Lower ore grade possibly persists, dwarfing the propellant of ramped-up capacity
The company results in 1Q17 continued to disappoint, following 4Q16. The sales volume only arrived at 3,669.9 ounces (oz) in 1Q17, compared to 7,271.4oz in 1Q16, a 49.5% YoY collapse. Meanwhile, the average realised gold price rose by 11.4% Y-o-Y to US$1287.6/oz in 1Q17. We worry the lower ore grade was not a one-off but a trend. Shown in Table 1, based on FY16 JORC report, the calculated ore grade has been trending down in Rixen pit*. In FY16, the company ramped up 200,000 tonnes of processing capacity on the previously untapped pit, New Found, with much higher ore grade. Apparently, the negative impact due to lower ore grade offset the benefit of this expansion, resulting in lower sales volume in FY16 than in FY15. The substantial lower grade scenario started to kick in in 4Q16 and stretched to the current quarter. The situation may continue to worsen in Rixen pit. We believe the leaching in New Found will buffer the deterioration since the ore grade is expected to be high in the first few years of mining.
*There are 4 pits in the Sokol field – Rixen, New Discovery, New Found and Manson’s Lode. More than 90% of mining activity is from Rixen pit.
Possible solutions may help but it takes time
The management guided two solutions. One is to establish the carbon-in-leach (CIL) plant, through which the company expected to ramp up capacity as well as improve the recovered rate. The other one is to monetize other minerals like silver, lead, and zinc. We believe that it will take time to realise the effectiveness and efficiency of the new CIL plant. The untapped minerals are expected to improve the profitability provided the average sales prices are higher than all-in costs. Besides, all these minerals are under Manson’s Lode pit, which is nearly untapped as well. Therefore, if management decides to implement it, we shall expect a substantial amount of CAPEX and profits may not be booked in in the near term.
May see inorganic growth in the foreseeable future
In 1Q17, CNMC acquired the third mine, Kelgold. This mine and Pulai are to commence operation in the next few years. Besides gold reserves, both mines are expected to have iron ore reserves in the preliminary assessment. Once the mines are commenced operation, we may see the enhancement generated from both.
Revise down the valuation due to expected lower ore grade
We revise down our FY17e and FY18e revenue forecast by 21% and 27 % to US$31.5mn and US$32.6mn respectively. Consequently, our new net profit forecast of US$8.5mn and US$9.1mn for FY17e and FY18e respectively, are 18.3% and 24.8% lower than our previous forecast.
We lower the forecast of implied gold grade to 0.31 g/tonne. Meanwhile, we update the projection of gold price.
The forecast prices remain US$1,240/oz in FY17, and change from previous US$1,265/oz to US$1,280/oz in FY18.
The cut-off grade for Rixen pit and New Found is 0.3g/tonne and 0.4g/tonne respectively. We derive the forecast ore grade from production-weighted average cut-off grade in both pits.
The cut-off grade calculation uses gold price of US$1,100/oz.
Due to lower estimated production volume, the all-in cost estimation is change from previous US$763/oz and US$735/oz in FY17 and FY18 to respective US$945/oz and US$855/oz.
Based on unchanged 9.8% cost of equity and discounted FCFE, we derive our updated TP of S$0.44 (previous: S$0.68). We maintain our “Buy” rating, which implies a 49.2% return from the last close price of S$0.295.