• Revenue and net profit exceeded expectations due to contribution from the Carbon-in-leach (CIL) plant.
• The first gold pour from CIL plant delivered a substantial improvement in production.
• Business remains intact under the new federal administration.
• Both operating and non-operating costs will surge.
• We revise up FY18e and FY19e EPS to 1.9 US cents and 2.7 US cents (previously 1.3 US cents and 1.7 US cents) due to the substantial improvement from CIL plant which will be operational in 2Q18. We upgrade our recommendation to BUY with a higher TP of S$0.42 as we expect production and earnings will rebound strongly this year.

The Positives

+ The first gold pour from CIL plant delivered a substantial improvement in production.  In Apr-18, the Group announced the first gold pour arrived at 863.3oz because of 2 weeks operation in Mar-18. Based on the daily ore processing capacity of 500 tonnes, the implied ore grade range from 3.1g/tonne to 3.5g/tonne. By contrast, the implied ore grade from the existing plants (heap leach and vat leach) was 0.23g/tonnes as of Dec-17. The cut-off grade for CIL operation is expected to be 1g/tonne. Currently, the Group has conserved a certain amount of high-grade ores specifically for CIL. Meanwhile, management is confident to extract ores that are above the cut-off grade to keep CIL plant’s operation smoothly in a few years.

+ Business remains intact under the new federal administration. The core officials of Kelantan state government was unchanged. The large change is at the federal administration. The key concessions such as exploration royalties have been renewed years ago. Hence, the Sokor field projects will continue operations without any change.

The Negatives

– Both operating and non-operating costs will surge. The group increased manpower and procured leaching consumables and chemicals for CIL operation. On the other hand, CNMC paid US$0.18mn pertaining to the proposed dual primary listing in Hong Kong. The total listing expense is expected to be no more than HK$5mn.

Outlook

In FY18, the primary catalyst that we look forward to is the significant turnaround of gold output, stemming from the replenishment of high-grade ore and higher gold recovery. Another positive factor is the resumption in the uptrend for gold prices. Meanwhile, we expect more capex from flotation facility construction and additional operating expenses from a planned dual primary listing in Hong Kong.