Central Asia Metals plc (CAML) Earnings Call Transcript & Summary

Hello. My name is Gavin Ferrar. I'm the CEO of Central Asia Metals. We're a base metals producer with operations in Kazakhstan and North Macedonia, producing copper, lead and zinc, respectively. And we've also got an exciting exploration portfolio in Kazakhstan and also a minority stake in another exciting exploration company called Aberdeen Minerals in Scotland.

Gavin, good to see you again. We're back in the same room.

Good to see you, Matthew.

Yes. Look, I think today, if you don't mind, let's just -- going to focus on this potential acquisition. It hasn't quite completed yet, but I want to know a little bit more about it and what it does to the portfolio, to derisking and I guess, the growth component. So why don't you tell us a little bit about the company and the deal structure?

Sure. As a lot of your viewers and listeners will know, we announced on the 2nd of June the proposed acquisition of a company called Cygnus Metals. Now Cygnus is an Australian-listed company, but they have their key asset in Quebec in Canada, and it's called the Chibougamau Copper Gold Project. And the Chibougamau project is comprised of 5 deposits. And importantly, it's got an old centralized mill. So this thing last operated in 2008 called the Copper Rand mill. So as a complex and ultimately, which would be a hub-and-spoke operation, it is attractive to us because it's brownfields. It's got, as I said, 5 deposits in the right metals, copper and gold are obviously pretty hot at the moment. We're more after the copper as CAML, but the gold gives you a lovely byproduct credit. And it's got great exploration potential. So we can talk about the numbers in a minute. But insofar as our sort of strategy goes, and I think last time we spoke, we were talking about how we've got the early-stage exploration, which I just mentioned in the intro, plus the operations and populating that gap in between it with the development asset has been our strategic goal for quite some time now. And what this does having -- assuming we close the transaction in September, which -- where that would close, it gives us the opportunity to really bring all of our operating and technical expertise to bear in terms of then driving this project, the Chibougamau project up the value curve from what is a PEA stage project right now through to DFS and then ultimately into construction and production.

Okay. Copper gold development project sits neatly within the portfolio scope. And maybe talk about some of the numbers in terms of what it will cost to you and how you're funding that?

Sure. So the acquisition itself is an all-share acquisition. So it's all around exchange ratios, which get a little confusing, but effectively, what we'll be doing is paying with CAML shares. And for each Cygnus share, we're paying effectively 0.06 CAML shares. Now that sounds kind of confusing, but what the ultimate group will look like is 30% legacy Cygnus holders and 70% legacy CAML holders. And that combined group, because we're paying in shares, the important thing to note here is that we'll continue to keep all the firepower of our balance sheet in our cash flow. So the balance sheet remains debt free. We've got a small overdraft facility there. I think we've drawn it up to about $1 million at the moment. And then we're generating a lot of cash from the operations. And what that means is the development of Chibougamau is not going to be dilutive at all to either set of shareholders apart from this one event now, right, or in September. And with that cash flow, we can still continue with our exploration activities in Kazakhstan and Scotland. We can also -- we can continue with our CapEx programs at both sites and importantly, continue with the dividend policy of 30% to 50% of free cash flow going out to the shareholders.

Okay. So I'm going to put -- if you don't mind, park Kazakhstan and Scotland, so maybe towards the end, we'll tip our hats. But coming back to what Cygnus want to do. What were they trying to do before you guys came along? Because it's been around for a while. We're very aware, we understand Chibougamau, Northern Superior client, it's very prospective district or part of the world. And how far have they gone? So a 2022 PEA I'm aware of.

That's right.

So what have they done since?

So the sort of positive history here is that a company called Dore Copper owned the asset, and they produced that 2022 PEA. And that's available on SEDAR for those of you who are curious or insomniacs or both. But it's a good basis of kind of what we're buying, if anybody is curious about that. But importantly, what Cygnus did and Cygnus bought Dore Copper and what they've done since then is a lot of drilling and a bit more study work. So they've drilled -- I can't remember the number of meters, but it's a bunch of meters, but what the consequence of that drilling was that they've increased the resource base by about 78%. And included in that, they've actually made a little bit of a discovery called Golden Eye. It was kind of known before, but there's another zone that they've discovered. And all this has been put into the public domain by Cygnus itself. And that drove them to in October, I think it was September, October last year, putting out a revised mineral resource estimate for the whole project. And I think that is a huge step up from what Dore was doing. So they've now got 6.4 million tonnes of measured and indicated resource.

