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Company insists it will keep paying generous dividends despite shift to become underground mining operator
Thursday 28 Sep 2017 Author: Daniel Coatsworth

Anyone used to owning shares in Central Asia Metals (CAML:AIM) as a low-risk, high-yield stock should brace themselves for a change in risk profile and potentially more volatile share price movement.

The miner has struck a deal to buy Lynx Resources, the owner of the Sasa underground zinc and lead mine and processing operation in Macedonia, for $402.5m.

Historically Central Asia Metals has been a waste reprocessing business without the risks of operating an actual mine. It has produced copper cathode at a higher profit margin than a traditional copper miner and generated a lot of cash to expand reprocessing interests in Kazakhstan and pay large dividends to shareholders.

It now has the added risk of running a mine, plus there are questions over whether it is buying Lynx right at the top of the current rally in the zinc price, thus paying a high price for the asset.

Zinc is presently trading around $1.40 per pound, having moved up from $1.18 per pound in the second quarter of 2017. Investment bank Macquarie forecasts the base metal will average $1.41 per pound in the fourth quarter of this year before averaging $1.37 per pound in 2018 and $1.17 in 2019.


Nick Clarke, executive chairman of Central Asia Metals, tells Shares: ‘The zinc rally won’t last forever, but the project will still make a good profit.’

Lynx achieved a 61% EBITDA (earnings before interest, tax, depreciation and amortisation) margin in the first six months of 2017. Clarke says historically it has earned a 40% to 50% margin.

The Sasa mine’s costs are presently at the lower end of the second quartile of the zinc industry. Clarke is confident that Central Asia Metals can get the mine in the lowest cost quartile next year.

We note that Lynx is building a new tailings storage facility as the existing one reaches full capacity next month. A delay to finishing the tailings facility could have material impact on operations and profit of Lynx, warns Central Asia Metals in the acquisition admission document.

Lynx is being bought from an Orion investment fund and investor Fusion Capital. The Orion fund is due to wind up in three years’ time, according to Clarke, and so the private equity owner had started to offload assets.

Central Asia Metals may consider a move from AIM to London’s Main Market, hints Clarke. He says this would be something to debate in six months’ time.

Trading at 231.5p, Central Asia Metals will be valued at £407m once all the shares associated with the acquisition are issued. That’s still too small to get the stock in the FTSE 250 index, should it move to the Main Market. The smallest stock in the FTSE 250 is presently worth just over £600m.

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