CNMC Goldmine Holdings

Voyage Research, Jan 15

CNMC Goldmine Holdings Limited announced last month that: a) it has formed a joint venture with the Perak state government to explore tin mining, and b) it will be paying its maiden dividend of 0.1 Singapore cent per share on Jan 20. We reiterate our highly positive outlook on CNMC on the back of increased production following the completion of leaching pad 2 in September 2013. Maintain "increase exposure" (intrinsic value at S$0.800).

We recall that CNMC successfully commissioned its second gold de-absorption plant last November, following record gold pours of 2,131 oz (or 66.3 kg) of gold dore bars from the new plant. In contrast, the company produced 81.5 kg (or 2,620 oz) of gold dore bars in October 2013. The new plant tripled overall gold de-absorption capacity to three tonnes per cycle to match this year's one million tonnes of ore heap leaching capacity.

Spot gold currently trades at US$1,252/oz; it remains above the input gold price of US$1,200/oz, which we applied towards our forecasts and valuation of CNMC. We are unfazed by lower gold prices, as falling unit costs and higher production are expected to more-than-offset price declines. Moreover, the decline in gold prices seemed to have slowed since Q3 2013 (down 2.7 per cent from end-Q3 2013 to Jan 14, 2014). CNMC reported an impressive low all-in sustaining cost of US$566/oz in Q3 2013. We remain optimistic about CNMC's Q4 2013 results and 2014 outlook.

The joint venture with the Perak state government-owned Menteri Besar Incorporated (Perak) reflects CNMC's long-term strategic planning to develop other resources, while leveraging on its experience and infrastructure in Malaysia.

For instance, the Kelantan CNMC office can support both the Sokor and Darul Ridzuan sites, thus reaping further synergies. From the technical perspective, there are similarities in how gold and tin ores are processed for their respective metals. We like the cooperation with the Perak state government, following CNMC's relationship with the Kelantan state government. This venture, if successful, will be evidence of the company's ability to grow beyond its current Sokor concession into a major mining company in Malaysia ...

Another positive development is CNMC's decision to give out its maiden dividend, which is a signal of stability and confidence in future production and cash flows. We expect CNMC to fund future exploration activities in Kelantan and Perak from cash flow generated from gold sales, while reserving some cash for shareholders.

INCREASE EXPOSURE