Central Asia Metals: Delivering on promises

We initiate coverage of Central Asia Metals, a junior copper producer in Kazakhstan with a Buy recommendation and a 12-month target price of 211GBp per share.

Central Asia Metals (CAML) has a subsoil use license for Kounrad waste dump deposit in Kazakhstan with estimated JORC compliant copper resources of 617kt. In 2012, the company commissioned SX-EW processing plant with annual production capacity of 10ktpa of copper cathode. The plant reached its full capacity in the first month of operations.

The company currently leaches copper from oxide ore at the eastern dumps of Kounrad deposit where 23% of its total copper resources are located. The western dumps, where the majority of copper resources lie, are 12 km away from the existing SX-EW facility and consist of sulfide and mixed ore which requires more extensive use of leaching solution to extract copper. CAML plans to spend $35mn in the next three years on the expansion of the current SX-EW facility to 15ktpa.

Despite strong share price performance since the launch of production at Kounrad facility, we believe shares still hold upside potential. CAML has demonstrated excellent operational discipline so far, meeting or beating almost every set operational target and deadline. Such performance allowed the company to generate significant operating cash flows over 2012-2013 which CAML routed back to its shareholders through generous dividends and share buybacks.  

The stock is offering not only one of the highest dividend yields in the mining stocks universe, but its dividend stream is also quite predictable and growing. In December 2012, CAML adopted a dividend policy committing to pay out at least 20% of revenue. Over 2014-2016, we assume dividend payout ratio in the 24-27% range and afterwards forecast that the company will pay out any excess cash above the three times cash cover specified in the dividend policy in the absence of growth projects. We forecast dividend yield on CAML stock at 6.1% in 2014, 7.1% in 2015 and 7.5% in 2016.

Key risks are related to the Kazakh regulatory regime, adverse commodity pricing environment, acceleration of cost inflation and capex overruns.

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