Central Asia Metals Share Discussion Threads

[mount teide] 01/2/2018 23:01

BB - Some thoughts;

The mining sector is in the early stage of recovery after a long and brutal recession that brought many heavily indebted sector heavyweights like Glencore and Anglo American to their knees.

Yet, unlike previous mining sector recessions some industrial metals like Zinc and Copper are already in deficit with warehouse stocks at or close to decade lows due to mine closures, bankruptcies, smart use of shut-ins and a near 70% drop since 2013 in capital expenditure developing new production. Exploration has dropped by nearly 90% over the last half decade.

Add into the mix global GDP forecasts recently getting uplifted by the IMF to nearly 4% for 2018 and 2019, together with the US announcing a record programme of tax cuts and the announcement yesterday to open the capital expenditure floodgates on an unprecedented scale to rebuild their crumbling infrastructure.

Add in the rapidly growing demand for industrial metals from the electric car and renewable energy sectors and India with a population almost identical to China (1.4 billion) commencing a huge countrywide infrastructure modernisation programme.

Collectively, that lot is the perfect storm brewing for many years of strong demand.

CAML is incredibly well placed as a low cost operator to do extremely well over the next 3-5 years - the II's would be fools(fortunately, most are not) to give this huge potential away for an offer equivalent to just 3-4 years dividends because that's all 30% on the current share-price actually equates to.


Consider a very plausible scenario where Copper, Zinc and Lead pricing continued to strengthen due to the unprecedented current fundamentals and averaged a further 10% above current pricing in 2019 at:

$3.50/lb Copper
$1.80/lb Zinc
$1.35/lb Lead

At current production levels this would generate EBITDA of over $200m - equivalent to EPS north of 60p.

Such a scenario could very comfortably support a share price of 600p and chunky 4%(25p) dividend. I would think any offer today would need to be in the region of 450p-500p as a minimum to be taken seriously.

The previous owners of SASA made 100% profit in just over a year of ownership - and the price CAML paid is already starting to look a bargain since it was based largely on the 2016 accounts - Zinc and Lead pricing has gone up over 150% and 50% respectively following the recession lows in 2016.


AIMHO/DYOR

[bogdan branislov] 01/2/2018 20:34

MT - thanks again for that. What is your view on a take over happening? Not so much whether CAML is a likely target, because at this price it probably is, but more whether you think a takeover will be a good thing for its shareholders. I ask this because two of my previous holdings that were taken over, Kentz (c2014) and Ithaca Energy (2017), although very profitable holdings for me over the long term, were taken over at relatively disappointing premiums to the share price at the point of the bid. The niggle with both was that these companies were taken out at prices which to me were still only priced around half a fair value of their forward earnings. If CAML were to be taken over now, whilst a fair value could easily be twice the current price level, we as shareholders may only realise a 30% premium on the current stock price in the event of takeover, nice to have, but CAML is worth far more. The other side of the coin of course is that a company seen as a likely takeover target, based on valuation, tends to go up in price very rapidly. What are your thoughts on how investors would fare in the event of a bid, do you think an assumed 30% premium above the current share price, if the bid came shortly, is too pessimistic. Bogdan

[mount teide] 01/2/2018 19:08

BB - yes, QD's model currently has a 2018 PE ratio of 8.1 and a trailing PE ratio of 12.5. If current metal pricing is maintained throughout 2018 the PE ratio drops to 6.2

Peel Hunt(issued 10 Jan 2018) currently has EPS for 2018 of 38.3p and dividend of 19.31p(6.4%) giving a PE ratio of 7.9.

An earnings uplift midway between QD's model and current metal pricing would give an EPS of circa 43p (I've penciled this in for 2018) giving a forward PE ratio of 7. (A relatively undemanding PE ratio of 10 would give a price target of 430p for 2018)

The recovery of the global mining industry has seen valuations of most mining companies surge off the lows during 2017 - the 102 US quoted mining companies currently have the following combined PE Ratio's:

18.83 - Forward
52.11 - Trailing

London quoted Copper sector heavyweight Antofagasta currently has a trailing PE ratio of 58.19.