At what grade?

At a grade of 2.3% copper, 0.8 gram a tonne gold and 7.6 gram a tonne silver. So I think on a combined equivalent copper equivalent basis, about a 3% deposit. So really attractive from that perspective. And that's really what turned our heads in the first place. And then in addition to that, more than 8 million tonnes of inferred. And again, they've also added to the land package. So taking the Dore Copper land package and they've added to that package and they now control effectively an 18-kilometer strike length along that mineralized zone that is, again, really ripe for exploration. There's a couple of additional prospects along there that have already been identified. Some of them have been old mines themselves. But again, so not only are the 5 deposits I mentioned earlier, and I can reel them all off for you guys, but it's Corner Bay, Devlin, Joe Mann, Golden Eye and Copper Rand. So we've got all of those open along strike and at depth. So additional exploration potential there, plus that 18-kilometer strike zone, which has again got some standup drill targets on it.

Right. So when we described it earlier as a development project, there's a heck of a lot of exploration to get done. And what's the name of the game? They've increased the resource, but will they go again? I'm trying to understand how you move this thing forward in the development sense rather than trying to expand as an advanced exploration story.

That's a good question. So probably worth talking about our due diligence that we did at as CAML. So we sent a team out there earlier on this year, having signed an NDA with the guys, kicked the tires on the assets that are on the ground, had a look at the exploration areas and all of the data that they've got. And whilst we are moving towards completing this transaction, which is a heap of paperwork and various other things, Cygnus will continue running their business. So they've got drill rigs turning.

Management doesn't change, operating management team doesn't change.

Operating management team won't change in Canada.

Board?

Board, we're talking about maybe bringing ex-Cygnus director onto the CAML Board. And I think that's really important for continuity because we've got Nick Kwong and his team based in Canada, who have obviously been working on the project for a few years. Nick is actually ex-Dore Copper. So he's got a lot of legacy with the project. So him and his team will stay on and become part of the CAML team and then one director, and that's for our Nomination Committee to figure out. But again, it gives us that continuity, not only in terms of the technical aspects of the project, but very importantly in terms of the social aspects. Again, maybe it's another question you have for us. But we've got the Ouje-Bougoumou Cree Nation that are the local sort of First Nation there. and Cygnus and Dore before them have done a great job of engaging with these guys. We'll continue with that and making sure that the permitting that will be required in the future involves that Cree Nation to the extent it needs to so that we can derisk the permitting. We're going the wrong way from what you asked. Let me ask you -- answer your actual question because you can see we're excited about as we can talk about it all day.

There's a lot of moving parts. I get it.

So we go -- so that due diligence, part of that DD that we did was looking at this Copper Rand facility, which is the old 2008 flotation processing plant that they've got there, plus there's an associated tailings dam. And to figure out what advantage that gives the project because look, I've looked at a few of these old plants in the past that you got to make them scrap metal and start again. But here, you've got a brownfield site, all the civil engineering work has been done. It's all the concrete there. There's even an admin building that -- so it's a refurbishment project. The thickener tanks are in decent condition, the flotation cells are in decent condition. So you have to refurbish those. And then you'd have to add a bunch of new kit to it. But what it does do, it gives you a massive head start in terms of the permitting because as I said, brownfields, existing plant, existing tailings are still classified as active tailings deposition facility. So it's on the legislators and authorities' books already. So that actually give you a head start. So we'll look at as CAML completing the PEA, so Cygnus started the PEA to update the one from 2022 with that new resource that they're holding. We'll pick up the baton there and effectively continue and complete that PEA. And then what we'll do, taking the results of that is start doing the feasibility study. And that's where we can really make a difference, as I said earlier, bringing our own operational experience and engineering knowledge into play because the important thing about Chibougamau and the other attraction to us there is that it's got very similar mining methods to what we use at Sasa and exactly the same tailings deposition method. And when I say exactly the same, it's dry stack tailings on top of old tailings. So we've got -- it's not hugely common doing that. And we've gone up a very steep learning curve at Sasa in terms of doing that. And I was just out there looking at what the guys are doing last week, and there's -- I can again bore everyone with the details around that, but it's a much bigger engineering undertaking than I have appreciated it would be. But bringing all of that into play in terms of generating a feasibility study and doing it as quickly as we can to get in to a construction decision and into production as quickly as possible, taking into account, obviously, all of the environmental baseline study work that needs to be done. So that's started. We'll continue with that and also bring in a whole bunch of other environmental work with our sort of credentials, with our community engagement, all of the ESG stuff that we've built up over the last 5 years, got a great team to do that, and we can just sort of parachute that knowledge in there as well and hopefully fast track this project as much as we can. But it's Quebec, as you said earlier, a great mining jurisdiction. And -- but it does have very rigorous permitting time lines that you'd have to meet and sort of hurdles you need to overcome. So again, mindful of all of that. That process is probably a 4 -- to get into production 4, 5 years.

