Business Model of CNMC Goldmine Holdings Limited (‘CNMC’)
CNMC Goldmine is a relatively young gold mining company founded in 2006 and headquartered in Singapore. Its principal activities are exploration and mining of gold, as well as the processing of mined ore into gold dore bars. It was listed in the Catalist Board of SGX in 2011. Its flagship project is the Sokor Gold Field, a mining area of approximately 10km2 located in the State of Kelantan, Malaysia. CNMC Goldmine owns 81% of Sokor Gold Field, with the minority owned by the Kelantan government and royal family.
The business model of CNMC Goldmine is relatively simple to understand. As shown in Diagram 1, it adopts a 5 step sequential process of mining, crushing, leaching, smelting and finally selling of gold dore bars.
Diagram 1: Gold Production Process by CNMC Goldmine at Sokor Gold Field
CNMC Goldmine sells the gold dores to a licensed buyer in Kelantan at a slight premium to the spot rate. It is important to note that Sokor Gold Mine is still at its teething stage and has not truly reached its full potential. As such, CNMC Goldmine is able to increase the proven reserves at Sokor faster than it can mine them.
Investment Merits of CNMC Goldmine
1. Solid track record
CNMC Goldmine’s revenue and net profit have increased from 2012 to 2015 despite a fall in gold prices during the same period. This is because continuous expansion at its existing gold production facility had more than compensated for the declining gold prices. What makes Heartland Boy even more excited is the growing net operating cashflow that it had achieved during this period.
Diagram 2: Increasing Revenue, Net Profit, Net Operating Cashflow of CNMC
2. Superior Operating and Net Profit Margins
CNMC’s operating and net profit margins have all risen since 2012, although there was a decrease in 2015 due to the falling price of gold. As one of the lowest cost gold producers around, it has a strong operating margin compared to its peers.
3. High and Growing Return on Equity
In addition, its Return on Equity reached almost 50% in 2014, although this dropped to 30% in 2015. This easily clears the 12% benchmark that Heartland Boy sets for all his stocks.
Diagram 3: Improving Operating and Net Profit Margins and Growing ROE of CNMC
4. Net Cash Situation
CNMC is in an enviable net cash position, largely due to its strong net operating cashflow generation capability. It has more cash than debt and this net cash position translates to $0.088 cents per share or roughly 17% of the current share price.
5. Increasing and Regular Dividend Yield
At a stock price of $0.49, it has a current dividend yield of 1.9%. While this is not a dividend yield to shout about, do note that its dividend yield was a respectable 3.5% before its prices started running up after May. In addition, CNMC pays dividend thrice in a fiscal year. Most importantly, it has increased dividends every year since it started paying dividends in 2013.
6. Sustainable Competitive Advantage
As at 1Q16, CNMC has an all-in production cost of $487 per ounce. This ranks it amongst the lowest cost producers of gold in the world as the global average was approximately $830 per ounce. This is largely attributed to the characteristics of the ore at Sokor which enables CNMC to use a cost-effective method of leaching to extract gold. Other external factors such as low diesel prices and a depreciating Ringgit also help to contribute to its low cost of production. Boasting one of the lowest costs of production gives CNMC a sustainable competitive advantage over its competitors.
7. Good Growth Story
Before Heartland Boy’s purchased CNMC in May, its management has reiterated that it was looking for M&A opportunities in the region. Heartland Boy thinks its huge cash pile puts CNMC in a favourable position to finance potential acquisition and the subsequent development of other mines. Indeed, this looks likely given that it has recently entered into exclusive talks to acquire a 51% interest in Pulai Mining. Pulai Mining is located in Kelantan too and this implies that the learning curve should be less steep and shareholders can look forward to strong synergies from this potential acquisition.
Investment Risks of CNMC
1. Expiry of Sokor’s Mining License in 2018
CNMC’s mining license was awarded in 2008 on a 10+21 years basis. The first period (10 years) will hence expire in 2018 and it has right of first refusal for the renewal of the second period (21 years). It’s management revealed that it has met the criteria for renewal and its application for renewal is already under “final review” by the Kelantan government.
Heartland Boy assessed that since CNMC has been a loyal and important contributor to the Kelantan government’s coffers, it will be loathe to kill this golden goose. Hence, the Kelantan government is likely to extend its mining license for another 21 years. However, Heartland Boy cannot rule out the fact that the Kelantan government may attempt to extract higher royalties and this will ultimately eat into the profits of CNMC.
2. Gold Prices have been trending downwards since 2011
Gold dore is the core product produced and sold by CNMC and therefore it has a direct topline exposure to gold prices. Moreover, given that gold is a commodity, CNMC is and will always be a price-taker. Therefore, shareholders should always pay close attention to prevailing gold prices. Gold prices reached its peak at almost $1900 per ounce in 2011 but have been on a downward trend since. However, given the uncertainty over BREXIT, it has since experienced a mini-resurgence and is currently at the region of $1300 per ounce.
Diagram 4: Chart of 5 year historical gold price by goldprice.org
Its management reveal that it does not speculate or hedge its exposure to gold price movement. Moreover, given the wide margin between prevailing gold price and CNMC’s all-in production cost, CNMC enjoys a wide buffer that should allow it to withstand any drastic volatility in gold prices.
Conclusion of CNMC
Heartland Boy has personally kept CNMC under his watch list since February 2016 as gold price was showing signs of growth after a long bear period. He first bought a small position in May but subsequently added another small position after BREXIT as he felt that political uncertainty will trigger demand for gold. He added again after it announced that he had entered into exclusive talks to purchase Pulai Mining. This announcement allayed the remaining concerns that Heartland Boy had on CNMC as he was uncomfortable with its dependence on a single mine.
Do note that CNMC has been gathering the attention of traders and hence had experienced some volatility of late. Therefore, it may not be a stock for investors who cannot stomach such volatility. Nonetheless, Heartland Boy is looking forward to record results when CNMC announces its 2Q2016 results on the 10 August.
Heartland Boy has a personal price target of $0.93 on CNMC.
Vested at an average price of 40 cents since May 2016
This article was published on 31 July 2016.