This is an excerpt from NRA Capital’s research report on CNMC Goldmine Holdings Limited.

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Profit guidance was in the context of 2Q16 results.

CNMC issued a profit guidance on 26th July morning to indicate that it expects 2Q17 profit to be significantly lower than that of 2Q16 (No mention was made of any loss).

We remind that the drop in CNMC’s profitability started in 4Q16 and that 2Q16 results still reflected CNMC’s performance when ore grades were higher. The company reported PATMI of US$4.7m for 2Q16.

Subsequently, it reported a loss attributable to shareholders of US$1.9m for 4Q16 and PATMI of US$60k for 1Q17.

Therefore, we can infer that the lower year-on-year profitability has likely been priced in and that the profit guidance is not a cause for us to revise our positive outlook on CNMC.

Guidance indicates a profitable 2Q17.

Profitability in 1Q17 was driven in part by close to US$0.3m of foreign exchange gains as the Ringgit appreciated by 1.4% against the US Dollar.

During 2Q17, the Ringgit appreciated by 3.0%. Hence, we can reasonably expect CNMC to report improved profitability in 2Q17 when compared to 1Q17.

Excluding foreign exchange gains, we can also expect operating performance to improve due to the larger number of working days in 2Q17. The first quarter of each year is partly affected by seasonal factors, such as holidays.

CIL plant remains on track to commence production in 2H 2017.

CNMC also released a set of presentation slides at the same time as the profit guidance, which included pictures of the CIL plant being under construction.

Subsequent phases will include for instance the completion of plant structures and the installation of plant and machinery. We maintain our assumption that the plant will come online in 4Q17.

Longer term drivers remain intact.

Long term, we continue to see three growth drivers – 1) commencement of production at the CIL plant, 2) base metal extraction and 3) the development of the Pulai and Kelgold mines.

We reiterate that CNMC has net cash of US$24.2m as of end 1Q17, translating to around 30% of its market capitalisation. Hence, we can expect CNMC to continue to pay dividends for 2017.

We also highlight that gold prices have continued to range around US$1,250/oz. in 2Q17, which is also our average selling price assumption for FY17.

Maintain Overweight rating.

In this update, we maintain our forecasts, valuation and rating, ranking CNMC as a high-average return and low average risk prospect. In our base case scenario, we expect CNMC to break even in 2017.

The 3Q17 performance will depend on factors such as the USDMYR rate and gold prices whereas 4Q17 profitability will be driven by how fast CNMC can commission the CIL plant.

Our model values the Sokor mine’s existing resources at S$0.380 and has yet to factor in exploration upside from all three mines – Sokor, Pulai and KelGold.

NRA Capital is the first independent equity research company licensed by the Monetary Authority of Singapore, offering independent institutional-quality equity research written for sophisticated investors.

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