SIF Folio: Should I Buy Central Asia Metals?

2nd Nov '21 by Roland Head

11 comments 3543 reads

This week I’m looking at copper, zinc and lead producer Central Asia Metals. This AIM-listed stock has appeared in my stock screen as a potential buy for my rules-based SIF folio.

This company owns and operates sites in Kazakhstan and North Macedonia. But it’s a UK-based business that’s been listed since 2010 and has solid institutional ownership. CAML has also paid regular dividends since 2013. It’s a stock I’m happy to consider for SIF.

Indeed, I have held CAML in SIF previously, back in 2016/17. You can read my sale review on the stock from September 2017 here.

The shares are now trading slightly ahead of the level at which I sold previously:

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CAML stock has also provided a total dividend return of 25% since the end of September 2017:

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Overall, I don’t think this has been a bad stock to hold over the last five years.

A low-cost European miner

Central Asia Metal is a profitable and cash generative producer of base metals. Its core business is a copper recovery plant at the former Kounrad mine site near Balkhash, in central Kazakhstan. This facility produces copper cathode from waste dump material that accumulated during open-cast mine operations from 1936 until 2005.

CAML’s Kounrad business has proved to be a low-cost and successful producer of copper. The company estimates that 140,000 tonnes of recoverable copper remain. That’s just over 10 years’ production at current rates.

Profits are expected to hit record highs this year:

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This is due to the price of copper, which has surged higher since the start of the pandemic:

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Source: IG

Group revenue rose by 41% to $106m during the first half of the year, while pre-tax profit rose by 72% to $42m. Free cash flow for the period doubled to $48.9m. This funded a further $20m reduction in net debt, which fell to just $10m.

These are excellent numbers, in my view. But most miners are doing well at the moment. If demand for copper eases, CAML’s profits could fall fast. Given this risk, why am I willing to consider buying CAML stock at what might prove to be a market peak?

One answer to this question is simply that CAML shares…

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Neil D56

2nd Nov '21

Roland- how does Anglo American stack up against CAML? Reason I ask is because it has similar Stocko metrics but is a much bigger company altogether- in terms of cash sloughed off and the commodity base it is much broader. The fact that CAML has such a narrow base in my view would lead me to invest in AAL from am an overall risk perspective.

Roland Head

Neil - I probably wouldn't compete Anglo American (LON:AAL) and Central Asia Metals (LON:CAML) directly. Anglo is far more diversified, but has many moving parts and is more complex. Some of its operations (such as the deep platinum mines in SA) are quite high cost, too.

I think that Anglo has been run well since Mark Cutifani took charge, but he has had some decent tailwinds. Taking a longer view, Anglo's overall performance has been variable over the last decade. Its balance sheet has come under strain, with too much debt at times (although not at present).

In contrast, I think CAML has been more consistent. It's certainly created more shareholder value. Since Central Asia Metals (LON:CAML) joined the stock market in 2010, the shares have risen by nearly 175%. In contrast, Anglo stock is roughly unchanged over the last decade:

I agree that in theory, the concentration of Central Asia Metals (LON:CAML) assets in just two mine sites adds risk. But if the sites are well run and management provide reliable guidance - as I think they do - then I think the risks are acceptable.

Ultimately I'm not sure that Anglo and CAML are a good comparison. They're very different businesses. History suggests that CAML has been the better quality investment over the last decade. But as I comment above, the medium-term future may be less predictable.

Of course, these comments represent my views only - please DYOR.

Regards,

Roland

Will Marsh

Hi Roland, what an interesting read! I bought into CAML for exposure to copper in my portfolio almost when you sold out and still hold them. The shares have not set the world on fire but have produced a decent dividend as you say. I am going to come at this from the left field. have you considered taking a position in Ariana resources (AAU) instead (which is more of a play on copper upside than realised)?

My reasons are :

1) Ariana is diversified into exposure to Copper, gold, silver and zinc (glod and silver being the most important but copper on the rise). Also has exposure to assets in more than one country but primarily Turkey

2) Ariana is really well run (albeit in a bit of a Heath Robinson way when it comes to RNS and div payouts)

3) loads of development project upside and AAU has paid a maiden div this year

4) If you use the compare tool AAU wins against CAML

Downside

AAU has a much smaller market cap

CAML has a more regular div

I am considering reducing my number of shares I hold and I am seriously considering selling out of CAML into AAU at this price because I think AAU has more upside. What do you think? Note I already have a bigger AAU holding which I have held happily for longer

Bouden54

I would also consider Atalaya Mining (LON:ATYM) if you're after copper exposure. Just announced a maiden (and very generous) dividend, and considerably cheaper than Central Asia Metals (LON:CAML) I personally hold both as keen to have a fair amount of copper, but not too much in any single company.

