Resolute Mining Limited

Company Overview: Resolute Mining Limited (ASX: RSG) is a gold production company with over thirty years of experience as an explorer, developer and operator of gold mines in Africa and Australia. The company’s exploration portfolio includes long-life, low-cost, large scale assets which provide a significant Resource base to the company. The company is currently listed on the Australian Securities Exchange (ASX) as well as on London Stock Exchange (LSE), providing RSG improved access to gold and African-focused institutional investors.


RSG Details
 
 
 
Strong Foundation for Future Success: Resolute Mining Limited (ASX: RSG) is an explorer, developer and operator of gold mines in Australia and Africa. The company currently owns several high-quality gold mines including the Syama Gold Mine in Mali, the Mako Gold Mine in Senegal and the Bibiani Gold Mine in Ghana. RSG aspires to be a leader in mining innovation and aims to create sustainable economic growth in Africa. In the past thirty years, RSG has mined over 8 million ounces of gold from 10 mines in Australia and Africa, and has gained significant operation expertise which provides a strong foundation for its future success. From the financial year 2016 to 2019, the company’s top-line has grown by a CAGR of 5.78%, rising from $554.6 million at the end of FY16 to $654 million in FY19. 


Revenue Trend (Source: Refinitiv, Thomson Reuters)
 
In FY20, one of the company’s key focus areas is to optimise mine plan for Senegal to support lower cost, longer life production, in-line with the company’s ambition of being a multi-mine, low cost, African-focused, gold producer. The company also intends to accelerate drilling activities to increase resource base in pursuit of mine life extension opportunities while maintaining its high productivity, strong cash flow generative operations. The company is also focused on defining mine plan for future Tabakoroni Underground Mine. Overall, the company is in a decent position to deliver on the full potential of its asset base and generate long-term value for its shareholders and broader stakeholders.

FY19 Performance Highlights: The financial year 2019 marked a significant year for RSG as it was able to achieve many strategic objectives during the period. Some of the strategic milestones achieved during the year include commissioning of the Syama Underground Mine; acquisition of Toro Gold Limited; getting listed on the London Stock Exchange and completing the Ravenswood strategic review culminating in the sale of the project. Further, the addition of the Mako Gold Mine in Senegal and the achievement of commercial production rates from the Syama Underground Mine significantly terraformed the company’s portfolio during the year.
From its operating mines, the company produced 384,731oz of gold (poured) during the year at an All-In Sustaining Cost (AISC) of A$1,577/oz. The company sold 394,920oz of gold and silver from Syama, Ravenswood and Mako at an average realised gold price of US$1,344/oz, generating revenue of $770 million for the year. 

The company reported underlying EBITDA from continuing operations of $208 million and underlying net profit after tax from continuing operations of $25 million. During the year, the company generated strong operating cash flow from continuing and discounting operations of $142 million.


FY19 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 55.10%. ICM Limited and Van Eck Associates Corporation hold the maximum interest in the company at 13.53% and 8.74%, respectively.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
A Quick look at Key Margins: For FY19, the company’s Gross margin and EBITDA margin stood at 9.2% and 10.7%, respectively. For the same period, the company reported an Asset turnover ratio of 0.42x. RSG’s Asset to equity ratio stood at 2.27x, higher than the industry median of 1.86x. For FY19, the company reported current ratio of 0.79x.


Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Strengthening Balance Sheet with Equity Raising: In January 2020, the company announced an equity raising of up to $196 million, comprising a two-tranche placement and share purchase plan (SPP) both of which received strong support from new and existing shareholders. The main purpose behind the equity raising was to repay debt and strengthen the company’s balance sheet. Both the tranches of the placement have been completed successfully and the $195 million equity raising has been finalized.

Q1FY20 Update: The company entered FY2020 in a strong position to deliver on the full potential of its asset base and generate long-term value for its shareholders and broader stakeholders. In the first quarter of FY2020, the company’s consistent and reliable performance helped in generating strong free cash flow. Over the quarter, the company continued with the drilling activities to increase resource base in pursuit of mine life extension opportunities. 

Gold poured for the March quarter stood at 110,763 ounces, up 5,470 ounces on the December 2019 quarter. From the Syama gold mine, the company poured 57,531 ounces of gold during the quarter, comprising 36,101oz from the oxide circuit and 21,430 ounces from the sulphide circuit. Over the period, the Mako Gold Mine poured 42,186oz of gold. At the end of the March quarter, the company had cash and bullion of US$96 million with net debt of US$212 million. During the quarter, the company witnessed significant high-grade oxide gold intersections from drilling at Syama, supporting the potential to extend the life of Syama’s oxide operation.

One of the major achievements for the company during the quarter was the completion of the sale of Ravenswood Gold Mine, which provided immediate liquidity and exposure to the future success of the Ravenswood Expansion Project. 


March 2020 Quarter Production Summary (Source: Company Reports)

Covid-19 Update: In response to Covid-19, the company has implemented several measures to ensure that the impact of Covid-19 is mitigated across all aspects of operations. In its response efforts, the company has committed US$1 million to support Mali and Senegal. As per the recent update, till now the company’s gold production has not been affected by the pandemic and mining and processing activities are continuing at Syama and Mako mines. However, the company has warned that further escalation of COVID-19, and the implementation of further government-regulated restrictions could negatively impact gold production, earnings, cash flow and the company’s balance sheet.
What to Expect:  Moving forward, the company intends to accelerate its drilling activities to increase resource base while maintaining its high productivity, strong cash flow generative operations. The company’s stable performance in the March quarter has helped it in maintaining decent production guidance for FY20.

In FY20, the company expects its production to be around 430,000oz at an All-In Sustaining Cost (AISC) of US$980/oz. From Senegal, the company expects the production to be 160,000oz at an AISC of US$800/oz and from Syama Gold Mine, the company anticipated production to be around 260,000oz at an AISC of US$960/oz.The company’s cost guidance is maintained at US$980/oz, reflecting production costs incurred at Ravenswood and the uncertainty related to potential increases in corporate costs associated with managing the impacts of COVID-19 pandemic.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (illustrative)

Price to Earnings Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the last one month, the company’s stock price has increased by 16.23% on ASX and is currently trading below the average of its 52-week price range of $0.605 and $2.120, offering investors a decent opportunity for accumulation. Despite the Covid-19 challenges, the company has able to maintain its operations and has performed resiliently in the March quarter. Further, the recently completed Capital raising has further strengthened the company’s balance sheet. We have valued the stock using Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose, we have taken peers like St Barbara Ltd (ASX: SBM), Saracen Mineral Holdings Ltd (ASX: SAR) and Sandfire Resources Ltd (ASX: SFR). Considering the company’s resilient performance amid Covid-19, its strengthened balance sheet, current trading levels and FY20 guidance, we give a “Buy” recommendation on the stock at the current market price of $1.130, up 1.802% on 26 May 2020. 

 
RSG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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