CNMC

The gold miner suffered a setback in in 3Q16 as it posted a 3.6% slide in net profit to US$1.8m, taking 9M16 earnings to US$11m (+49%) or only 65% of the street's relatively bullish FY16 estimate.

For the quarter, revenue fell 15% to US$8.5m, hurt by a seven-day stop-work order (SWO) issued by the Kelantan state government, which ultimately reduced gold production to 6,285 oz (-24.3% y/y, -35.9% q/q). The drag on revenue was partially mitigated by higher average realised gold prices of US$1,345.31/oz (+12.3% y/y, +4.5% q/q).

Operationally, all-in cost escalated to US$728/oz (+29.1% y/y, +45.6% q/q), which translated to thinner margin of 45.9% (-7ppts y/y, -15.2ppts q/q). This was a result of the following factors:

1) Jump in mining-related costs to US$399/oz (+41% y/y, +26.7% q/q) due to reinstatement costs after the SWO was lifted. Overall, gold production took about 20 days before returning to pre-SWO levels.

2) Reduced capex of US$6/oz (-86.7 y/y, -65.2% q/q) after it completed a recent upgrade to one of its leaching yards.

3) Initial part payment for its 21-year mining lease extension of RM2m or US$95/oz.

Owing to the weaker operating performance, net operating cash flow was almost halved to US$3.5m. Despite this, CNMC continues to boast a solid balance sheet with net cash of US$33.4m (+51.9% y/y, +3.4% q/q).

In a post-results briefing, management flagged that the current quarter will be negatively affected by:
1) Seasonally weaker gold production due to the monsoon season. 4Q15 was a drier quarter due to the strong El Nino weather pattern, which reduced rainfall over Malaysia.

2) Cash payment of the remaining RM18m for its 21-year mining lease extension. While this is expected to affect the all-in production costs and cash margin, the cost associated with the mining lease extension will be capitalised and amortised until 2034.

3) Higher royalty and tribute expenses with management expecting the latter to increase from 3% to 4% of revenue.

In view of the above, it will be an uphill task for CNMC to meet bullish street estimates for FY16. This, coupled with the likelihood of a Fed rate hike in Dec could temper gold prices and its performance in 2017.

CNMC currently trades at 7.9x forward consensus P/E on bullish estimates with 3 Buy ratings and a consensus TP of $0.92.