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Profits look simple with Central Asia Metals

From a standing start, this copper miner looks set to generate significant revenues from a low-cost extraction process
June 21, 2012

Central Asia Metals (CAML) has a copper mining project in Kazakhstan that's just what a miner needs for these troubled times - a 'plain vanilla' operation that will quickly generate revenues and won't be greedy for hard-to-find capital.

IC TIP: Buy at 80p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Simple copper production method
  • Low operating costs
  • First-year output on track
  • Significant expansion potential
Bear points
  • Copper price weakness
  • Kazakhstan risk

CAML's plan is to extract copper from waste rock - rock previously deemed uneconomic to process because of low grades - stockpiled over the past 70 years by a large, neighbouring copper mine in Kounrad in the eastern part of the Asian republic. By treating the rock with chemicals in a conventional leaching process, the company can produce copper at low operating costs - around 80¢-85¢ a pound after royalties, very much in the lower quartile of the industry.

CAML spent two years perfecting the process on-site before raising $60m (£38m) through an initial public offering in 2010 to build a full-scale production plant. It commissioned the plant this spring - on time and, unusually for a miner, under budget - and recently sold the first batch of copper on a spot contract. Moreover, management confirms the ramp-up is on track to deliver at least 5,000 tonnes of copper this year, rising to 10,000 tonnes a year in 2013. That will generate roughly $43m and $83m in revenues, respectively.

Although there remains the risk that scaling up production won't go as planned, the successful pilot plant testing and the relatively simple nature of the extraction process gives confidence that it will.

What's more, CAML is completing a study for a second plant at the site, which could double production to 20,000 tonnes a year at a cost of around $50m. The second plant would process the much larger supply of sulphide material on site. It would be more difficult and expensive to produce, but CAML hopes to confirm commercial viability by the year end.

CENTRAL ASIA METALS (CAML)

ORD PRICE:80pMARKET VALUE:£69m
TOUCH:78-80p12-MONTH HIGH:107pLOW: 54p
DIVIDEND YIELD:nilPE RATIO:7
NET ASSET VALUE:49pNET CASH:$16m

Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20091.14-15.0-46nil
20101.45-6.69-11nil
20111.12-5.94-13nil
2012*43.429.711.1nil
2013*83.164.441.5nil
% change----

Normal market size: 3,000

Matched bargain trading

*Mirabaud Securities forecasts

Admittedly, spot copper prices have fallen from $3.90 a pound to $3.38 a pound over the past two months, and the shares of CAML have likewise drifted. With industrial metals prices closely tied to bad news in the eurozone and fears of a hard landing in China, further weakness in copper prices over the near term could be in store. China's policymakers have already started to inject stimulus into their slowing economy, however, and City analysts expect China's growth rate to rebound - that should provide underlying support for prices over the longer term.

Operating in mineral-rich but democracy-poor Kazakhstan also poses challenges. Then again, nearly half a dozen FTSE 100 companies have operations there, and CAML has seemingly built solid relationships with government and local business partners.