Central Asia Metals: Review of 1H2017 results

Buy recommendation with 12M TP of 290GBp per share

Andrey KozhokaruNovember 08, 2017

Reverse takeover of Lynx Resources will transform the business of Central Asia Metals (CAML), increasing the Company's revenues and assets. Moreover, the deal will introduce the diversification of the product line and of the geography of operations. The Kounrad mine is a highly profitable asset and the effective implementation of plans to increase production at western dumps will provide continuous operations of the mine for the next 14 years. Meanwhile, the acquired SASA mine (Lynx), considering the current estimation of reserves, will ensure the production of zinc and lead for the next 20 years. In addition, SASA mine has a significant potential for further exploration, which can contribute to the organic growth of CAML. Given medium-term optimistic forecasts for the base metals market and the current price environment, as well as the potentially high dividend yield of the enlarged Company, we recommend to Buy Central Asia Metals with a 12M TP of 290GBp per share.

The promising acquisition that changes the scale.According to the Company, acquisition of the Lynx-owned SASA mine in Macedonia will increase the annual production of CAML by 148% to 34.8k tons in copper equivalent. The new asset has a low production cost and stable grades. The total resource base of the merged Company will be 499k tons of recoverable copper equivalent, which will increase the current CAML resource base by 2.6 times. In last years, the SASA mine demonstrated stable production levels of an average of 29k tons of lead and 23k tons of zinc per year. Moreover, the mine has a potential for further exploration, which could increase the resource base.

Two assets that generate stable cash flows. After the full transfer of production to the western dumps of the Kounrad mine, CAML should be able to maintain the copper production level of 13-14k tons per year for the rest of the mine life. Due to steady production at the SASA field, the Company will have a sustainable annual production of three metals with low cash costs, which, while lowering the debt burden, will provide Central Asia Metals with a high and relatively predictable cash flows. Given the Company's commitment to a policy of high dividend payments, we expect that with stable realization prices for metals produced, CAML will continue to pay one of the highest dividends in the sector.

Optimism in the market of base metals. Strong growth in prices of zinc, lead, and copper, observed since the middle of this year, has a supportive fundamental basis. The base metals supply due to lower investments in the period 2014-2015 and the inability of widespread and rapid add of additional production capacities will not be able to fully meet the growing demand in the short to medium term. On demand side, the rise of industrial activity indicators of the world leading economies, as well as the ongoing trend towards the use of renewable energy sources, which require more metals to be produced, will support the demand.

The target price is 290GBp per share, Buy recommendation. For calculation of the target price, we applied the USD/GBP exchange rate of 1.315. We used our conservative forecasts for copper, zinc and lead prices during the period of 2017-2022. We took into account full repayment of the Company’s debt until 2022. For the forecasted period, we expect moderate capital expenditures, which should be below depreciation expenses, because of the absence of plans to add additional production capacity. Taking into account the increased equity capital and the corresponding increase in the scale of the Company's operations, we recommend to Buy CAML shares with 12M TP of 290GBp per share.