By Gary Newman | Wednesday 8 March 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Copper has been showing some signs of weakness in the past week or so following an unstoppable rise from around $2/lb during the early part of 2016, and despite the pullback it is still trading much higher, at around $2.62/lb, as I write this piece.
Personally, I believe that the drop that we are seeing at the moment presents a buying opportunity in the copper producers, and that we will see it showing renewed strength during 2017, especially with forecasts of supply shortages and increased demand from China.
My favourite at the moment amongst the copper producers would have to be Central Asia Metals (CAML), which already has a successful operation in Kazakhstan, as well as an as yet undeveloped licence in Chile.
This company is undoubtedly one of the few success stories amongst resource stocks on AIM, and in the 6 years or so since its IPO it has already returned more than its initial $60 million fundraise via dividends and share buybacks! It should certainly be an example to others of what a well-run company with real assets can achieve.
Production from its Kounrad operation has continued to increase steadily, with the latest operations update showing record production of 14,020 tonnes during 2016, up from 12,071t the previous year. Although production in Q4 was actually slightly down and guidance for the current year is for 13,000 to 14,000 tonnes.
So far the company has been concentrating on leaching copper from the Eastern Dumps and will continue to do so during 2017. But it has also been investing in expanding operations, with anticipated costs of $13.6 million (30% below the budgeted $19.5 million originally expected) to commence production from the Western Dumps, which is expected to commence in Q2 2017, although it will be 2018 before it really has an impact.
Aside from Kounrad, the company also recently acquired an 80% interest in the Shuak project, also in Kazakhstan, but that is still at a very early stage. The company is being cautious with its spending, having earmarked $1 million for drilling programmes during the coming year.
Outside of Kazakhstan, it also has a 75% stake in the Copper Bay tailings project in Chile, where a definitive feasibility study was recently carried out. That showed measured and indicated resources of more than 92,000 tonnes of copper, but initial investment will be around $88.5 million and it would produce around 5,000 tonnes per annum at an average operating cost of $1.37/lb.
Given that the projections for the internal rate of return (19.1%) and post-tax NPV ($34.1 million) are based on copper being at an average price of $3/lb, the company appears to have very sensibly shelved the development for the time being until the price of copper going forwards becomes clearer. To me that seems like a good move, rather than risking that amount of capital upfront at the present time, and especially given the success of the Kazakhstan operations and expansion there.
Financially, the company is also in a strong position as it is debt-free and had $40 million in the bank at the end of 2016, plus it already pays a regular dividend – the final dividend for 2016 will be set on April 4 when the 2016 final results are released.
During the first half of 2016 the company still managed to make a net profit of over $10.5 million, and that was with copper prices averaging just $4,903/t as opposed to the current market price of around $5,770/t, so I would expect the next set of accounts to be well received by the market, especially in light of the cost reduction measures that were carried out during that period of copper price weakness.
In terms of being an income stock, the interim dividend was 5.5p and, even if we assume the final dividend to be in line with the 8p paid last year (it has actually risen by a substantial amount each year), that would give a yield of in excess of 6% - and makes this very attractive for that alone, even aside from the further growth prospects for the share price.
Currently the company is trading at around 223p to buy and with a market cap of circa £245 million, and given how profitable it was even when copper prices were weak, it is very much on my watchlist and I may well buy some on any further dip caused commodity price weakness during the next few weeks.
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