Okay. So I'm coming from -- I said that we know the area well. But for those reading about this or about this interview, when you did your due diligence, you talked about some of the moving parts there, but how -- where did you attribute value? Where should we attribute value, okay, fast forward, in a plant with a little bit of infrastructure, in a district which is you got all your water, roads, access energy, all that kind of good stuff. We still need a sort of sense of what you value today and what you think it could become because it's all paperwork at the moment.

It is.

So what's it -- what could it be in reality.

So look, we've been saying to the market for a long time, we want to buy an asset just like this, a development asset that we're not taking the discovery risk on, right? So we're happy to do that in Kazakhstan, where we've got a great team. But here, we've got a really robust JORC resource statement there. So it's really starting to weave all the engineering around that. And generally, if people look at the comparables, things at PEA stage are trading at a deep discount to their NAV. And by doing the work and derisking this asset, you're trying to drive it up that NAV curve and you're eroding that discount all the way through to ultimately, when you get into production where theoretically, you should be at 1x NAV. So that's the one real area of value generation that we're going to be focusing on, on Chibougamau. So it's taking it from the PEA stage, given our knowledge of what we're doing there, probably try and get it straight into feasibility study once we've completed that PEA and then get all that final engineering and design work done as quickly as we can as well because while we can't really cut and paste what we've done at Sasa, obviously, there's a lot of knowledge that we can bring to bear. And as you said, the other thing, the other value driver here is the exploration. But the other thing people mustn't lose sight of here. This deposit is not in a remote area. And I think you made the point now. The town of Chibougamau is a mining town. It's a small town, 7,500 people, but it's actually got a mining training center in it. It's got a lot of skills. It's got power, roads, rail, airport, everything. So for year-round operation, it's pretty good.

I just want to -- I'm viewing it on the whole at the moment because it was just kind of the best way to do it in terms of do I understand the concept of what you're trying to do? And I heard a lot of what you said. But you've got a team in Cygnus who built in, I'm looking at Kevin Tomlinson, he's done a lot. What's -- why would they do this deal with you guys? Obviously, access to kind of, I guess, cheaper capital to advance the exploration and move the economic study phase forward is very, very appealing, but they're kind of also giving away a bunch of things for that as well, right? For you as builders, maybe you see similarities to the way that you're already doing things and perhaps it holds no fear for you in that sense. I appreciate that as well. But it's a different jurisdiction, different part of the world. So you've got risks associated with this deal, too, in the sense of the unknown in some ways, but they're known in others. So I'm trying to work out what do they get out of this? Why wouldn't they just get on and do this thing themselves? What do they see in you apart from the things I just said?

Money and a little bit of expertise. I mean I think you kind of nailed it, Matt, in a way because what the Cygnus shareholders get out of the deal is a clear path to production.

Why couldn't they do that themselves, though? why not -- market is kind of good, cops come off a bit but they could access money, surely.

They could access money. But what -- in order to drive it all the way to that construction decision, they probably have to do maybe at least 1 more capital raise, maybe even 2. So that will be dilutive to their shareholders. They've then got to build a team to construct this thing. They've got a good exploration team and the guys I mentioned earlier, Nick a mining engineer, but there's several geologists on the books but they don't have a proper project management and construction team. We just completed doing all the dry stack and pace backfill and all that sort of stuff at Sasa. So we've got people who are very experienced. So we did -- yes, we had some construction firms to help us, but we manage the whole thing ourselves. So I think from a Cygnus' perspective, what you're getting is the CAML balance sheet, the CAML cash flow, you're getting the dividend and you're getting -- you've -- and you're not looking at any dilution, potentially all the way through to construction.

So a very different profile company.

So for them, it derisks that whole financial sort of Lassonde Curve sort of pathway that they would be on as a junior explorer anyway. And for us, what we get, the 70% of the combined is that optionality around the exploration, plus also the ability to deploy all of our skills into driving Chibougamau up that value curve. So I think it's a win-win really for both sets of shareholders.