All of which probably explains why CAML management had to run their slide rule over 150 companies before finding one priced to their taste.

And makes CAML's mid case 2018 earnings scenario above with a forward PE ratio of 7 and trailing of 12.5 look mis-priced by comparison. The CAML valuation is difficult to ignore on a pure value level - and should a decent chunk of the valuation gap fail to close over the next 12 months, will leave the company a prime target for a market that is now experiencing a rising trend of M&A activity


AIMHO/DYOR

[bogdan branislov] 01/2/2018 17:11

mount tiede - thanks for that. If we were to assume a small relatively conservative uplift on the QD model my rough and ready estimate is for a 2018 full year PE ratio somewhere in the mid single figures, based on the current share price once indirect costs and tax is allowed for. Do you think my forward PE ratio assumptions are along the right lines here? Bogdan

[mount teide] 01/2/2018 11:35

Zinc, Lead and Copper pricing - the strong Q4/2017 performance continues into Q1/2018.

Copper
Currently trading at $3.21/lb - 45.9% above 2016 average, 14.2% above 2017 average and 22.9% above H1/2017 average.

Lead
Currently trading at $1.20/lb - 41.1% above 2016 average, 13.7% above 2017 average and 18.8% above H1/2017 average.

Zinc
Currently trading at $1.60/lb - 68.4% above 2016 average, 21.2% above 2017 average and 31.1% above H1/2017 average.

Data Source: Kitco

SASA mine acquisition - $402m price paid was based largely on the 2016 accounts - pricing of all three metals hit decade lows in 2016 before starting to recover later in the year.


Some further refinement/metal price updating to the Quoted Data Model:

Quoted Data have forecast 2017 EBITDA at $71m, increasing by 94.3% in 2018 to $138m(EBITDA Margin of 66%) as the full year impact of the SASA mine production kicks in.

QD's forecast model for 2018 EBITDA looks conservative - an average of the current metal prices through 2018 would generate circa $27.3m additional revenue/profit compared to QD's model - broken down as:

Copp +$11.6m - model assumes $2.81/lb - current price $3.21/lb
Lead +$10.4m - model assumes $1.04/lb - Current price $1.20/lb
Zinc +$ 5.3m - model assumes $1.49/lb - current price $1.60/lb

In addition the QD model conservatively assumes 13,150 tonnes of Copper production in 2018. CAML management has forecast 13,000t to 14,000t for 2018. A 13,500t mid range performance would generate an additional $2.5m of EBITDA, while a top end 14,000t performance would see an additional $8.5m.

Consequently, at current metal pricing, QD's model with a 13,500t performance from Kounrad in 2018, would generate EBITDA of $167.8m, while a similar Kounrad performance to 2017 of circa 14,000 tonnes would result in EBITDA of $173.8m(up 144% compared to QD's $71m 2017 forecast)

EBITDA of circa $170m would put EPS up from QD's 2018 forecast of 51.8c(37p) to circa 67.5c(48p).



Note: QD's forecast for 2018 metal pricing compared to H2/2017 Actual and 2018 Current pricing:

Copper
$3.01/lb - H2/2017 Actual average
$2.81/lb - QD Model Forecast for 2018
$3.21/lb - Current Price (+14.2% above model)

Lead
$1.10/lb - H2/2017 Actual average
$1.04/lb - QD Model Forecast for 2018
$1.20/lb - Current price (+15.3% above model)

Zinc
$1.42/lb - H2/2017 Actual average
$1.49/lb - QD Model Forecast for 2018
$1.60/lb - Current price (+7.3% above model)


AIMHO/DYOR

[lord gnome] 01/2/2018 08:52

Wrong thread bricky, but thanks anyway.

