Company Overview: Aurelia Metals Limited (ASX: AMI) is an Australian mining and exploration company with a portfolio of gold and base metals assets. The company’s portfolio includes three cashflow producing assets – Peak Mine, Hera Mine, and Dargues Mine. The Peak and Hera Mines are located in the Cobar Basin in western New South Wales (NSW), and the Dargues Mine is in south-eastern NSW. The company’s vision is to be a mining business recognised for creating exceptional value through its people and a portfolio of gold and base metals assets.

AMI Details

Long-term Outlook Underpinned by Diversified Production Base and Financial Discipline: Aurelia Metals Limited (ASX: AMI) is a high-grade gold and base metal production company with a highly strategic landholding and three operating gold mines in New South Wales. As on 25 May 2021, the company’s market capitalisation stood at $506.24 million. The company’s strategy is focused on creating value through its portfolio of gold and base metals assets. AMI has a decent track record of delivery in development, operations, acquisition, and exploration. In December 2020, the company completed the acquisition of Dargues Gold Mine and regional exploration tenements that diversified AMI’s production base and reweighted the group portfolio further towards gold. During the first half of FY21, the company saw a 26% YoY increase in revenue and a 27% YoY increase in statutory NPAT, mainly driven by the higher prices achieved on all assets, with gold delivering the biggest benefit.

Looking ahead, the company is focused on progressing the ramp-up of the Dargues underground mine to fully utilise process plant capacity. Over the next five years, Dargues is expected to produce an average of 45 – 55 koz gold p.a. at an average AISC of A$1,150. The company also intends to maximise its returns via mine life extensions and operating discipline driving margin. Moreover, the development of the Federation Project, located 10km south of the Company’s Hera Mine, represents a substantial opportunity for the delivery of further long-term value and returns growth. AMI is focused on delivering long-term value to its shareholders and is targeting top-quartile returns on equity.

AMI’s Historic Group Gold Production and Future Estimate (Source: Company Reports)

Decent Revenue Growth in H1FY21: For H1FY21, the company reported total gold production of 45,868oz at All-In-Sustaining-Cost (AISC) of A$1,035/oz. The company’s total revenue increased by 26% YoY to A$207.7 million in H1FY21, driven by higher prices achieved on all metals. Further, the underlying EBITDA increased by 83% YoY to A$91.5 million. Net mine cashflow increased 457% YoY to A$62.3 million in H1FY21. One of the important highlights of H1FY21 was the 100% acquisition of the Dargues Gold Mine and regional exploration tenements for A$190 million. Notably, Dargues is expected to produce an average of 45 – 55 koz gold p.a. at an average AISC of A$1,150 – 1,350/oz over the next five years. As at 31 December 2020, the company had cash of $105.8 million and debt of A$53.2 million.

Key Metrics: For H1FY21, the company’s gross margin stood at 34.6%, up from 25.6% in H1FY20. EBITDA margin for H1FY21 stood at 45.2%, up from 39.6% in H1FY20. Current ratio for H1FY21 stood at 1.36x, down from 2.11x in H1FY20.

Top 10 Shareholders: The top 10 shareholders together form around 34.21% of the total shareholding, while the top four constitutes the maximum holding. Eley Griffiths Group Pty. Ltd. and Van Eck Associates Corporation are holding a maximum stake in the company at 5.33% and 4.99%, respectively, as also highlighted in the chart below:

Decent Production Performance in Q3FY21: For the March 2021 quarter, AMI reported gold production of 34.9 koz at group AISC of A$1,429/oz. The production was 120% higher than the previous quarter, mainly due to higher gold grade ores at both Peak and Hera, and the first full quarter of ownership from Dargues. Over the quarter, the company sold 29,755 ounces of gold, up 64% on the previous quarter. Peak ore throughput decreased to 128kt in Q3FY21(Q2FY21: 166kt), while Hera ore milled was steady at 111kt (Q2FY21: 114kt). The sales revenue for Q3FY21 stood at A$103.5 million, comprised of 69% from the sale of precious metals and 31% from copper, lead and zinc sales.

Gold and Base Metals Production (Source: Company Reports)

Federation Project Proceeds to Feasibility Study: In April 2021, the company completed the Scoping Study on its Federation Project. The Scoping Study has reported a robust ESG framework that drives AMI’s business-wide approach to operating sustainability. The study has provided AMI with the confidence to immediately progress to a Feasibility Study and submit approvals for an exploration decline development.

Key Risks: The company is exposed to the risk related to the fluctuations in the price of gold and other base metals. The company is also exposed to the risks and uncertainties caused by the COVID-19 pandemic that could cause temporary suspension of operations and could also impact the cost of doing business.

Outlook: AMI has recently commenced the Feasibility Study for Federation Project. The Feasibility Study is expected to be completed by mid-2022. The company is of the view that the development of the Federation Project represents a substantial opportunity for the delivery of further long-term value and returns growth.

The company is also progressing the ramp-up of its Dargues operation. Nameplate mine and mill throughput from the Dargues operation is expected to reach around 355 ktpa by the end of the June 2021 quarter. Dargues is expected to deliver FY21 attributable gold output slightly below the previous guidance of 20 – 23 koz at an AISC of A$1,850 – 2,050/oz. For FY21, the company expects its group gold production to be in the range of 100 – 113 koz gold at group ASIC of A$1,425 – A$1,575/oz.

FY21 Guidance (Source: Company Reports)

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 0.602%. The stock is currently trading lower than the average 52-weeks’ price level band of $0.296 - $0.636. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer average EV/Sales (NTM trading multiple), considering the decline in liquidity ratio, ongoing uncertainty surrounding the impact of COVID-19 pandemic, while also taking into account the that the company has been trading at a discount in the past 3-years over its peer average. We have taken peers like Resolute Mining Ltd (ASX: RSG), Sandfire Resources Ltd (ASX: SFR), and Red 5 Ltd (ASX: RED). Considering the company’s decent performance in H1FY21, increased gold production and gold sales in Q3FY21, modest long-term outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.405, down by 1.220% as on 25 May 2021.

AMI Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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