Central Asia Metals has now released its final results for the year ended 2015.
Revenue declined when compared to last year with a $7.7M decrease in international revenue and a $1.5M fall in domestic revenue. Depreciation and amortisation fell by $1M, mineral extraction taxes were down $597K, buyer fees decreased by $504K and duties fell by $101K but the cost of reagents and materials increased by $1.2M as a result of the higher tonnages produced and an increase in electricity costs, so that gross profit declined by $8.2M. We then see a $1.8M growth in consulting services relating to the Copper Bay feasibility study, an $887K increase in duties, a $482K growth in share based payments and a $600K inventory write-off which was offset by a $7.1M increase in forex gains to give an operating profit $4.5M below that of 2014. The group did not benefit from last year’s $33M gain on the fair value acquisition of a controlling interest but tax was down modestly to give a profit for the year of $22.4M, a decline of $37.1M year on year, although without last year’s one-off gain relating to the completion of the Kounrad transaction, the profit would have been down by a more modest $4M.
When compare to the end point of last year, total assets declined by $83.4M, mainly as a result of the collapse of the Kazakhstan Tenge, driven by a $30.4M fall in the value of mining licenses, a $29.5M decrease in plant & equipment, a $10.2M reduction in goodwill, a $5.7M fall in construction in progress and a $4.6M decrease in cash. Total liabilities also decreased as a $10.3M decline in deferred tax liabilities due to the translation of the goodwill arising on the Kounrad transaction which is denominated in Tenge, was partially offset by a $2.9M increase in trade payables. The end result was a net tangible asset level of $74M, a decline of $32.4M year on year.
Before movements in working capital, cash profits declined by $14.4M to $37.2M. There was a modest cash outflow through working capital, although this was slightly less than last year, but tax payments were $6.6M lower, mainly due to a payment towards 2013’s tax bill that occurred last year, to give a net cash from operations of $23.5M, a decline of $7M year on year. The group spent $7.8M on property, plant and equipment along with $556K on intangible assets which meant that there was free cash flow of $16.2M. This did not cover the dividend payment of $20.4M, however, and there was a cash outflow of $4.4M for the year and a cash level of $41.5M at the year-end.
The Kounrad business made a profit of $43.7M, a decline of $35.6M year on year. The total production for the mine was 12,071 tonnes compared to 11,136 tonnes last year and the average gross price achieved was $5,336 per tonne, down from $6,794 per tonne in 2014 although the copper price did hit a six-year low of $4,500 per tonne during 2015. C1 cash costs were $60c per pound compared to 62c last year (why they can’t quote this in dollars per tonne I don’t know!). The fully inclusive costs was $1.58 per pound compared to $1.65 in 2014 and included a 2c cost of the organic inventory loss.
In November the Kazakhstan authorities approved an amendment to the project’s existing Subsoil Use Contract. This approval gives the group the right to exploit the copper contained in the western dumps with the start of production scheduled for 2017. The procurement of materials and equipment for the stage 2 expansion is now underway, with the programme’s capital costs remaining within the $19.5M estimate, most of which will be paid in 2016. The construction works will be executed primarily by company personnel. The commissioning of the additional SX-EW facilities during the year has already had a positive impact on the unit cost of production.
The Copper Bay business made a loss of $728K and this was the first period of incorporation into the group. The $3M invested by the group into the business is being used for the Definitive Feasibility Study which should be completed in late 2016.
Following the completion of the pre-feasibility study in June, the group subscribed for 135,621,610 newly allotted shares in Copper Bay for $3M which increased their shareholding from 50% to 75%. An intangible asset of $3.2M recognised in 2013 equal to the cash consideration paid for the initial 50% shareholding has been reduced by $1.6M following the consolidation of the business into the group so the exploration asset relating to the Copper Bay business is now $1.6M.
In August the Kazakhstan Tenge immediately devalued by almost 37% when the government transitioned from a free-floating exchange to allowing the market to determine its value. It devalued further towards the end of the year, resulting in a total devaluation of about 85% and ended the year at 339.47 per US dollar which has resulted in the recognition of exchange gains through the income statement of $9M arising mostly on US dollar denominated monetary assets and liabilities held by the group’s Kazakhstan based subsidiaries whose functional currency is the Tenge.
The group’s main receivable is the VAT incurred on purchases within Kazakhstan. At the year-end there is a total of $4.4M of VAT receivable that was still owed by the Kazakhstan authorities, this was less than the $6.4M recorded at the end of the prior year due to the devaluation of the currency. In February 2016, the authorities refunded a portion of the outstanding amount totalling $1.7M and the group remains confident about its prospects of recovering the remaining $2.8M. The planned means of recovery will be through a combination of the local sales of cathode copper to effectively offset VAT liabilities and by a successful appeal to the authorities.
