CNMC Goldmine (SGX:5TP) has released their 2Q19 results yesterday after trading hours. On first glance, it seems like it has an excellent quarter, reversing from a loss in the same period last year. This is actually expected as mentioned in my previous post on them.
The real question is not whether they will report profit but rather, whether it has the potential to go back to their golden years of 2014-2016.
|Revenue (US$ mil)||10.01||9.32||7.4%||10.38||-3.6%|
|Results from op activities (US$ mil)||1.74||(0.39)||n.m||2.3||-24.3%|
|Net Profit (US$ mil)||1.10||(0.18)||n.m||1.76||-37.5%|
|Net Profit excl exceptional items & FX (US$ mil)||1.32||1.80||n.m||1.48||-10.8%|
|Ave Realised gold price||1,317||1,296||2%||1,293||1.9%|
It might seem to be a good set of results but when you compare to the previous quarter and 2Q18 excl exceptional items, I find it quite disappointing. Due to higher operating expense and tax, the all-in cost have increase 13.3% since last quarter.
Average realised gold price was US$1317 per ounce for the last quarter and it should increase as current gold price is about US$1500 per ounce. If they can maintain their all-in cost, they should have a higher profit margin in the coming quarters.
I have my doubts that they are able to reduce their all in cost significantly. As their facilities increase, their labour and maintenance cost will also rise. The only way to improve performance is for the production to outgrow the increase in costs and looking at the last 3 quarters, I feel that it is quite unlikely. Let’s not forget that they are also expediting their exploration efforts for their other mine assets (again, more moolah needed).
The company’s plan to improve their financial performance is more or less based on increasing their gold production and reducing operating cost. They are going to commence underground mining and are in the process of adding more facilities to improve efficiency. Talks are also ongoing to build a power grid to reduce diesel consumption and they are also trying to negotiate lower tax rates.
Their construction of mining facilities for production of silver and other metals are currently ongoing and is expected to start next year, subject to approval from authorities. I think most investors tend to miss out the part where they have not been granted approval to produce and sell other metals. This means that there is a possibility that it could drag longer before they are able to. Just look at 2017 when they are trying to get their extension of permit to mine gold at the Sokor mine.
As for underground mining, this is definitely going to be more costly and hence affect their all-in cost. Whether they are able to obtain higher grade ores and increase their production remains to be seen.
Do take note that there is also a risk of them being unable to construct the power grid and lowering of tax rates and I think all of us should take this into account in our analysis. Cost will also increase when underground mining starts. I will also probably not factor in the catalyst of producing other metals such as silver until more details regarding their permit are released.
Overall, it was a good quarter for CNMC and so far it has been a good year for them. The rise in gold price to about US$1500/ounce should help them increase they profitability and I expect them to have revenue of about US$11mil and EBITA of about US$3mil next quarter.
However, it seems that their cost increases in tandem with their revenue and gold production and it is not helping their bottomline growth.
I am still not willing to invest in them as I feel that the biggest reason for their improved performance is the rise in gold prices and not really about their fundamentals (eg. cost control, efficiency etc).
If you ask me where I think the price of gold would go over the next 12 months, my best guess would be that it would go higher due to all the economic uncertainty. However, gold is neither within my circle of competence nor part of my strategy.
If I am really considering investing in CNMC short-term, it would be because I’m speculating the price of gold. No doubt 2019 will be a good year for them, but I would advise all CNMC investors to be prepared and have a clear exit strategy.