• 9M16 Revenue met 65.8% of our full year expectation of US$44.8mn
• Operating income met 62.2% of our full year expectations of US$21.9mn
• Net income met 64.8% of our full year expectation of US$21.1mn
• We revise down our FY16e revenue from US$44.8mn to US$42.1mn while maintaining FY17e and FY18e unchanged. We maintain our “Buy” rating with a reduced discounted FCFE-derived TP of S$1.01 (from S$1.03). Cost of equity used remains unchanged at 9.8%. Our TP implies a 96% return from the last close price of S$0.515.

Results at a glance

Missing the higher gold price for 21 days

Compared to US$1,197/oz of average realized gold price in 9M15, CNMC’s dore gold was sold at  average US$1,255/oz with 4.8% y-o-y growth in 9M16, and meanwhile the production and sales volume was reported at 23,363 ounces  with 2.9% y-o-y growth. However, the group could have performed even better during this period, since the operation was suspended due to the temporary stop work order (SWO) lasting for 21 days in 3Q16 (c.90 days).  It took 7 days for the State Government to review the application for large scale operation starting on 25 Jul-16, and another 14 days for the group to reinstate operation. During the 21 days’ suspension, the spot gold was trading at US$1,342/oz on average. Also, based on YTD production and sales volume, we can derive the daily volume of 93.8 ounces, which infer that the group could have produced 1,970 ounces if SWO was not incurred. Thus, theoretically we estimate that the group’s 3Q normalised revenue should have been US$2.6mn or 31.3% higher.

Long-term prospects remain

From the perspective of long-term development, CNMC is still riding on the tailwind of both organic and inorganic growth. As of Sep-16, the group was producing gold at the capacity of 1.2mn tonnes ores per annum (mt/y), of which 0.2 mt/y was ramped up in Apr-16. According to the management,

1 mt/y leaching capacity in the northern part of the Sokor field has been saturated, while the newly-built leaching yard in southern part is awaiting larger expansion next year from the current base of 200,000 tonnes per annum. Besides, the group holds a mid-and long-term bullish view on gold price. For Sokor project, it took 3 years for CNMC to start producing gold from the beginning of the project. Comparatively, the management guided that it should take shorter time to start producing gold operation on Pulai project once it seals the deal. We expect the group to have updates on it in the near term.

All-in cost will shoot up this year due to non-recurring expenditure on license extension

The management has guided that the one-off processing fees for 21-year mining lease extension rounded up to US$5mn will be paid off this year. As of 9M16, the group has paid US$0.6mn, which translated into average US$95/oz all-in cost, and the remaining US$4.4mn is expected to result in cash outflows in 4Q16.  Accordingly, the FY16e all-in cost is expected to be US$767/oz (previous forecast US$725/oz), since we revised up the forecast for marketing and publicity expenses to US$580,000 (previous US$ 150,000) and for Capex (exploration) expenses to US$300,000 due to higher lease extension fees than previously forecasted.

All-in cost forecast

Source: Company, PSR

Sensitivity Analysis

Valuation

Source: PSR

We revise down our FY16e revenue from US$44.8mn to US$42.1mn while maintain FY17e and FY18e unchanged, and accordingly respective net profit to the company is estimated to be US$16.8mn, US$19.2mn, and US$22.7mn in FY16e, FY17e, and FY18e.

Based on unchanged 9.8% cost of equity and discounted FCFE, we derive our updated TP of S$1.01, slightly down 2 SG cents from our previous forecast. We maintain our “Buy” rating, which implies a 96% return from the last close price of S$0.515.