[bricktycoon] 01/2/2018 01:47

Amazon set to soar on block buster results buy buy buy

[topazfrenzy] 31/1/2018 16:49

oh bluerunner, do take Topaz's advice next time, whether it comes from the school computer or not ....

[bogdan branislov] 31/1/2018 15:36

Whilst the value growth case remains compelling, the stock price did become a little over bought by any measure. Not that I buy considering such indicators, I just buy on value, but about three weeks of shallow decline and sideways movement will unwind all the overbought indicators. Such periods are when those who cannot sit on any kind of profit without cashing in will depart this stock, possibly buying in again later when they realise what a mistake they have made in selling. By the end of this week we should be about ready to go again. Bogdan

[bluerunner] 31/1/2018 15:14

Topaz - please stay OFF the school computers. Now run along with the rest of the children and make some friends.

[topazfrenzy] 31/1/2018 13:28

Head formation, down to second shoulder circa 250 before it goes back down to 190ish by end of year.

[topazfrenzy] 31/1/2018 13:27

China manufacturing cooling fast, the top was hit here, double top in fact, down from now on, don't be caught out.

[warranty] 31/1/2018 08:41

Added again this morning, very confident of this going forward. I consider CAML to be one of the best holdings in my portfolio.

[mount teide] 31/1/2018 07:36

Trump's State of Union Address to Congress last night - "It is time to rebuild our crumbling infrastructure"

Industrial metals sector will be rubbing their hands at that news.

Thanks coxsmn - we should be well rewarded over an 18 month outlook now we have a strengthening sector flood tide behind us.

[coxsmn] 30/1/2018 19:40

Mount, good analysis thank you. I continue to add here.

[bogdan branislov] 30/1/2018 10:23

Mount Teide - on the basis that prices for CAML's commodities average at their current levels for this year - unlikely of course - based on forecast volumes, what would you expect CAML's total earnings and earnings per share to be for the current year? Bogdan

[mount teide] 30/1/2018 10:18

Effectively, in the last 6 months the CAML business has been transformed from a 14,000 tonne Copper producer at $2.60/lb to a 36,400 tonne copper equivalent producer at $3.16/lb.

In reality, its probably a little better than that because the last available C1 cash cost/lb data for SASA showed a very slightly declining trend while Kounrad's Copper production C1 costs were on a very slightly rising trend.

[mount teide] 30/1/2018 09:34

Despite a strong increase in the price of copper in Q4/2017, since the SASA mine acquisition the price increases of Zinc and Lead in relative terms has still OUTPERFORMED Copper.

To the extent that where in revenue/profit terms the Zinc/Lead SASA production on takeover of the SASA mine was calculated by CAML to increase total production in Copper equivalent terms from 14,000 tonnes per annum to 34,800 tonnes, it currently is equivalent to 36,400 tonnes per annum, a 160% uplift.

AIMHO/DYOR

[mount teide] 30/1/2018 08:41

L2 - now there's conviction and commitment, someone has just put over £1m on the table with two 'O' trades around 8:30 of 150k and 168k, at prices above and at the full offer respectively.

[gary1966] 29/1/2018 15:19

Zinc on a tear today to continue the recent trend. Just under $1.63/lb as I type, up nearly 4c on the day.

[mount teide] 29/1/2018 09:04

Encouraging start to the week - L2/PEEL has just been taken out from the 325p Offer side of the book leaving just WINS, after that there is one MM on 335.5p and the rest at 340.5p and above.

[mount teide] 27/1/2018 12:47

As alluded to in previous posts we are seeing increasing validation of the assertion that M&A activity after a near decade recession is now on a rising trend within the Copper sector - latest supporting evidence is the industry reporting the strongest January corporate transactions in 2018 in over a decade.

For what will be driving industrial metal pricing, company valuations and M&A activity over the next half decade - read the next two paragraphs, re-read them and read them again before electing to sell any Copper/Zinc mining sector equities over the next few years:

'The combined capital spending of copper producers tracked by Bloomberg Intelligence has plunged by more than half to $52.3-billion last year, from almost $129-billion four years earlier.'

