Central Asia Metals: Low-Cost Base Metal Producer with Strong Cash Flows and Growth Ambitions

• Central Asia Metals is a base metal producer with two operating assets: the Kounrad copper project in Kazakhstan and the Sasa lead-zinc mine in North Macedonia.
• Kounrad is a low-cost copper producer that reprocesses old Soviet-era dumps, with an EBITDA margin of 72%. Sasa is a traditional underground mine producing lead and zinc concentrates.
• Sasa is undergoing an operational transformation to implement new mining methods and tailings management practices to future-proof the mine. Kounrad continues steady production.
• The company has a strong balance sheet with $56.3million in cash, no debt, and generates $60 million in free cash flow annually. It pays a dividend yield of around 12%.
• Management is focused on growth through acquisitions, targeting projects that can generate $50 million in EBITDA. They have looked at many opportunities but remain disciplined.

Cash Generating Assets in Kazakhstan and North Macedonia

Central Asia Metals (CAML) is a unique base metal producer with a portfolio of low-cost, cash-generating assets in Kazakhstan and North Macedonia. Led by a management team with strong technical and financial expertise, the company is well-positioned to deliver value to shareholders through a combination of steady production, high margins, and a disciplined growth strategy.

Kounrad: A Low-Cost Copper Producer

CAML's flagship asset is the Kounrad dump leach copper project in Kazakhstan. Unlike traditional mines, Kounrad reprocesses old Soviet-era waste dumps, extracting copper through a leaching process. This allows for very low operating costs, placing Kounrad in the first decile of the copper cost curve.

Gavin Ferrar, CEO of CAML, highlighted the unique advantages of Kounrad:

"Because we don't mine, because we don't crush, we don't have to move stuff around, it's super cheap. Anyone cheaper than us has got a gold credit or some other credit that's getting their costs lower...EBITDA margin last reported was 72%."

Kounrad produces 13,000-14,000 tonnes of copper annually at a cost of $0.78 per pound, generating significant cash flow for CAML. The operation is set to run until 2034, providing a long-life revenue stream.

Sasa: A Steady Producer in a Stable Jurisdiction

In 2017, CAML acquired the Sasa lead-zinc mine in North Macedonia for $400 million. Sasa is a traditional underground mine that has been in operation for many years, providing a steady source of production and cash flow.

Sasa produces lead and zinc concentrates which are sold to smelters in neighboring European countries. This proximity to end buyers reduces logistics risks and costs compared to mines that sell to distant Asian markets.

Ferrar emphasized the favorable fundamentals for zinc, with increasing demand driven by galvanizing steel for construction and infrastructure. Lead also has a positive demand outlook, with its continued use in energy storage and backup power systems.

Interview with CEO Gavin Ferrar

Strong Financials and Shareholder Returns

CAML boasts a rock-solid balance sheet, with $56.3 million in cash, no debt, and free cash flow of around $30 million on the first half of the year. This financial strength provides flexibility to pursue growth while continuing to reward shareholders.

The company has a dividend policy to pay out 30-50% of free cash flow, with a current dividend yield of approximately 12%. CAML's management believes the dividend instills capital discipline and aligns with shareholders' interests.

Growth Pipeline and Ambitions

While CAML's existing assets provide a strong foundation, the company is actively seeking growth through acquisitions. Ferrar and his team are looking for projects that can add $50 million in EBITDA, with a particular focus on copper and other base metals.

CAML has reviewed numerous opportunities and conducted site visits for the most promising projects. However, management remains disciplined in its approach, walking away from deals that don't meet their investment criteria or have fatal flaws.

With a supportive shareholder base, a strong balance sheet, and established banking relationships, CAML has the financial firepower to execute on the right acquisition. As Ferrar states:

"We've got great firepower, we've got a debt-free balance sheet so we can lever up to do this. We've got very supportive relationships with the lending banks who've supported us through the acquisition of Sasa in the first place and financing of future acquisitions as well."

Operational Excellence and ESG

CAML's management places a strong emphasis on operational excellence and continuous improvement. At Sasa, the company is implementing new mining methods and tailings management practices to future-proof the operation and reduce environmental risks.

The paste backfill and dry stack tailings initiatives will allow Sasa to store more waste material underground and reduce the need for wet tailings dams on the surface. This not only improves the mine's environmental footprint but also lowers future capital requirements.

At Kounrad, CAML has invested in a solar power plant that will continue to benefit the local community after the operation winds down. The company takes a long-term view of its social investments, focusing on education, healthcare, and infrastructure projects that will have lasting impacts.

Conclusion

Central Asia Metals offers a compelling investment case as a profitable, low-cost base metal producer with a strong financial position and clear growth ambitions. With a proven management team, supportive shareholder base, and disciplined approach to acquisitions, CAML is well-positioned to create value for investors in the years ahead. While the company faces the challenges of securing the right growth project, its existing assets provide a solid foundation of cash flow and operational excellence.

The Investment Thesis for Central Asia Metals

• Low-cost, long-life copper production from Kounrad with industry-leading 72% EBITDA margins
• Steady cash flow from the Sasa zinc-lead mine in a stable European jurisdiction
• Strong balance sheet with $56.3M cash, no debt, and $60M annual free cash flow
• Attractive dividend yield of ~12% supported by policy to pay out 30-50% of FCF
• Disciplined management team with clear growth strategy to acquire projects adding $50M EBITDA
• Operational excellence initiatives to future-proof Sasa and reduce environmental risks
• Opportunities to gain exposure to strong copper and zinc demand fundamentals

Macro Thematic Analysis

The interview highlights several key macro themes in the base metals sector. The first is the increasing importance of environmental, social, and governance (ESG) considerations for mining companies. CAML's Kounrad operation, which reprocesses old waste dumps and extracts copper through leaching, is an innovative example of how miners can minimize their environmental footprint while still generating strong returns.

Ferrar's comments also touch on the positive demand outlook for copper and zinc. Copper is a critical metal for the energy transition, with growing use in renewable energy infrastructure, electric vehicles, and energy-efficient buildings. Zinc, meanwhile, is seeing steady demand growth from its use in galvanizing steel for construction and infrastructure projects.

On the supply side, Ferrar notes some of the challenges facing new mine development, particularly for zinc. Environmental concerns in China are constraining output, while new projects in jurisdictions like Russia often face delays. This supply picture, coupled with robust demand fundamentals, suggests a favourable price environment for established producers like CAML.

This financial strength and supportive shareholder base position CAML to take advantage of opportunities in a fragmented market. With many assets held by private equity, family offices, or diversified miners looking to rationalize their portfolios, there is potential for a well-capitalized, technically proficient acquirer like CAML to create value through consolidation.

Key Takeaway

Central Asia Metals provides a unique investment opportunity in the base metals sector. The company's low-cost, cash-generating assets and strong financial position differentiate it from many peers. With a clear growth strategy, disciplined management team, and operational excellence focus, CAML offers an attractive mix of income and upside potential for investors. While there are risks inherent in any mining investment, CAML's portfolio and financial strength help mitigate some of these concerns. For investors seeking exposure to copper and zinc with a management team aligned with shareholders, Central Asia Metals is a compelling consideration.