This “cheapest cash generator” is about to start production, but its share price is simply not moving

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In its May report, the Chester High Conviction Fund said New Century Resources Ltd (ASX:NCZ) remains “the cheapest cash generator we can find.”

This month, the company expects to restart production at the Century Zinc Mine in Queensland. Its aim is to become one of the top 10 zinc producers in the world and also in the lowest cost quartile globally.

As often happens for cheap looking mining stocks, much of the share price action comes prior to production as investors get all excited about its prospects.

The New Century Mines share price is no exception, jumping last year from 35 cents to as high as $1.65. The excitement has wavered in 2018, with New Century shares down around 10 per cent year to date.

New Century shares currently trade at $1.22, giving the company a market capitalisation of $625 million. The company has no debt and $65 million in cash and receivables.

In a presentation today to the Sydney Mining Club, the ASX 300 listed company confirmed it was expecting to start generating cashflow this quarter as it transitioned from developer to producer.

From a valuation perspective, the company says it trades on an enterprise value to 2019 EBITDA ratio of 2.1 times, putting it as one of the cheapest zinc producers in the world. By comparison, Oz Minerals (ASX:OZL) trades on a 5.0 times ratio, with Western Areas (ASX:WSA) shares trading on a 4.6 times ratio.

To emphasise its potential, the company showed how it can generate almost $450 million EBITDA per annum over the average life of the mine, which compares very favourably to the company’s market cap of $625 million.

Source: Company Presentation

While it may seem a no-brainer investment, there are always risks. Mining companies first coming into operation notoriously miss early production targets.

And then there’s the real achilles heel — the price of zinc.

Although zinc is trading well above the mine’s break even point today, you can bet your bottom dollar other zinc producers are working on adding to the world’s supply, something that absent a commensurate increase in demand, will ultimately drive the zinc price lower.

Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au