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Central Asia offers unrivalled income

We think now is a good time to dip back into one of our favourite mining stocks.
August 3, 2017

Resources stocks are not designed to be reliable, utility-like investments. The prize – and substantial risk – of exposure to commodities’ inherent volatility is leverage. Buy at the right time, and few asset classes or sectors can match the gains. Conversely, investors who have watched the miners’ share price convulsions in recent years might be tempted to avoid the sector entirely. But for readers taking this latter course, we'd suggest pondering copper producer Central Asia Metals (CAML), one of Aim’s gems, and the closest thing to a bond proxy you will find among mining equities.

IC TIP: Buy at 218p
Tip style
Income
Risk rating
Medium
Timescale
Medium Term
Bull points

Rising copper price

Bear points

Limited growth

Single project risk

Central Asia is a uniquely profitable operation, thanks to its ownership of the long-life, low-cost Kounrad plant in Kazakhstan, which recovers copper from dumps accumulated from a Soviet-era open-pit mine. Using leaching and a process known as solvent extraction-electrowinning (SX-EW), the company converts copper oxides and low-grade sulphides into A-grade copper cathode. This leads to extraordinary margins. Last year, Kounrad generated cash profit of $51.3m (£39.5m), on post-offtake sales of $66.7m. On a cost-basis, onsite mining, administration and general expenses came to just 43¢ per pound of copper produced compared with an average selling price of $2.27. Throw in foreign exchange losses, and $11.4m of central costs including running a head office in London, and the group's post-tax profit came in at $26m for the year.

Copper currently sells for about $2.90 a pound following a recent fillip, and has consistently traded above $2.50 in 2017. This suggests Central Asia should be doing very well at the moment. Of course, any interruption to production should worry investors, and an operational shift to Kounrad’s western dumps in the second quarter partly explains why the shares are trading below their February high of 263p. However, last month's half-year trading update, which reiterated full-year production guidance of 13,000 to 14,000 tonnes of copper cathode, suggests the dump transition happened without a hitch. Even if Central Asia hits the lower end of that guidance, investors can expect gross sales of $75m at $2.60 a pound copper.

As the table below shows, broker finnCap expects better. That' good for income seekers, as Central Asia seeks to distribute at least 20 per cent of revenue to shareholders in the form of dividends. With $41.7m net cash, there’s little to reason to expect a fall in the payout in the near term.

CENTRAL ASIA METALS (CAML)  
ORD PRICE:218pMARKET VALUE:£244m
TOUCH:218-220p12-MONTH HIGH:263pLOW: 161p
FORWARD DIVIDEND YIELD:7.8%FORWARD PE RATIO:9
NET ASSET VALUE:109¢*NET CASH:$41.7m
Year to 31 DecTurnover ($m)Pre-tax profit ($m)**Earnings per share (¢)**Dividend per share (¢)
201473.137.225.119.4
201564.433.320.718.8
201666.732.923.720.2
2017*80.444.031.620.8
2018*83.344.932.222.1
% change+4+2+2+6
Normal market size:1,500   
Matched bargain trading    
Beta:0.80   

£1=$1.30

*Includes intangible assets of $40.8m, or 36.5¢ a share

**finnCap forecasts, adjusted PTP and EPS figures