We note that despite of significant cooper prices volatility in 2016, Company retains its investment attractiveness due to low production cost, debt absence and attractive dividend policy. Given the strong 2016YE results against the background of stabilization of copper prices and presence of significant amount of cash on the balance sheet, we maintain our Buy recommendation on Central Asia Metals shares and increase our 12M TP to GBp 290 per share.
2016YE results and current outlook. In 2016, the Company increased copper production by 16% yoy to 14kt. Against the background of cost reduction, EBITDA showed a positive dynamics of 12% yoy. Net profit in 2016 increased by 17% yoy, reaching $26mn. Taking into account a positive financial and production performance, the Company made decision to pay 31% of gross profit as dividends.
The Company plans to produce between 13 and 14kt of copper at Kounrad project in 2017. In connection with increasing inflation pressure and tenge floating rate, the net cash cost, according to our forecasts will increase by 4-5% and reach $948 per ton. The company plans to invest in production about $4mn in 2017.
Expansion projects. The Kounrad (Kazakhstan) currently only one active mine in the Company. To date, main production capacity is carried out on eastern dumps, however reserves in this area are estimated to be depleted by 2019, in this connection the Company is expanding its mines to the western dumps. The expansion will compensate degrading eastern dumps and maintain the current level of copper production of 13-14kt annually.
The feasibility study of Cooper Bay project (Chile) has completed in 2017, according to which the total volume of resources estimated at 84.6kt or 8.6kt per year, at cost of $3020 per ton. Given the significant capital costs estimated at $88.5mn, and lack of confidence in copper prices stability, the implementation of the project is postponed indefinitely.
Low cost. The specificity of copper production from the mined ore by applying the extraction and electrolysis method at the Kounrad, assumes that there is no stripping and mining cost involved. In 2016 due to the transition of the national currency of Kazakhstan to the de facto floating rate already low operating costs decreased by another 40% and amounted to $970 per ton. Currently the Company’s cost of production is one of the lowest in the industry.
Dividend attractiveness and a strong cash position. The Company demonstrates an attractive dividend policy, differing from its competitors, by charging dividends from 25-30% from gross revenue. In total, from the beginning of the Company's IPO in 2010, the Company has paid in total $96mn covering the investors funds by 160%.
As of 2016YE, the Company had significant cash resources amounted to $40 mn, which is 1,5 times higher than its net profit for 2016. I our opinion due to absence large-scale investments in near future, the Company may decide to pay special dividends.
12M TP GBp 290/share, recommendation "Buy". Taking into account the stable production and financial performance of the Company with low cost of production and simultaneous positive consensus forecast of copper prices, we are increasing our 12M TP to GBp 290 per share. This price assumes a potential upside of 32%from current price.