CGNM’s results came in below estimates on 1) absence of KAP’s compensation payment of c.US$10m; 2) lower-than-expected production and offtake in 4Q23. CGNM has one of the highest realised uranium ASP in 2023, showcasing its unique advantage among uranium miners as being backed by major nuclear utilities. We expect the company to achieve higher ASP and profits in 2024 on escalated uranium prices, and continual demand growth and possible supply disruption/delay could lend uranium further strength. We maintain BUY rating on CGNM but cut 2024 earnings forecast by 13% to reflect constrained production in Kazakhstan.
Key Factors for Rating
Results review. Other than the HK$96m compensation accrued in 1H23, CGNM’s flagship Central Mynkuduk mine produced only 78.4% of planned target in 4Q23 due to the shortage of sulfuric acid. Its trading segment fared better than we expected, posting a gross profit of HK$92m instead of our feared losses. And the wider spread of inventory cost and contracted price (US$7.2/lb) at end- 2023 implies a brighter trading profits in the future.
Update on uranium price outlook. During the post result briefing, the management shared their insights on uranium S/D outlook for 2024 and longer- term. They are positive on global nuclear demand growth across regions, led by China’s upbeat new approvals. New builds in Russia/South Asia/Europe and restarts in Japan all created incremental uranium fuel demand. On the other hand, prospective new/restarting uranium mines face challenges from geopolitical uncertainness, financing difficulties, production issues, etc, making S/D balance still favouring uranium price. The uranium price correction in March is also possibly not a result of fundamental weakness but rather a volatility induced by uranium derivatives - a sign that the yellow commodity is gaining financial institutions’ attention itself.
Lapse of dividend a boon in disguise? CGNM skipped dividend announcement for the second year in a row, citing its intention to retain cash for expansion needs. Given the active exploration and financing activities in the uranium space, we believe there are opportunities for CGNM to grow its pipeline with the backing of parentco, which would eventually benefit shareholders as well. The challenge is how to acquire quality mines at reasonable consideration in today’s uranium market. To be conservative, we have not put any additional pipeline in our model.
Key Risks for Rating
Lower-than-expected production; unexpected nuclear accident.
Valuation
Retain BUY rating for CGNM but cut TP to HK$2.10 to reflect lower-than- expected output in 2024. The recent dip creates a good entry point, in our view.