An incident occurred in June which resulted in about a third of the organic inventory being lost to the dumps within a very short period of time which resulted in the write-off of inventory totalling $600K. Following the incident an insurance claim was submitted and in March the group received notification that the merits of the claim had been accepted with negotiations ongoing as to the quantum. The group has not recognised a receivable for the claim.
After nine years as Chairman, Nigel Hurst-Brown will step down to the role of Deputy Chairman and CEO Nick Clarke will assume the role of Executive Chairman which seems like a step backwards for corporate governance at the company. Also, due to personal reasons, Technical Director Howard Nicholson will be stepping down from the board at the AGM although he is staying with the group as an employee and will be focussed on delivering the western expansion programme at Kounrad as well as ensuring the strong operational performance of the project. The group be appointing Gavin Ferrar, the existing Business Development Director, to the board and Roger Davey, an experienced mining engineer, has also been appointed to the board.
Going forward the group will focus their efforts on maintaining their low cash costs and meeting their 2016 production target of between 13,000 and 14,000 tonnes. The recovery of copper from the dumps is taking slightly longer than originally expected but the board are confident of producing the same tonnage of copper overall which extends the life of the operation beyond 2030 which will have the effect of reducing depreciation by about $4M a year, all else being equal.
Delivery on time and within budget of the stage 2 expansion programme at Kounrad is the primary objective for 2016 and the company is confident that it has sufficient funds available to finance the dividend policy, complete the capital expansion and provide them with flexibility to support the growth of the business.
At the end of the year the group had a cash position of $41.5M and no debt compared to $46.2M at the end of last year. At the current share price the shares are trading on an undemanding PE of 12.3 but this increases to 20.6 on next year’s consensus forecast. After a modest increase in the final dividend the shares are yielding 7.4%, which reduces to 6.5% on next year’s forecast – still nice to have!
On the 7th April the group released a Q1 production update. Copper production of 3,207 tonnes in the quarter was 36.5% higher than that achieved in Q1 2015. This increase is due in part to mild winter conditions and the completion of the stage 1 expansion of the SX-EW plant in Q2 2015. The company is on track to deliver its 2016 production guidance of between 13,000 and 14,000 tonnes.
In March the group commenced groundworks on the stage 2 expansion which will enable them to leach copper from the larger resource within the western dumps. The 12km overhead power line and substation are complete and a significant portion of all process equipment and pipes has been delivered to date. They are on track to achieve first production from the western dumps in the first half of 2017 and estimated capex remains at $19.5M.
Overall then this has been a difficult year for the group, as with many miners. Profits were down, net assets fell, driven by a depreciating local currency, and the operating cash flow decreased. The group is still generating a decent amount of free cash, but not enough to cover the dividends. Copper production actually increased, and is forecast to increase again in 2016 but the problem has been the price of copper which was on average $5,336 per tonne during the year.
In the coming the year, the group has a big capital project in the form of the stage two expansion but it does have plenty of cash to cover this. There is not much new info on the Copper Bay project but there seems to be some potential there. I am a little concerned about the CEO taking over the role of exec Chairman, I do hope this is only temporary but there is no sign that it is. The forward PE is not that special, at 20.6, but the 6.5% dividend yield is very good. This is a company Which I do really want to own but the price of copper is under $5,000 and although, they are still profitable at that level, I think it may be a bit soon to buy in here.
On the 4th July the group released an operations update covering Q2. Copper production in the quarter was up 20% year on year to 3,701 tonnes which brings production for the first half of the year to 6,908 tonnes, a 27% increase. Copper cathode sales of 6,355 tonnes represents an increase of 24% with 3,125 tonnes being sold in Q2 at a fixed price of $5,025 per tonne (prices are now around $4,700 per tonne).
Construction of the buildings, collector trenches, ponds and pipeline infrastructure to connect the SX-EW plant to the Western dumps area is progressing on schedule and under budget.
Construction of the main buildings consisting of pump houses and a boiler house are nearing completion, with boilers in position and the chimney erected. Three solution ponds have been excavated and will be lined in July whilst the installation of the 24km solution transfer pipeline infrastructure for PLS and raffinate is now 30% complete.
The water pipeline that will supply water to the site from Lake Balhkash is 95% complete and will be commissioned during Q3. The scheduled completion date of the stage 2 expansion in October with leaching operations on the Western Dumps planned to start in Q2 2017. Completion of this project will extend the life of the operation beyond 2030.
At the end of the period the group had cash of $30.2M and no debt and going forward, in H2 the group aim to complete their stage 2 expansion works which will be the last major capital programme required at the mine, and to conclude their definitive feasibility study for Copper Bay.
Overall then, things seem to be progressing nicely – the remaining doubt is the weakness in the Copper price but at some stage I am going to have to bite the bullet and buy these shares!