Attractive dividend story with catalysts in sight

Yerkin AbdrakhmanovMarch 02, 2015

Once again CAML delivered on its guidance – production in 2014 exceeded plans, capital expenditures were on schedule and within budget. The story is almost ‘boring’ as excellent, but expected results do not move the market. The company’s cash pile which it plans to use for M&A opportunities is growing, as expected. There are several stock price catalysts ahead, including the publication of details of Copper Bay project’s feasibility study, release of FY2014 financial results and completion of copper plant expansion by mid-year. We reiterate our Buy recommendation with a 12M target price of 218 GBp. The stock offers a very compelling value proposition based on the attractive and sustainable dividend story (2014E-6.2%) and potential upside from the growth projects. 

FY2014 operational results beat guidance, but came below our estimates

In 2014, the company produced 11,136 tons of copper cathode (+6% y/y) and sold 11,160 tons. The results beat guidance of 11,000 tons, but came below our forecast of 11,600 tons. We have overestimated the full-year production expecting an excellent third quarter to continue through the fourth quarter. Nonetheless, we view the results as positive y/y confirming the company’s operational discipline. We have reduced our FY2014 revenue estimate by 5% to $76.4mn, adjusting for lower volumes and weaker copper price dynamics in the 4Q2014. We estimate dividend yield for FY2014 at 6.2% with interim dividend payout of 5GBp per share.

Capex spending in line, cash continues to pile up

Kounrad expansion project is progressing on schedule and on budget. CAML expects the plant to reach the run-rate of 15,000 tpa by mid-2015, which should translate into average production of 13,000 tpa for FY2015, we estimate. As of 2014-end, the company’s net cash balance amounted to $46.7mn, which is more than sufficient to fund the remaining growth capex of $25.5mn over 2015-17. We model dividend payout ratio at 25% in 2015 and 2016, which translates into dividend yield of 7.2% and 8.5%, respectively. Despite capex spend on the expansion project and generous dividends, we estimate that CAML will accumulate $72mn net cash balance by the end of 2015. We believe that this cash is unlikely to translate into a special dividend. We expect it to be invested into growth projects which will serve to increase the company’s resource base.

Valuation update

We have updated our valuation to reflect the following changes: 1) higher cost of equity (negative), 2) expectations of tenge weakening (positive) 3) lower costs growth rate (positive) and 4) dilution due to exercise of management stock options in 2014 (negative). As result we reduce our 12-month target price by 4% to 218 GBp, but reiterate our Buy recommendation.