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 that provide a significant Resource base to the company. RSG also has a portfolio of strategic investments in highly prospective, well-managed, African-focused gold exploration companies, which provide a pipeline of future development opportunities. The company’s vision is to be an innovative, multi-mine, low-cost, African-focused gold producer.

RSG Details                         

Multi-Asset Production Base: Resolute Mining Limited (ASX: RSG) is an experienced gold mining company that operates multiple long-life, high-margin assets including the Syama Gold Mine in Mali and the Mako Gold Mine in Senegal.  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. Over the last thirty years of operations, the company has produced more than 8 million ounces of gold from its gold mines in Australia and Africa. Notably, in the last two years, the company has witnessed material improvement in its total production numbers, rising from 129,199oz of gold in the H2 FY18 to 217,946oz in H1 FY20.

1HFY20 Production Results (Source: Company Reports)

Despite the operational challenges presented by the COVID-19 pandemic, the company continued its mining and process operations throughout the period, with no negative impact on gold production. With decent H1FY20 production performance, the company seems well placed to achieve its FY20 production guidance. Looking ahead, the company is focused on maintaining high productivity and low-cost operations at its Mako gold mine. In the second half of FY20, the company is focused on reducing its net debt and evaluating accretive growth opportunities. Lately, the company has undertaken various steps to strengthen its balance sheet, including a successful equity raising and debt refinance, the sale of Ravenswood, and the acquisition of the Mako third party financing royalty. These initiatives have improved the company’s financial position and created a more flexible, low-cost balance sheet, positioning RSG for future growth and development.

FY19 Result Highlights: During the financial year 2019 or FY19, the company generated 384,731 ounces of gold at an All-In Sustaining Cost of $1,577/oz. Over the year, the company sold 394,920 ounces of gold at an average realised gold price of A$1,933/oz. Further, the company reported a revenue of $770 million and an underlying EBITDA of $208 million, reflecting the strength of core operations at Syama and Mako. In FY19, the company incurred a net loss after tax of $113 million, compared to a net profit of $34 million in FY18.

During the year, the company delivered several major milestones which include commissioning of its Syama Underground Mine, adding the Mako Gold Mine to its portfolio, achieving exploration success across its portfolio with particularly exceptional results at Tabakoroni. The company also completed the Ravenswood strategic review culminating in the sale of the project and significantly progressed its strategic review of Bibiani.

FY19 Results Highlights (Source: Company Reports)

H1FY20 Result Highlights: The company’s results in H1FY20 were supported by the continued decent performance of Syama oxide and Mako operations, recovery of the Syama sulphide operations and the sale of Ravenswood. For the period, the company reported total gold production of 217,946 ounces and total sales of 212,668 ounces. Further, the company reported total revenue of US$305 million, up by 33% on the pcp, and EBITDA of US$101 million, up 85% on pcp. For the period, the company reported net profit after tax of $36.29 million. The growth in revenue was driven by increased production following the repair of the roaster and a stronger gold price environment.

During the period, the company completed equity raising of ~A$195 million comprising two-tranche placement and share purchase plan. In H1 FY20, the company completed the sale of its Ravenswood mine to EMR Capital Management Limited and Golden Energy and Resources Limited. Over the period, the company also completed the refinancing of syndicated loan facility with a new flexible low-cost US$300m facility in March 2020. As at 30 June 2020, the company had cash, bullion, additional liquid assets and a promissory note valued of US$35 million. The total borrowings stood at US$307 million in H1FY20.

H1FY20 Results Highlights (Source: Company Reports)

Key Metrics: For H1FY20, the company’s gross margin and EBITDA margin stood at 9% and 34.7%, respectively. The company’s current ratios stood at 1.63x in H1FY20, up 37.1% on the pcp, demonstrating that the company has improved its ability to pay short-term obligations. The company’s asset to equity multiple stood at 1.72x, lower than the industry median of 1.77x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 53.74%. ICM Limited and Van Eck Associates Corporation hold the maximum interest in the company at 13.16% and 8.38, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Operations Update: In an update provided on 25 August 2020, the company informed that its supply lines to the Syama Gold Mine are open and secure. The company also assured that its operations at Syama are continuing as normal. And it has not experienced any impact to production or to the safety and security of employees and contractors.

Covid-19 Update: In order to deal with COVID-19 related challenges, the company has implemented new protocols and operating procedures at all of its operations. These measures have helped the company to maintain its full-year production and cost guidance for Syama and Mako. As per the recently released half-year report, the company’s gold production has not been impacted by the pandemic. Notably, RSG has committed more than US$1 million to support African host governments in Mali and Senegal in their response efforts to combat COVID-19. 

Key Risks: The COVID-19 pandemic poses unique risks and challenges to global mining companies operating in Africa. Any escalation in the COVID-19 pandemic and the implementation of further government-regulated restrictions could impact the company’s gold production, earnings, cash flow and balance sheet. Further, the company is also exposed to various environmental and social risks. The company’s operations may be impacted by the deterioration of the political environment.  

Outlook: For FY20, the company expects its total production to be around 430,000oz at an AISC of US$980/oz. From the Syama mine, the company expects production to be approximately 260,000oz at an AISC of US$960/oz and from Mako mine, the company expects production to be around 160,000oz at an AISC of US$800/oz. With decent H1FY20 production performance, the company seems well placed to achieve its FY20 production guidance.

Looking ahead, the company is focused on maintaining high productivity and low-cost operations at its Mako gold mine. For the new Syama Power Plant, the company has commenced Bulk earthworks, mobilisation and construction work. For the Tabakoroni Underground Mine, the company expects to complete a PFS in the September 2020 quarter. An updated Syama Life of Mine Plan is expected in the second-half of FY20.

In the second half of FY20, the company is also focused on reducing its net debt and evaluating accretive growth opportunities. With successful equity raising and debt refinance, the sale of Ravenswood, and the acquisition of the Mako third party financing royalty, the company seems well placed for future growth and development.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the last six months, the stock of RSG has provided a return of 28.9% on ASX. The stock is currently trading slightly higher than the average of 52-weeks price level. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). For the purpose, we have taken peers like St Barbara Ltd (ASX: SBM), OceanaGold Corp (ASX: OGC) and Westgold Resources Ltd (ASX: WGX). On the face of the company’s multi-asset production base, decent H1FY20 production and financial results, FY21 expectations and focus areas, we are of the view that the stock might see further upside in the coming times. Hence, in the light of the above-mentioned facts, we give a “Buy” recommendation on the stock at the current market price of $1.110, down by 0.448% on 08 September 2020.

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

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