5.05% per annum while the compounded growth rate for its dividends was 4.46% per annum.
Kounrad - Move To Western Dumps Continues
The company continues with its increasing focus on its Western dumps - producing around 71% of its Copper for H1 2019. And where it has some 155,000 tonnes of recoverable Copper at a recovery rate of 35%-42% (Its Eastern dumps now have around 10,000 tonnes of recoverable Copper with a recovery rate of 45%-50%). Basically, the move to its Western dumps increases its cost - both in terms of electricity and labour.
Focus On Maintaining Low-Cost Base
In Copper equivalent terms, its C1 cash costs have risen significantly to US$0.90lb (H1 2018: US$0.79lb). However, this is in large part the result of the relative decline in Zinc and Lead prices causing a rise of US$0.07lb. With the remaining increase (US$0.03lb) is largely down to increased Zinc treatment charges (A rise of US$1.5 million to US$6.2 million compared to H1 2018). That said, it has demonstrated an ability to control its on-site costs - its Zinc cost was US$35.4 per tonne (H1 2018: US$35.2 per tonne). At a broader level, its fully inclusive Copper equivalent costs have fallen by 4.6% to US$1.44 per lb. But this appears due to lower capex spending rather than operating efficiencies. Presumably, this is not a one-off and the business has reached a level of maturity where major amounts of capex are simply not required.
With its output from Kounrad in the lower quartile in C1 cash terms at US$0.51 per lb. And its SASA Zinc output in the lower end of the second quartile at US$0.47 per lb, the company can cope with most pricing scenarios. As I pointed out before, should commodity prices really collapse then many will go to the wall and so will their production before CAML gets hit. The low-cost dimension is key to its success.
Its cost of sales has fallen around 5% to US$36 million largely as a result of lower depreciation and amortisation charges. Both its North Macedonian and Kazakhstan sites benefited from lower electricity costs. But both operations were impacted by rising labour costs (SASA employees received an average pay increase of 6% while those at Kounrad saw an average increase of 5%).
A devaluation of the Tenge against the US dollar as well as tight cost control, both in terms of operational as well as capital costs, reduced production costs at Kounrad. But with inflation in Kazakhstan running at 5.4 %, there could be cost pressure going forward.
Although its administration costs fell to US$7.3 million from US$11.2 million (H2 2018), this was largely a result of a change in the way share-based payments were administered rather than efficiencies.
De-Leveraging Is A Key Goal
During the period it made debt repayments totalling US$19.2 million (H1 2018: US$18.2 million), this represents a repayment of capital. In addition, it paid US$5.2 million in interest (H1 2018: US$6.19 million). At the period end, its gross debt stood at US$126.4 million (H1 2018: US$165.7 million). Group net debt is now US$100.4 million (End of H2 2018: US$110.3 million) but this does not include restricted cash of US$4.206 million (This is held as part of its financing arrangements - it appears set to fall as the level of its outstanding debt falls). For 2019, it's aiming at debt repayments of US$38 million - US$39 million (Excluding interest). It still seems to be looking to reduce its debt to zero in the absence of locating a suitable acquisition target.
The group cash balance fell to US$30.2 million (H2 2018: US$39 million). Both of these figures include restricted cash balances. Unusually, the interest it received increased to US$159,000 for the period (H1 2018: US$114,000). This does not concern me and can probably be explained away by timing differences. But, as I have mentioned before, I am suspicious of companies that point to large cash balances (They seldom report the daily average cash balance) at the period end but have very low interest received figures as per the cash flow statement.
In terms of its general financial stewardship, its return on capital employed is 18.1% (Ranking it 15th out of 139 companies in the Metals and Mining market). So it seems to efficiently manage its assets - firstly it's a business and secondly, it's a mining company.
