CNMC Goldmine to strike while the iron is hot

This had brought the company’s earnings for the first nine months of FY2019 to US$4.2 million, surpassing its full-year earnings of US$1.68 million for 2018. Higher gold prices have helped drive this gain. CNMC was able to sell gold at an average price of US$1,494.95 an ounce in 3QFY2019 compared with US$1,205.02 in 3QFY2018.

Despite the higher earnings so far this year, CNMC CEO Chris Lim prefers to maintain a cautious tone. “We just don’t know where the gold price is headed, which results in a high degree of uncertainty because of potential price fluctuations,” says Lim in an interview with The Edge Singapore. “All commodity companies tend to be price takers, and no one can accurately set the price of gold.”

Yet, with the steadily increasing gold price, he believes in striking while the iron is hot. In FY2018, it produced 31,500 ounces — a new record. For the nine months of FY2019, CNMC has already produced 23,058 ounces of fine gold.

Expansion and diversification

CNMC generates 99% of its revenue from gold production, and the remaining 1% is from silver. Studies of CNMC’s Sokor and Pulai concessions have revealed the possibility of other minerals besides gold. Sokor, which has also been CNMC’s flagship project since its acquisition in 2010, were rich in lead and zinc ores, while Pulai contained iron ore concessions.

CNMC has been exploring how to exploit these other resources, and generate additional revenue for the company. “This will happen in parallel with gold extraction. So, this is in no way indicative of the company’s shifting away from gold,” says Lim.

In addition to a greater variety of extractions, CNMC is also looking to amp up its production of gold in terms of expansion. Lim recognises that if he cannot control the market prices of this precious commodity, the only way to manage earnings is to be more efficient in production.

Located at its Sokor concession, CNMC’s carbon-in-leach plant is poised to pay off handsomely, with its high gold recovery rate of above 90%. Lim says an expansion of the CIL facility is in the pipeline, which would see the plant being able to process 1,000 tonnes of gold ore a day, a twofold increase from 500 tonnes now.

“Efficiency improvement has always been a key part of the company’s strategy,” says Lim. “But we have to ensure that we are able to deliver a consistent supply of oil from the facility, which is what makes this more complicated.”

Operational efficiencies

Cost is likely to be a growing issue. CNMC is attempting a gradual transition into underground mining from the current open-surface mining. According to Lim, this is likely to increase the company’s operating costs significantly.

“However, we expect the increase to be offset by higher revenue generated from the sale of gold produced from higher-grade ore extracted from underground mining,” says Lim, who explains that underground mining is able to reap higher grades of gold ore, owing to its deeper extraction methods.

For greater operational efficiency, CNMC has strategically acquired assets based in Kelantan, Malaysia. According to Lim, all the concessions are located within a three hour-drive from each other.

For the foreseeable future, CNMC’s future acquisition of new concessions will also be in Malaysia instead of other countries to maintain operational efficiency. “CNMC is just a small mining company. We have to understand our strengths and weaknesses,” says Lim. “While small companies are agile and nimble, we don’t have the in-house capability that bigger companies have to expand easily across countries.”

When times are good, many resource companies would go on an acquisition spree to buy up other mines or new concessions. CNMC, while on the lookout for concessions, is careful not to rush in for now. “A lot of projects in the mining industry have always remained stagnant at the exploration stage because of a combination of factors that include high costs or inefficiencies. Therefore, we have to convince ourselves that the new project is something that we have confidence to extract sufficient ore from,” says Lim.

Capex-intensive industry

It is easy to acquire new mines, but mining and selling the gold requires high capital expenditure. The whole process can take years. “Once you acquire a project or asset, it’s all about spending money,” says Lim.

“You don’t see your first revenue until you take the asset into the production stage. For Sokor, it took us about three years.”

Lim also notes that, in general, banks are unwilling to grant gold mining companies any form of credit. As more banks pledge to become more environmentally friendly, gold mines get lumped together with other mines such as coal to be classified on the lists of companies that some banks will not do business with. He says, “I am unable to recall seeing any mining exploration company securing a bank loan.”

As such, Lim stresses the need for gold mining companies to have a stable and consistent cash flow to sustain themselves in terms of developing assets and expansion.

In January 2018, CNMC announced plans for a dual listing in Hong Kong, which has since been shelved. Lim recalls that, during the listing hearing in December 2018, the group’s market capitalisation stood at HK$470 million, just shy of the bourse’s requirements of HK$500 million.

Although CNMC’s market capitalisation currently surpasses the requirements at $102 million, Lim says the group’s board of directors insisted that the management was to focus on the projects on hand, instead of reviving its dual listing plans. “The board’s main focus now is on operations. [Other] plans, including the dual listing, can come in later when the company is more stable.”

The best is yet to be

CNMC’s earnings have improved in the past year, but its share price has yet to reflect a corresponding improvement. It went public in 2011 at an IPO price of 40 cents, and went as high as 66.5 cents during its trading debut on Singapore Exchange. In July 2016, CNMC also saw its highest closing price of 61 cents, on the back of uncertainties surrounding Brexit. However, shares collapsed to as low as 16.7 cents in January 2016. On Nov 20, it closed at 25.5 cents, valuing the company at $101.9 million. At this level, CNMC is trading at 20.2 times historical earnings. Its net asset value as at Sept 30 stood at 15.31 cents.

As Lim tells it, long-term investors tend to be less price-sensitive, paying more attention to the overall growth plan and prospects of the company. There is a group of investors consisting of both retail and institutional investors, however, who tend to hone in on the company’s daily share-price fluctuations. Not only are they expecting capital gains, but they are yearning for more dividends as well. The company last paid a dividend of 0.2 cent per ordinary share for 3QFY2019 ended September.

Lim is focusing on making CNMC’s operations more cost-efficient — a critical area made even more so as a bigger proportion of the mining goes underground. “All the machinery at our concessions are currently powered by diesel. We are looking to change this into an overhead power line, which will see a good savings in terms of monthly diesel consumption,” he says.

Despite the operational challenges, he is comfortable with the company’s financial status. As at end-September, its cash and cash equivalents stood at US$16.7 million, which Lim says is more than enough to fund the expansion and improvements. Save for a convertible loan inherited from the previous management at the group’s Pulai concession, CNMC has no bank borrowings. “For every quarter henceforth, we are slightly more positive on the group’s performance and profitability. We are also looking at accumulating our cash flows in the near term,” he says.

“Gold mining is a highly uncertain industry and moving forward, we have an ultimate goal of increasing the company’s gold production capacity and, subsequently, the revenue generated from these projects.”