Silver Moon

3rd Nov '21

Hi Roland, I've held Central Asia Metals (LON:CAML) since buying in 2017 and have struggled with it at times. There has been just one financial year at the 6% level in dividend, Covid blowing a hole in my returns, and yourself, with a 6-month default you could collect the final of next April. I see Central Asia Metals (LON:CAML) as just jogging along over that period. My alternative investments in Atalaya Mining (LON:ATYM) and Ariana Resources (LON:AAU) have been far more exciting. Buying the dip matters a great deal to me.

Rusty2

I hold Central Asia Metals (LON:CAML) but as you say it’s just jogging along, in fact fallen recently, maybe a good time to buy? I do hold Phoenix Copper (LON:PXC) which is much more exciting and far better returns so far.

TangoDoc

I've always been chary of miners, considering them far too speculative for my conservative tastes. My normal comfort zone/ no lost sleep approach to investment is well enough served by stocks that have survival features I can have faith in. I feel rich enough already to concentrate on keeping what I have over needing to double it. It was an online presentation by the CEO and CFO of Central Asia Metals (LON:CAML) some years ago, explaining the logic behind buying Sasa that convinced me that they had a very strong grasp. I'll admit that I do surf the waves, buying and selling as sentiment ebbs and flows but I'm happy to be back in right now. I feel sure that management are already sizing up a replacement for Kounrad, well in advance.

Pentago

Roland, thank you for this analysis. I feel investing in copper producers today is one of the easiest investment themes to support. You mention that, with commodities, "nothing cures high prices like high prices". This has generally been true when miners were considered strong plays on the China growth engine, and easy money was available, seemingly without much concern for balance sheet strength and investor returns. Now, this supply side phenomena has been addressed, scrutiny is intense on each project sanction, and its environmental impact. Importantly though, this time it is a demand story - and not really a China story (which is providing the current buying opportunity). As we move away from large conventional generating stations to distributed solar and wind sites, to significantly greater electrical storage, linkage of batteries, heat pumps, the connectivity equation results in huge copper demand growth through to 2050. Unfortunately with Kaz minerals off the market there are few copper plays with materiality, Antofagasta (LON:ANTO) would be one of my recommendations as well as those already mentioned. Other diversified miners, especially Glencore (LON:GLEN) should also perform well.

Anthony127

4th Nov '21

"But most miners are doing well at the moment"

If you look at the stock reports of our two biggest miners Bhp (LON:BHP) and Rio Tinto (LON:RIO) you will not get that impression. Both traditionally get 40% -50% of their turnover from China and moves to control prices and usage of steel in China has impacted Iron Ore prices. Add to this the fact that China's GDP is forecast to decline to 3 or 4 per cent next year I think this is ominous for these global miners.

That said I do agree that copper is the commodity to be in and miners that focus on copper are going to do very well. The increasing use of copper caused by the advance of EVs and the impending US Infrastructure bill worth $1.2 Trillion suggests to me that copper has a clear runway ahead.

Suggestions have been made that Atalaya Mining (LON:ATYM) could be a better alternative to £CAML. The Stockopedia company to company comparison does give ATYM the definite edge and perhaps it does have the advantage of being based in the more operationally stable Spain.

The article also suggests that CAML may be close to a cyclical peak. My own expectation is that global GDP will be much higher three years from now and that miners are not close to cyclical peaks but I would be interested to hear other views on this.

5th Nov '21

It's true that profits at Rio Tinto (LON:RIO) and Bhp (LON:BHP) are expected to fall over the next couple of years - but they are falling from record highs. Forecasts suggest earnings at both companies will remain well above historical average levels in 2022 and 2023.

My reading of the recent share price falls at RIO and BHP is that the market is starting to price in lower commodity prices. In my view, both shares are still valued at the upper end of their long-run valuation range.

Of course, I may be completely wrong! Caveat emptor.

Angela Sclater

3rd Dec '21

When recovery costs are substantially lower by reclaiming copper from waste dumps and considering other beneficial factors the shares are worth holding and considering the expected increase in copper prices due to a higher copper demand from alternative energy sources. However the share price is back where it was in January which is disappointing when the objective is to buy & sell for profit.

SIF Folio: Should I buy Central Asia Metals?

A low-cost European miner

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Roland Head

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