Company Overview: Firefinch Limited (ASX: FFX) is engaged in gold production, mineral exploration and project evaluation in Mali, West Africa. FFX produces gold from its 80% owned Morila gold mine in southern Mali and also explores its tenements surrounding Morila to increase mineral resources and make new discoveries. FFX also owns the pre-production Goulamina Lithium Project in Southern Mali.

FFX Details

Rising Production and Capital Raising to Aid Future Growth: The company’s Morila Gold Mine has produced more than 7.5Moz of gold since 2000 at the highest grades, as claimed by the company. During the past years, Morila has achieved a targeted rise in gold production. The company is optimistic about the production of over 45koz pa from mine nearby satellite pits in 2021 and rising production in excess of 100koz in 2022. The strategic priorities of the company revolve around exploring near mine and regional targets and defining underground potential at Morila. The company seems to be on a growth path, evident by oversubscribed Share Purchase Plan (SPP) of $51.36 million. In addition, the company raised $100 million via institutional placement in December 2021.

Insights of Q4FY21:

• During the quarter ended 31 December 2021 (Q4FY21), the company received high-grade drilling results from the eastern side of the Morila Super Pit, which signals the presence of a new high-grade zone. In addition, it established mining and haulage operations at a Viper satellite pit.
• FFX recorded gold production of 11,115 ounces, which was at the upper end of the guidance range of 10,000 -11,500 ounces of gold.
• The company has commenced pre-stripping at the Morila Super Pit, which is likely to support an increase in production to ~100,000 ounces of gold in 2022.
• With respect to Goulamina Lithium Project, the 50:50 joint venture with Jiangxi Ganfeng Lithium Co Ltd is near to formal finalization, which would help FFX to develop and operate the world-class Goulamina Lithium Project. The company is expecting the first production from Goulamina in 2024.
• At the end of the quarter, the company had cash and cash equivalents of $152.06 million as compared to $39.73 million as of 30 September 2021.

Gold Production Trend (Source: Analysis by Kalkine Group)

1HFY21 Operational and Financial Summary: During the half-year, the company increased the mineral resources and ore reserves for the Morila Gold Project. The mineral resources increased to 50.5 million tonnes at 1.50g/t gold for 2.43 million ounces of contained gold, which include a probable ore reserve of 23.8 million tonnes at 1.40g/t gold for 1.07 million ounces of contained gold.

Financial Summary (Source: Analysis by Kalkine Group)

Addition to S&P/ASX300 Index:  As per the recent quarterly rebalancing of the S&P/ASX Indices, Firefinch Limited has been added to S&P/ASX 300 Index, which will be effective from 22 March 2022.

Top 10 Shareholders: The top 10 shareholders together form around ~15.65% of the total shareholding, while the top 4 constitute the maximum holding. Van Eck Associates Corporation. and Pacha (Michael) are holding a maximum stake in the company at 5.05% and 1.86%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During 1HFY21, the company recorded a current ratio of 2.32x as compared to the industry median of 2.10x. On the leverage side, FFX posted a debt-to-equity ratio of 0.14x in 1HFY21 as compared to the industry median of 0.17x.

Liquidity & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Gold Price Fluctuation: The company’s operational and financial performance could be impacted by the adverse movement in the prices of gold as it generates a major portion of revenue from the sale of gold.
• Climate Change Risk: FFX’s business could be affected by an extreme change in climate, which could temporarily pause its operations.
• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the compliances could lead the business to fines, penalties, etc.

Outlook: The company seems to be fully financed for the implementation of its aggressive growth plans at Morila. This includes rising gold production to ~100,000 ounces of gold in 2022 and to over 200,000 ounces of gold in 2024, as well as advancing the Goulamina Lithium Project. In addition, the company has maintained gold production in the range of 10,000oz to 11,500oz in Q1FY22. Looking forward, the company would be focused on the high-grade zone of mineralization at Morila Northeast Drilling, which would be supported by planned follow-up drilling activities. The company believes that the satellite pit feed will continue to feature prominently in the Q1 2022 production plan as it continues to advance the pre-strip at the Morila Super Pit. The company is likely to release FY21 results on 30 March 2022.

Valuation Methodology: P/E 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: The stock of FFX is trading above its 52-week low-high range of $0.190 - $0.930, respectively. The stock has been corrected by ~5.96% in the past three months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, P/E multiple, considering the COVID-19 uncertainties and other material business risks. For the purpose of valuation, a few peers like Pantoro Ltd (ASX: PNR), Perseus Mining Ltd (ASX: PRU), and Silver Lake Resources Ltd (ASX: SLR) have been considered. Considering the expected upside in valuation, growing production, recent capital raising, optimistic long-term outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.695, down by ~2.113% as on 08 March 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing

FFX Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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