December 5, 2020

Central Asia Metals: Tailings Leak Is A Small Blip In A Resilient First Half

Central Asia Metals’ robust interim results were slightly dampened due to a tailings leak at its Sasa mine. Shares did finish up 2% following the results but had fallen 20% on the news of the leak a few days prior. I am bullish on CAML, the results show a company that can deliver good cash generation and manages its debt pile well. These are two factors that I believe are crucial to creating a healthy balance sheet and to position the company for growth. There are concerns regarding the Sasa leak but I believe the subsequent fall is an overreaction.

Central Asia Metals upbeat on outlook after decent 2019 production | Sharecast.com

Source: sharecast.com

Interim Results

The company’s Sasa mine showed growth in both production and sales over the first half. Zinc production jumped to 12,200 tonnes from 11,500. While lead production jumped to 15,100 tonnes from 14,300. These production rates show a steady increase in production at the Sasa mine. Copper production levels were pretty much level from the prior year with production of 6607 tonnes from the Kounrad mine.

Due to weaker base metal prices, the company’s gross revenues dropped around 20% to $75 million from the prior year while net revenue fell to $70 million. Due to the fall in revenues and the subsequent pressure on margins in relation to fixed costs and the necessary precautions taken as regards to COVID, pre-tax profits were hit more heavily, dropping around 30% to $24 million. The board acted swiftly to cut production costs to mitigate the effect of COVID-19. Cash cost was reduced to $0.43 per pound for zinc at the Sasa mine, while the reduction was 3 cents to $0.48 per pound at the Kounrad mine.

The company has brought net debt down to a more healthy level of $58 million compared to $80 million of the prior year, while CAML has ample liquidity with a cash position of $44 million. Both of these figures show strong financial health with CAML, prepared for any future turbulence that may come it’s way. Nonetheless, even with poor metal prices CAML still delivered strong free cash flow of over $20 million in H1.

CAML also delivered a EPS of 10 cents (7.7p) a share in H1. To be theoretical, If CAML were to see identical numbers in H2 (which they won’t), shares would stand on a P/E of around 11. I believe this is cheap for a company that has proven its ability to weather poor metal prices, while also reducing net debt and deleveraging its balance sheet.

Tailings leak

Frustratingly for investors, the company reported a tailings leak at its Sasa mine in Macedonia. This was from the TSF4 storage facility. Due to this incident, the mine has temporarily halted operations and the company has decided to defer the payment of its interim dividend as a precaution. I believe CAML has done this more as a necessary precaution and I believe they will pay it later on. Due to nobody being harmed and it being a leak from just one facility I believe the mine will soon quickly be reopened with some minor disruptions to the full-year results. The company will now have to adjust its forecast production figures for the full year. CAML believes that the chance of an extended mine shutdown will be low. For shares to plunge circa 20% on this news is a large overreaction in my opinion for a relatively small bump in the road for the mine. The company then confirmed on the 17th of September that they had reopened the mine. The mine was closed for just a few days yet shares are still down 10% since the announcement.

Looking ahead

A source of optimism for investors is that metal prices have started to see a recovery since June, particularly for copper which has been on a strong bull run and now stands well above pre-COVID levels. These improved prices mean that Kounrad mine should deliver far improved profitability for H2. This should mitigate the disruption that is going to be experienced at the Sasa mine as a result of the recent leak and associated halt in production, however this halt was for a very short period. Consensus has CAML reporting 16p a share for the full year, with a slightly improved second half than first. This means CAML is on a forward P/E of around 10, I believe this is more than reasonable, particularly when considering CAML is predicted to deliver 20p EPS in 2021, that valuation will quickly improve. The large cash generation also gives opportunity to pay the interim dividend and continue to reduce the company’s debt and improve balance sheet health further.

Conclusion

CAML took swift action to cut costs and due this have delivered fair profitability in the first half with continued cash generation. I believe the tailings leak is a minor blip for the Sasa mine and the market reaction is an irrational one. With metal prices picking up CAML is looking good going into H2.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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