Central Asia Metals

Central Asia Metals (CAM) – 09/09/15

Dividend yield – 6.08%

P/Exp FCF – 9.34

PT - £2.04

 
·      This is not conventional mining and therefore the cost structure and margins are much better than other miners.
·      Dividend policy offers healthy current and future yield. Investors are being paid adequately to hold.
·      Safe access to mining sector with the lowest cost producer in industry with very high FCF/dividend cover in coming years.
·      This actually becomes an income play plus a low risk exposure to future rising copper prices. 

Central Asia Metals (CAM) is a low cost copper producer and base metal exploration company with it's main operation in Kazakhstan and Mongolia. Their main operation in Kounrad, Kazakhstan is the business I am interested in. CAM are the sole owners and operators of a copper recovery plant, a facility that recovers copper from so-called 'waste dumps' that remain from the original Kounrad mine back from the 1930's. Long story short, they are very low cost producers of copper. 

CAM plan to produce 12,000 tonnes of copper in 2015 and at the current price p/t of copper is $5,390 will give around $64m of revenue in 2015 year-end, a 15% decrease yoy. They then plan to ramp up to 15,000 tonnes, and assuming this depressed copper price this gives us $80m annually of revenue from 2017 onwards.

Cost base

CAM has a fully absorbed cost of $1.65/lb in 2014 and $1.87 in 2015, with today’s copper price at $2.5. Increase in total cost is mainly due to increased depreciation charges, business development and hiring.

$.45c of this is production costs of cathodes, $.16c is mineral extraction tax and around $5m of costs is assumed to be salaries, taking into consideration the Directors are most probably paid in dollars. CAM’s fully absorbed cost of $1.87 implies the copper price has to decrease another 25% for the company to breakeven, excluding any future benefits from the local currency devaluation.

Management states that half of cash costs are in the local currency amounting to around $.32c/lb of costs that will be 70% of 2014 value. This reduces total cash cost to $.55c, a 26% decrease and gives a long run fully absorbed cost of $1.675/lb. This reduction in the cash cost will amount to an expected $5m in cash savings per year for CAM, increasing the dividend cover in the future.

An incident on site that halted production for a short period hurt results slightly in 2015H1. EBITDA margin was down to 53% and net margin in H12015 was down to 33% from 57%. Average sale price p/t was $5,936. A 16% decrease in average sale price resulted in 10% fall in revenue, although the halt in production also affected this.

CAM created $13.3m in cash in H12015. Extrapolating this figure prices CAM trading at 10x cash flow. The cash generated suggests CAM turned 44.3% of sales into cash flow. This cash flow is double the $6m of dividend payments agreed as 20% of revenue to shareholders providing some safety in ensuring investors are paid to hold this company.

How much does the Kounrad mine cost to maintain annually?

Capex is crucial. Operating cash needs to cover the dividend and any maintenance capex.

Estimated $6.5m maintenance capex needed for the Kounrad mine over 3 years is $2.16m per year. Total expansion costs for the mine is $35m of which $9.4m was paid in 2014, leaving $26m left over 3 years amounting to $8.6m. So we can assume around $10m plus growth capex for Copper Bay and any other external issues that arise to sum around $12m max capex per year.

Using a decreased operating margin of 40%, down from a 3-year average of 50%, on extrapolated revenue of $64m (12,000 tonnes at current copper prcies) implies OCF of $26m and FCF of $28.5 assuming D&A of $7m, capex of $14m and change in working cap at the historical average of 15% of revenue. This FCF amounts to around $.26c per share which gives a dividend cover of 1.76x. Summing PV of future FCF at discount rate of 12.5% gives an intrinsic value of $2.5, a 5.4% discount to current price. However, using the average operating margin of 50% gives a value of $3.06.

Return

CAM plan to return at least 20%, 25% in 2015, of the REVENUE from the Kounrad project to shareholders EVERY YEAR. This is a powerful insight on the incentives of management and their plan to continue returning value to shareholders. Estimated dividend yield is around 6.4% and therefore I would revalue CAM when the dividend yield gets revalued to the market average of around 4-4.5%.