Political Unease In Kazakhstan Improves Profits But Dims Outlook
With the Kazakhstan Tenge at its lowest ebb in some five years, the company clearly stands to benefit in the short-term, at least. However, this freefall in the currency seems to indicate wider political concerns. According to the IMF, the Kazakhstan economy shrank from a GDP of around US$240 billion in 2013 to some US$170.5 billion in 2018. While the country's Central Bank foreign reserves fell from US$18.05 billion in July 2018 to US$11.13 billion in June 2019. And it's still unclear just how well the new President, Kassym-Jomart Tokayev, elected in June 2019 will perform. At a more prosaic level, the company was owed US$3.1 million in VAT from the authorities at the end of the period. However, after the period end, it managed to collect US$300,000 of this debt. It seems to be looking at the local sale of Copper cathode to offset some of the remaining amount owed to it.
Putting the above to one side, CAML is a good corporate citizen. Thus far, it has paid some US$165.8 million in taxes to the Governments of North Macedonia and Kazakhstan (Over the period it paid US$19.8 million in a variety of taxes in both jurisdictions). Some 98% of its 1,000 employees are locals. And around 25% of its staff bonuses are paid based upon KPIs relating to health and safety. It seems to put in the efforts required to maintain its good corporate standing. I would suggest that this should not be overlooked by investors.
Easing Up Of Capital Expenditure
The Tailings Storage Facility (TSF4) at SASO was, according to the company, "Materially completed" during the period. It predicted the total cost to be around US$11.5 million. However, it looks set to exceed this figure. It spent US$1.1 million on its construction in H1 2019 and expects to spend a further US$800,000 over the rest of the year. The cost of this project has crept up significantly and its completion delayed. However, the company took this over some time after it had been launched and has clearly been saddled with some legacy problems. Incidentally, it has used a "Downstream" design for the dam. Although the safest, it's the most expensive approach. On completion, the tailings dam is expected to have a life of around six to seven years. It's worth mentioning that, globally, companies operating tailings dams are under considerable public pressure through the Church of England's Investor Mining & Tailings Safety Initiative to improve the safety aspect of these dams. It also seeks greater transparency in regards to their operations. I don't believe that this presents any downside risk for the company but I suspect that the same could not be said for many of its competitors.
For the full year, the company expects to spend between US$10-12 million on capital expenditure.
Scope For Development
Certainly not new for the rest of the world but innovative for SASA is the introduction of 3D software systems to improve mine planning and also to provide on-site 3D modelling. In addition, it's considering underground WIFI to improve safety and productivity. During the period, it improved Zinc recovery rates through the use of a stirred media detritor mill. Short-term, its crushing and milling circuits appear likely to increase throughput by some 850,000 tonnes per annum - it plans to purchase a new tertiary crusher at a cost of around US$600,000 with commissioning in Q4.
It has also made a number of personnel changes at its SASA project. This includes several technical hires and, post-period, a Group Geologist. In parallel, it has upgraded SASA's metallurgical laboratory.
Although it has a drilling programme at Svinja Reka, this is of limited scope - to a depth of some 3,000 metres and at a cost of around US$250,000-US$300,000. It's aiming to convert inferred to indicated resources (As of 2017, it had 13.3 MT indicated and 2.7 MT inferred - Lead and Zinc). While at Kozja Reka, a previously mined asset, its goal is to establish mineralisation. This US$300,000 drilling programme is currently delayed due to issues with forestry permits. Overall, its development goals in North Macedonia appear quite limited.
The Life Of Mine project should be delivered later this year. For the moment, it's unclear whether this will entail further capital expenditure.
Still Looking For Acquisitions But No Immediate Opportunities
Usefully, the company provides us with a breakdown of the potential targets that it has investigated. It screened 17 opportunities and signed seven non-disclosure agreements (As many as it signed in the whole of 2018) and conducted two site visits over the period. However, according to the conference call, the company is seeing no great bargains on offer as a result of the relatively depressed Copper price. In terms of Zinc mining, it does not seem to be impressed with what it has come across. In the past, it has stated that it's only really interested in buying a business that is in or close to production and that still seems to be the case. Its preference appears to be for something in the Copper sector.
Literally, as I write Nick Clarke, Chairman of CAML, has been appointed as Non-Executive Director for Zimbabwe focused Gold producer, Caledonia Mining (LON: CMCL). What, if anything, this means for CAML is unclear but it certainly indicates that the Chairman is now paying a lot more attention to this part of the world. This could be worth remembering as the company's future growth will almost certainly come through acquisitions.
Most recent research:
April 16th 2019