Central Asia Metals Diversifies Portfolio With Macedonia Mine
Central Asia Metals PLC released a slew of news to shareholders on Friday, as it outlined proposals to buy the SASA zinc-lead mine in Macedonia for USD402.5 million, above the miner’s own market capitalisation.
The miner, currently valued at around GBP283.9 million, said it plans to fund the proposed acquisition, equal to around GBP297 million, via USD187 million of debt financing, USD203.5 million of equity and a deferred consideration of USD12.0 million.
Central Asia is to purchase the owner of the mine, Lynx Resources Ltd, from Orion Co-Investments III LP and Fusion Capital AG. The underground mine is a “low cost operation with strong operating track record and a reserve base supporting production until at least 2032,” the company said.
The mine produced 22,515 tonnes of zinc in concentrate and 28.995 tonnes of lead in concentrate from a total of 783,000 tonnes of ore in 2016. Central Asia also highlighted that Lynk’s margin at the earnings before interest, tax, depreciation and amortisation level was around 61% in the first six months of 2017.
In terms of costs, the project lies “at the lower end of the second quartile of the Wood MacKenzie 2017E zinc industry cost curve,” based on the C1 zinc equivalent cash cost of 39.0 cents per pound achieved in the first half of 2017.
“The transaction is expected to be both earnings and cash flow per share accretive in the first full year, underpinning Central Asia Metal’s dividend profile,” said the London-listed miner.
In terms of funding, USD120 million of debt has been sourced from Traxys at a rate of 4.75% plus LIBOR over a five-year term, while a further USD67.0 million of existing Lynx debt has been rolled over with five years remaining.
The equity portion of the consideration includes USD153.5 million raised in a placing Friday, or GBP113.0 million. The placing was fully underwritten and the proceeds will represent approximately 39.6% of the company’s current market capitalisation based on the closing share price on September 1, when shares were suspended.
Those new shares will not be entitled to the interim dividend declared on Friday, Central Asia said.
In addition to the shares to be issued under the placing, Non-Executive Kenges Rakishev will sell 10.6 million existing shares in the business held under CBH Europe Ltd. While Central Asia will not book any proceeds from those shares, the sale will “release liquidity and manage his broader investment portfolio”.
The director’s shares are equal to a 9.5% stake in Central Asia Metals. Rakishev is halving his stake, and will retain 10.6 million shares in the business after the sale.
A further USD50 million will be raised by issuing shares in Central Asia to Orion via an equity subscription.
The USD12 million deferred consideration will be payable in six equal monthly instalments commencing on the first anniversary of completion, which is anticipated in the fourth quarter of 2017.
The meeting for shareholders to vote on the transaction is pencilled in for October 11. The directors plan to use their combined stake of 23.5% to vote in favour of the proposals. The placing is not conditional on the acquisition, notably.
“We believe that this transaction is an exceptional opportunity for Central Asia Metals to acquire a high quality asset which complements our existing business. The combination of Central Asia Metals and Lynx creates an AIM-listed, diversified, base metals producer with low cost, long life operations which are expected to generate positive cash flows throughout the commodity cycle. The transaction is projected to be both earnings and cash flow per share accretive in the first full year, which is in line with our business development strategy of pursuing value accretive acquisitions in the base metals sector that enable Central Asia Metals to continue paying one of the leading dividends in the sector,” said Executive Chairman Nick Clarke.
The acquisition of the Macedonian SASA mine, when added to the Central Asia’s existing principal operations at Kounrad in Kazakhstan, should provide the enlarged group with “two low operating cost, long life and cash generative base metal mines in two highly prospective jurisdictions”, the company said.
The SASA mine has “significant” inferred mineral resources and other brownfield exploration targets that offer potential for growth in terms of production levels and the life of the mine. This compliments the firm’s Kounrad operation, it said, which is highly cash generative but which does not offer growth potential.
Kounrad has produced copper cathode since 2012 and output has increased annually to a level that is “broadly sustainable for the medium term.”
Central Asia’s production in 2016 met the top end of its copper production guidance, producing 14,020 tonnes of copper. The production guidance for 2017 is 13,000 to 14,000 tonnes of copper cathode. In the first half of 2017 copper production increased by 2% year-on-year to 7,027 tonnes from 6,908 tonnes.
“The directors believe that the enlarged group should have combined recoverable copper equivalent mineral resources of 499,000 tonnes and be able to produce in the order of 34,800 tonnes (based upon commodity prices) of copper equivalent metal annually, representing an increase in metal equivalent production of 148% to 2016 Kounrad production,” said Central Asia on Friday.
Central Asia also Friday released its interim results for the six months to the end of July, posting a 2% rise in copper production and an 8% lift in sales. Revenue for the half rose to USD38.6 million from USD30.9 million the year before, delivering a 36% rise in pretax profit to USD20.4 million from USD15.0 million.
The interim dividend, to which new shareholders under the placing will not be entitled, was declared at 6.5 pence, up from 5.5 pence the year before. Buyers of the new placing shares or those from the director will be entitled to any final dividend for 2017, however.
The company’s dividend policy is currently to return a minimum of 20% of the attributable revenues generated from the Kounrad project to shareholders subject to maintaining three times cash cover.
From the start of 2018, Central Asia’s dividend policy is intended to be to return to shareholders a target range of between 30% to 50% of free cash flow, the company said.
Cash at the end of the period stood at USD41.7 million, a touch higher than the USD40.4 million balance at the end of 2016. Currently, the company is debt free ahead of the proposed deal.