“Copper valuations are disconnected from where copper prices will ultimately trade in the long run,” Cosgrove said in a telephone interview. Assets are being valued based on copper prices below $7,000/tonne, when the cost of bringing in new capacity is much higher, he said. '


Copper deals off to best start in 12 yrs as prices surge - Mining Weekly/Bloomberg



Copper mining deals are off to the best start in at least 12 years – and more money could be pouring into the sector this year.

More than $500-million in transactions are pending or were completed so far this month, the most recorded for January in Bloomberg data going back 12 years. Merger interest is picking up after years of under-investment limited mining companies’ capacity to meet rising demand for the metal, said Stephen Gill, a managing partner at Pala Investments

“We see the large mining companies indicating their need to buy growth,” said Gill, whose mining and metals-focused investment company is the biggest shareholder in Nevada Copper. “Due to years of under-investment, their project pipelines are now empty and can only be replenished through acquisition as it takes years to develop, permit and build a new copper mine.”

The appetite for copper-mining assets is surging after prices climbed the most in seven years in 2017 amid disruptions that widened the shortfall in supply. While the rally has faltered since prices climbed to a three-year high in late December, Goldman Sachs Group analysts say the outlook remains positive. Signs of synchronised global growth also are boosting demand prospects, highlighting the need to bring new copper projects online soon.

Production trailed consumption by 175 000 metric tons in the first ten months of last year, according to the International Copper Study Group. The deficit widened from 143 000 t in the same period a year earlier, after a labour strike at BHP Billiton’s Escondida mine, in Chile, and a temporary ban on concentrate shipments from Freeport-McMoRan’s Grasberg curtailed supply in the early part of 2017, the study group said.

There may be more supply troubles brewing. More than 30 labour contracts are up for negotiations this year in Chile and Peru, putting almost one-fifth of global copper supply at risk of disruption this year, Bloomberg Intelligence analysts Andrew Cosgrove and Eily Ong estimated.

“People forgot about the depleting copper mines or the grades declining at a large amount of the copper mines, plus the elevated strike risk which is occurring in the industry,” Ivan Glasenberg, CEO of Glencore, said in an investor meeting in December

Over the next decade, the market would need 5-million tons of copper from new mines to meet growing demand, Freeport CEO Richard Adkerson said Thursday, citing Wood Mackenzie estimates. New projects being developed have lower ore grade, he said.

“There is a real absence of major new projects on the horizon,” Adkerson said on the company’s fourth-quarter earnings call. “Supply’s reflecting a very long period of under-investments. And even as we speak today with higher prices, we don’t see a wave of new investments being started immediately.”

The combined capital spending of copper producers tracked by Bloomberg Intelligence has plunged by more than half to $52.3-billion last year, from almost $129-billion four years earlier.

The dearth of investments and the difficulty in finding lucrative projects meant less spending on acquisitions last year. The value of transactions pending or completed in 2017 shrank to $1.15-billion, from $3.03-billion a year earlier. Still, in terms of number of deals, the 51 transactions last year targeting copper assets were the most in Bloomberg data in at least 12 years.

To be sure, January’s performance isn’t always a clear indicator of the annual flow of money into mining deals. And $510.6-million in transactions this month pales in comparison to some of the large deals of the recent past, such as the $7-billion sale by Glencore of the Las Bambas copper project to a group led by MMG announced in April 2014. Deals that year reached $11-billion, the highest since 2012.

Still, mining companies will be under heavy pressure to start buying new assets soon, especially with copper prices trading above $7 000/t for most of the past month.

“Copper valuations are disconnected from where copper prices will ultimately trade in the long run,” Cosgrove said in a telephone interview. Assets are being valued based on copper prices below $7 000, when the cost of bringing in new capacity is much higher, he said.

[wassapper] 25/1/2018 14:54

CAML timing probably could not have been better ...

Zinc price will vault $4,000 within months