Another great set of results from Central Asia Metals, Buy says Gary Newman

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Central Asia Metals (CAML) is one of those companies which I think is consistently undervalued by the market and, although it carries some degree of geopolitical risk, I believe that too large a discount is applied for that. The company mostly mines copper, zinc and lead in Kazakhstan and Macedonia and, understandably, the conflict in Ukraine has caused a certain degree of nervousness amongst investors when it comes to any business operating in this part of the world, and even more so with the Kazakhstan involvement and a possible exodus of Russian companies moving there businesses there. From an economic perspective that could be very good news for Kazakhstan as it will benefit from an influx, but there is also a risk that the international community could see this as a way of Russian companies trying to bypass the existing sanctions and there is always a risk - albeit small in my opinion, otherwise I’d have expected some measures to already have been taken against Kazakhstan when they were first discussed around a month ago - that some sanctions could be placed on Kazakhstan to prevent this. The risk from this is very hard to gauge at the moment, but is likely to continue to weigh on the share price of Central Asia Metals at least in the short term and until the current Ukrainian situation looks like reaching some sort of resolution. Even allowing for all of that though, I believe the market is being far too cautious when you consider the very impressive operational performance of this company during 2021 – even though Kounrad accounted for around 64% of EBITDA.

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The company generated revenue of $235.2 million and a pre-tax profit of $109.3 million, resulting in EPS of $0.4769 (approximately 36.5p), and at the current share price of just 236p, that means that it is trading on a PE ratio of just 6.45x, which seems ridiculously low given that revenue, EBITDA and net profit were all significantly higher than in 2020, and EPS almost doubled. That performance has also translated into significantly higher free cash flow as well, as by September of this year the company expects to have fully repaid all of the debt associated with the acquisition of its Sasa zinc and lead asset in Macedonia which it bought at the end of 2017 for $402 million. I think that it is impressive that it has managed to pay off that money so quickly from operational cash flow, and although you could argue that it has also had a bit of luck from the high commodity prices we’ve seen, it also goes to show that it made that acquisition at a good time in the cycle. Net cash at end of last year stood at $22.7 million, an improvement of $59 million on the previous year, and that included paying out a total dividend of 20p per share during 2021 – in line with company policy to pay out 45% of the free cash flow of $103.8 million that it generated during the year. Although many will be investing in Central Asia Metals for its future growth potential from its operations, it has also been one of the best companies in this sector that I’ve ever seen on AIM when it comes to returning capital to its shareholders – prior to the Sasa acquisition it had returned way more to holders, via dividends, than it had ever raised via equity issues. That theme seems to be continuing, as not only has it paid off the Sasa debt, but it is also offering a dividend yield of around 8.5%, at the current share price.

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This impressive performance looks set to continue as well as its assets have a long lifespan (Sasa until at least 2037 based on current resources) and guidance for 2022 points to another strong performance, with Sasa guidance at around the levels actually produced in 2022 (guidance of 20kt to 22kt of zinc and 27kt to 29kt of lead), and Kounrad slightly lower at 12.5kt to 13.5kt, versus actual 2021 average production of just over 14kt. Obviously the financial performance will depend on commodity prices, but barring significant further Covid lockdowns around the world (the current situation in China is of course a concern and represents a risk), I see these prices as remaining strong for the foreseeable future. You’re unlikely to get rich quickly from investing in Central Asia Metals shares, but at a market cap of £415 million I believe it is too cheap, and has been for some time now but at some point the market will wake up to that, and especially if the geo-political risks start to reduce (you’re always likely to have some discount for that though, given where it operates).

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Operationally and financially, there is nothing really not to like about this company and I think you’d be hard pressed to argue that there isn’t value here at this price, based purely on company-specific factors. There is of course some risk from the fact that it only has two producing operations, and if anything happened that majorly impacted either, that would have a big impact on the company – but then the same is true for most other miners of this size, and in some cases they are even reliant on a single asset. In terms of outside factors, whilst I accept that there is geo-political risk, that isn’t exactly unusual for miners given the parts of the world that they operate in, and you could easily point to parts of Africa or South America as carrying just as much, if not more, risk. It is just something which seems to come with investing in miners. Central Asia Metals is a company that I’ve been following and covering for a number of years, and although it is yet to really do much in terms of a big increase in share price it is worth remembering that during that time it has produced a decent income yield. I believe that it is worth having patience with this one, and therefore it remains a buy and is one of the best run miners on the AIM market.

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Filed under: Central Asia Metals, Bearcast, Parsley Box, Recycling Technologies, Artisanal Spirits, Gfinity

2022-03-30 14:05:29

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