So your portfolio -- no gaps in the portfolio now relative to what it was before. Expiration upside, I like it and driving to a presumably construction decision at some point in the nearer future than perhaps would have been achievable. Okay. Very different profile company that we're talking about here. So if I look at the company as a whole growth, you just -- that's a big task you've taken on. And is that the kind of balance sheet may be leveraged up for now, you'll sort of sit back and you stop looking at other things.

Well, never say never.

Focus is what...

I think the key thing for us is to get through to September right now. So very short term, close this transaction. And there's a lot of work to do there. And just to go back to some transactional things, it's complicated because we've got to do the scheme of arrangement in Australia. So there's a lot of paperwork to be done with that. We're also going to do a TSX listing. So we're making an application to the TSX. And if the deal goes ahead, we will then be listed in London and the TSX. So there's a couple of key work streams we need to complete there. So that's not -- the entire team is focused on that right now. Then we're going to just be doing an integration over a couple of months. And there's an integration committee we're actually setting up with ex-Cygnus to try make the handover as smooth as possible. And then it's really knuckling down and bedding Chibougamau into the portfolio and making sure that it's set up for those study work, is the exploration going ahead? What is the exploration, getting our own geologists involved and Graham, our group geologists already speaking to their guys. And so we're making them hand over as smooth as possible. But I don't think we'll have the bandwidth, frankly, for at least maybe 6 to 12 months after September this year to go out and do anything else.

We're focused. Okay, good.

That's the key thing. Balance sheet is still clean though. So if something came along that looked really interesting and we could do it in a way that made sense for our shareholders and enlarged shareholder group, fine. But we're not -- and also, we're not going to disrupt that time line I was telling about for Cygnus. That's key, right, because I think you've got to deliver on that. And we've got a good track record of delivery as a company. What we always do, every acquisition we look at, we look at -- you asked about the balance sheet. We look at that balance sheet evolution over a 5-year period. So what's the balance sheet look like on day 1 of the acquisition and then all the way through to construction. And one of the lessons we learned last year when we had a sort of attempted an acquisition that ultimately didn't go through, some of the feedback from people is like, okay, fine, you're paying in cash, you're raising debt to pay for something now, how are you going to finance the construction in a couple of years' time? I think the advantage of doing this all shares, again, going back to your earlier point, what's in it for the Cygnus guys is our balance sheet is strong enough to probably finance the construction, given what we know about the CapEx right now. And we've got very supportive relationship banks who've already been on the phone to us. We've got other people that are interested in looking at funding this thing in a nondilutive way. So we look at that balance sheet evolution over that 5-year period. So we know that the ultimate CapEx is going to be manageable for a company of our size with the balance sheet and there's a little -- there's still room in there to continue with our normal capital allocation program.

Because -- so it's lessons learned -- I asked this question with the CEO a couple of days ago, which is lessons learned from your life in this space, you've got a finance background as well in there. And you'll have seen us maybe a few times where management teams in a very strong market get overconfident and believe that they are the reason that the gold price is going up or going down and they'll take advantage of it and get over leveraged. That's why the phrase I used earlier in terms of when you look at your balance sheet and you know what's coming down the line, do you behave differently, more cautiously as a result? And I appreciate all CEOs got to say, one, we're undervalued and two, we're always on the lookout for stuff. I want to know that my money is in safe hands. So what you said is partially quite attractive to me, but that comes from experience. You've seen train wrecks in the past, I'm sure.

Well, people say I've got a finance background, a lot of that finance background was in the debt markets. So it's actually lending money to mining companies. And I remember -- I think it was my first week in the job, someone said to me is like lending the money is easy, getting it back is the hard part, right? So I've always had that in my mindset. So we've always done, okay, like can we afford to pay this debt? How easy is it going to be? What is the impact on all the other parts of the business to debt service? What additional risk are you carrying when you put got debt on? Is there interest rate risk? Is there -- how do you manage the commodity price risk? All that sort of stuff starts going through your mind. We're quite a long way from that, but I've already got my treasury team thinking about, right? So Alex and the guys are already having a look at all of this. And Louise is a fantastic CFO, and she's not going to let us do anything crazy. But also, I think inherently, as a business, CAML has been quite conservative. So I think we've always been very disciplined about how we manage the capital, taking on debt, the Board is very conservative about. And we generally talk maximum 2x net debt to EBITDA. If we are going to leverage up, banks will give you generally in a covenant way, maybe a bit more headroom than that anyway, right? So we're inherently conservative just in the amount we can borrow against our debt capacity. And then we're always looking at what is the pathway to repayment, how we're going to get that? What is the impact on the profile of the business. So I would say that the Board is conservative, as a management team, we're conservative. I think we've got a great CFO and a great finance team that's going to manage everything. My background means that I'm inherently a little bit more conservative than your average kind of equity style.

