Central Asia Metals Turns In A Maiden Profit As Copper Production At Kounrad Gets Into Its Stride
By Alastair Ford
“I’ve never given promises I haven’t subsequently delivered on”, says Nick Clarke of Central Asia Metals, after the company delivered a maiden profit on just a few months of production from the Kounrad copper project in Kazakhstan.
Copper production at Kounrad
“It pays to deliver on what you say. At the end of 2010 we made certain promises. We said we’d deliver Kounrad for US$47 million. We actually did it for US$39 million, so in an industry which sees double-digit over-runs we’ve come in under budget. And we said we’d do 5,000 tonnes of copper this year, and already we’ve increased on that.”
Indeed, commissioning at Kounrad has gone so well that for the full year to December the company now expects to produce 5,750 tonnes of copper, up by some margin from the previously anticipated 5,000 tonnes. And there could be more to come.
“Some people have argued that since we’ve already produced 4,300 tonnes, surely we can do more”, says Nick. But in any new plant, when it comes to ramping up production it pays to be cautious.
The great unknown that Central Asia Metals is about to get to grips with is the Kazakh winter, which has crippled more than one UK-backed mining enterprise in the past.
“Our main product is ostensibly a solution”, explains Nick. “And what happens in cold weather? Solutions freeze.” But Nick is a seasoned mining engineer, and this is not his first time round in Kazakhstan. The Kounrad operation has been equipped with an 8MW coal-fired boiler station which will allow the company to keep the solution at around 8º centigrade.
So, all being well, it’s perfectly possible that even that revised 5,750 tonnes target might be surpassed. Certainly, Nick is very confident that next year’s 10,000 tonne target will be met. “The way the plant has performed so far, we will do it”, he says.
Even more to the point, Kounrad is now beginning to throw off sizeable chunks of cash. As things stand, Central Asia is currently producing metal at a cost of around US$0.46 per pound, while the overall cost of sales figure, which includes distribution and selling costs and taxes, stands at US$0.85 per pound.
That allows for a nice chunky margin on the current copper price of US$3.75, and has already helped the company turn a maiden pre-tax profit of US$500,000 for the six months to June. Will there be inflationary pressure? - of course.
But Nick is resolute. “Our objective next year is to keep at that level of costs”, he says. “Staying in business is all about being in the lowest cost quartile you can be in.”
So with a tight grip on costs, the copper price strong and production set to rise, Central Asia looks well positioned for the future. “Everything that we can control, that we can influence, we have”, says Nick.
The next challenge will be further growth. Plans have been in train for some time now to double output at Kounrad via the construction of a second plant. The cost of such an undertaking has been put at between US$45 million and US$50 million, but it would probably be a fairly easy lift for Central Asia, given that it’s already put one such operation into production.
“There are different infrastructure issues to work out”, says Nick. “But we know that we would keep the plant pretty much as is. It’s a Chinese plant. It has a good design, good adaptability. We would keep the design as it is, and that would foreshorten the approval process.”
So far so good. But Nick’s unlikely to press the go button on that development until he’s received clarity on an ongoing transaction relating to the ownership of Kounrad itself.
When Central Asia first brought Kounrad into production it was under the auspices of a 60:40 joint venture with various Kazakh interests. Subsequently, the company agreed a deal to buy out those interests, for which it is now seeking official approval.
Already, the government has waived its pre-emption rights, and the transaction is now in front of the State Anti-Monopoly Committee. This stage of the process ought not to prove a major hurdle. “At 10,000 tonnes a year we’re below the radar screens of virtually everybody and everything”, says Nick.
Even so, the process is taking longer than he’d anticipated, partly because there was recently a change in government. “I’d love it complete”, he says. But for now it’s a waiting game. “And we can’t ignore the fact that this second plant is also tied up with the ownership issue. We’re not going to commit to US$45 million or US$50 million until the ownership issue is resolved. We can’t separate the two.”
In the meantime though, Central Asia’s shares have been on the rise, partly on account of the strong financial results, and partly as a result of a robust by-back programme which Nick has initiated after he was given a mandate to acquire up to five per cent of the company on market.
The programme was initiated earlier in the summer, at a time when Central Asia’s shares were suffering from what seemed to Nick an unjustifiably low valuation. “I’m a fairly emotional character when it comes to supporting my own stock and story”, says Nick. “And I couldn’t understand why we were being discounted. So I said: we mustn’t show the enemy the fear in our eyes. We’ve got cash, let’s go into the market.”
To date, the programme has been remarkably successful. When it was initiated back in July, the company’s share price was 70p, and there were 86 million shares out. Fast forward three months and the share price is touching 100p, and there are 85.5 million shares out. That means that for an outlay of £600,000 and £700,000, Central Asia has been able to support an increase in its market capitalisation of around £25 million.
That’s pretty good going, especially considering that most other juniors suffered weaker share prices across the same period. Consistency has been important - notices from Central Asia that it’s been buying share have been coming out on a regular basis ever the buyback was initiated. From the 1st to the 5th October there was one every day.
But perhaps more to the point, the market can now see clear evidence of a company that’s really getting into its stride. Production is on the rise, costs are well under control, the shares benefit from robust support on the market, and there is plenty of scope for further growth down the tracks.
All told, it’s perhaps not surprising that the shares have risen by more than 40 per cent over the past few months. It’ll be interesting to see where they go from here.
GTE Price at posting:
18.5¢ Sentiment: ST Buy Disclosure: Held
(20min delay)