• 2Q19 revenue and PATMI missed our expectation due to lower ore grade and higher effective tax rate.
• Gold price is on the bull run after rallying back to a 6-year high of US$1,400/oz.
• Expect underground mining to mitigate lower ore grade issue.
• Revenue propelling and cost reduction plans are on track.
• We adjust the FY19e and FY20e average selling price to US$1,350/oz (+3.8%) and US$1,400/oz (+3.7%) upward respectively while tweak down the FY19e implied gold grade to 0.48g/tonne (previously 0.49g/tonne). Accordingly, the present value of FCFE increases by 6.8%. Meanwhile, the updated cost of equity drops 0.5 ppt to 12.5%. The last done price is 10% lower than our updated target price due to the recent price appreciation.  We downgrade our call from BUY to ACCUMULATE with a higher TP of S$0.33 (Previously S$0.31).

The Positive

Gold price is on the bull run after rallying back to a 6-year high. In 2Q19, the gold price averaged at US$1,308.5/oz (up 0.1% YoY and 0.4% QoQ). The improving spot gold market resulted in the 1.6% YoY and 1.8% QoQ growth in average realised selling price. It’s worth noting that the gold price surpassed US$1,400/oz, which is a 6-year high since Apr-13 by the end of Jun-19. As of mid-Aug-19, the gold price is holding up at above US$1,500/oz.

The Negatives

Lower ore grade led to a decline in QoQ production.

In 2Q19, the gold output dipped by 5.3% QoQ to 7,600oz due to lower ore grade. As of Jun-19, all the output were from open-pit mining whose ore grade is lower than underground mining. During the period, the carbon-in-leach plant was more than 100% utilised with a daily ore processing capacity of 500 tonnes. However, phase one underground mining has commenced operation by the end of Jun-19. The lower ore grade issue is expected to be mitigated in 2H19.  

Outlook

The expansion plan below enables CNMC to boost production and lower operating costs further.

Downgrade to ACCUMULATE with a higher TP of S$0.33

We adjust the FY19e and FY20e average selling price to US$1,350/oz (+3.8%) and US$1,400/oz (+3.7%) upward respectively while tweak down the FY19e implied gold grade to 0.48g/tonne (previously 0.49g/tonne). Accordingly, the present value of FCFE increases by 6.8%. Meanwhile, the updated cost of equity drops 0.5 ppt to 12.5%.

The last done price is 10% lower than our updated target price due to the recent price appreciation.  We downgrade our call from BUY to ACCUMULATE with a higher TP of S$0.33 (previously S$0.31).

Source: Phillip Capital Research - 19 Aug 2019