And the reason I ask is because it's quite important for me to buy into the management team and their mentality. And I've definitely got investments where I've had to have a quiet word with the CEO and just go, this market is not because of you. Let's just change our attitude because if you come from that conservative mentality and background, partially if you think about it, Kazakhstan, the great unknown for a lot of people. So therefore, a few doubts on that one, ramping up, a few doubts on metal price is not where they were in terms of margin, not a lot to play with. So you're conservative by design, but also by effect from the market. And that sort of means sometimes when money is new to individuals or companies, the mentality and the thought process changes. What I'm hearing is, don't worry about it, Matt, we're aware. We've got that. And we're self-aware enough to understand.

I like to think so. I think we've got a pretty experienced Board as well with a good mix of finance, technical and sustainability people on it as well. So our Board has been very well informed about the transaction as we expect it to be all the way through. So we've had a lot of discussions with the Board, how we're mitigating risks relating to the financing, how are we mitigating risks related to tailings, how are we mitigating risks related to social engagement, all that sort of thing gets discussed at pretty great length and depth. So -- and we've taken a lot of third-party advice on this, not only from financial advisory, but also technical, social tailings, specifically when we drill down into certain things to get everyone comfortable. So I think where we sit right now in relation to Chibougamau is we know as much as we can about it without owning it. We have already identified the areas that are going to require greater attention. And as a group, we are planning already financially for the next 5 years.

Great. Love it. Get that over the line, bit of work to do. Been there myself in 3 different jurisdictions, pain in the butt and I'm sure a few bills come through as well. But let's kind of -- we said we sort of tip our hats towards the rest of the business. We caught up at the end of March. So anything significant change there? Or have you been able to deliver what you said?

I think...

As you said, I mean.

Feeling pretty positive about life at the moment with our current portfolio. We've got Kounrad, which is -- we actually released a little bit about the cycle actually. We put a note out last week just saying everything is okay because the market was just really mispricing. We felt it was mispricing. And as you said earlier, every CEO is going to say that. But we look at the trajectory of the share price. We thought we just need to reassure people that actually the underlying business is still strong. So we've got Kounrad that's operating really well. It's come out of a harsh winter. It actually produced a little bit more copper than we expected in the first quarter. We've got Sasa, which has gone through its issues, which we discussed last time, coming out of those pretty well. And the release we made recently was just to reassure people that everything was on track. So if you compare our first quarter or the first 5 months performance against last year's first 5 months, we're ahead on all 3 metals and into what are record copper prices and pretty decent zinc prices. So I think the underlying business is looking very good.

Yes. I do think that if you look at the stock and the charts, yes, a bit of a bump and we sort of come off a bit because it kind of feels like the sort of great unknown of what the distant future looks like as opposed to short-term revenue generation. I think maybe today, you've answered that question about what it could be. So it'd be interesting to see how the market reacts to that for sure, when you get to integrate it.

Well, exactly. And I think that -- there's a few catalysts coming along. We've also got some exploration results we're expecting out of Kazakhstan, which could come out in Q3. We've got -- we're going to start seeing when we put our H1 results out in September, the impact of all of the changes we discussed last time in Sasa. Jamie and the team are doing a great job out there. We've got the summer months coming in Kazakhstan, where our production always ramps up over the summer because we've got a lot more flexibility. We're not -- we can run a lot more solutions through there without risk of freezing, all that sort of good stuff. So we run that plant flat out all the way through the summer. And then in terms of the next big catalyst, obviously is September when hopefully this transaction closes.

Transaction closes, TSXV listing.

Well, we're keeping an open mind at the moment. So I think we're more naturally a TSX company. And we have had some discussions with the exchange there. We're going -- in order to get to the sort of TSX, there's a couple of extra hoops we need to jump through. So if we -- within the time frame of the transaction, can't jump through those hoops, then we'll go to the V.

Short term.

Yes.

Okay. Gavin, Great update.

Thanks very much.