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Central Asia Metals weathers low copper price to reward shareholders

Central Asia Metals has maintained its dividend in a tough copper price environment
Central Asia Metals weathers low copper price to reward shareholders
Copper production at Kounrad

The absolute centrality of the dividend to the strategy of Central Asia Metals PLC (LON:CAML) comes through time and again when chief executive Nick Clarke speaks.

He’s keen, first off, as he always is, to emphasise how much money the company’s been able to return to shareholders over the years.

Once it’s paid the recently announced 8p final dividend, which brings the total for fiscal 2015 to 12.5p, the company will have paid back a total US$73mln to the market via dividends and buy-backs.

Since it only raised US$60 mln when it listed back in 2010, that’s quite some record.

Clarke is keen to preserve it, as the company’s actions in the face of the weaker copper price make only too clear.

Copper’s at multi-year lows, and although the production from CAML’s Kounrad copper project in Kazakhstan hit record levels last year, revenue was nonetheless adversely affected.

Overall, for the full year to December 2015 the company generated gross income of just over US$67mln, compared to the US$73mln generated in the prior year.

Nevertheless, supported by a cash pile of more than US$40mln, Clarke has chosen to maintain the dividend at the same level as was paid out in 2014.

In total shareholders will receive more than US$12mln.

Given that profits before tax still rang in at more than US$33 mln, that decision is one that passed without demur among London’s broking community. Indeed, in a world where the mighty have fallen – the likes of Rio (LON:RIO), BHP Billiton (LON:BLT) and Antofagasta (LON:ANTO) have all cut dividends in recent months - it even provoked strong expressions of support.

“We interpret the final dividend pay-out ratio as a sign of the CAML board’s confidence in the group’s cash-generating capability, despite lower copper prices in 2015,” wrote broker Mirabaud in its morning briefing note following the release of the financials.

Shore Capital’s Yuen Low called the balance sheet “very healthy” and referred to the dividend as “generous” and the 7.45% yield as “tasty.”

It’s that sort of approval that’s allowed CAML’s shares to recover quite sharply from a bout of heavy selling from one particular fund manager, as existing shareholders hoovered up loose shares on the market.

The shares opened  a couple of pence higher at 170p when the full year financials were announced.

That's up more than 35% on a recent low of 124p hit back in mid-February.

Underlying it all is the strength of the Kounrad operation itself. Following a two-phase expansion programme that is now nearing completion, the project is slated to continue production at an average of 200,000 tonnes per year till 2030.

The cost per pound of copper produced, using the company’s new metric which excludes taxes and royalties, is likely to run at an average of around US$0.60 per pound during that period, which allows plenty of space for the huge margin that Central Asia continues to enjoy - even at its current lowly US$2.11 level.

“We stand by our dividend policy,” says Clarke. “We’re confident. We think we’ve seen the bottom of the market.”

Quite possibly there are better times ahead, and Ivan Arriagada of Antofagasta appears to agree, according to reports cited by Credit Suisse recently. He argues that copper is “best-placed for a recovery”, although admittedly that recovery is likely to take two or three years to show through.

Ahead of that Clarke is on the look-out for opportunities for growth.

But here again he harks back to the primacy of the Kounrad dividend. “What we want to see is a good cash-generative opportunity,” he says. “But when we do move we’ll move for the right reasons. Our dividend payment will always be our priority.”

It won’t be put at risk for the development of the company’s second project, Copper Bay in Chile, either.

A previous economic study showed that Copper Bay might require US$88mln to develop, although Clarke is hopeful that more up-to-date studies will shave quite significant amounts off that number.

In any event, the development funding for Copper Bay will be a matter for future discussion, with the following proviso from Clarke to bear in mind: “CAML won’t finance it at the risk of a cut in the dividend.”

But in any case Copper Bay will always be secondary to Kounrad, likely to produce less copper at higher cost, although still decent margin all-told.

What would really make a difference would be if Clarke and his team could cut a deal on a new asset that cash flow from Kounrad could support. That might not be easy as sellers are still seeking high valuations even in the current market, and in some cases private equity has stepped in and delivered that value.

Even so, Clarke has retained Central Asia’s position as one of London’s best performing mining companies over the past five years, and any move he makes is likely to enjoy strong support.

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