Company Overview: Regis Resources Limited (ASX: RRL) is a Perth-based gold production and exploration company with a decent track record of developing mid-sized gold operations. The company currently has operations at the Duketon Gold Project in the North Eastern Goldfields of Western Australia and the McPhillamys Gold Project in the Central Western region of New South Wales. The Duketon Gold Project consists of two operating centres being the Duketon South Operations (DSO) and the Duketon North Operations (DNO).

RRL Details

Growth Backed by Operational Efficiencies and Decent Production Performance: Regis Resources Limited (ASX: RRL) is an Australian gold mining company with operations at the Duketon Gold Project in the North Eastern Goldfields of Western Australia and the McPhillamys Gold Project in the Central Western region of New South Wales. As on 16 February 2021, market capitalisation of the company stood at $1.79 billion. RRL is one of the leading players in the gold industry with decent fundamental business metrics of profitability per ounce of production, earnings per share, dividend yield and return on equity. From 2016 to 2020, the company’s revenue and NPAT have grown at a CAGR of 10.8% and 15.60%, respectively, reflecting the strength of the company’s business.

5-Year Financial Performance (Source: Company Reports)

Looking ahead, the company is focused on organically increasing its reserve base by discovering and developing satellite resource positions and extending the reserve base of existing operating deposits. It recently commenced work on the Garden Well South Underground Mine with first development expected to commence in the March quarter. RRL has also accelerated development work at Duketon and expects expanded Greenfields exploration activities on newly acquired tenure to generate new large gold targets. In terms of production performance, the company expects its production rate to lift in the second half of FY21.

FY20 Result Highlights: During the year ended 30 June 2020, RRL reported record net profit after tax of $200 million, up from $163 million in FY19, driven by increased gold price and consistent operational performance. Further, the company reported net profit after tax margin of 26%, reflecting the strength of the business. As a result of the higher gold prices, the company’s gold revenue grew by 16% YoY of $757 million. During the year, the company produced 352,042 ounces of gold at an All in Sustaining Cost of $1,246 per ounce. EBITDA for FY20 stood at $394 million and EPS at 39.3 cents. The company declared and paid a final dividend of 8 cents per share, taking the total dividend for the full year to 16 cents per share, representing 11% payout of FY20 revenue and 21% of FY20 EBITDA.

EPS and DPS Trend (Source: Company Reports)

Key Metrics: Over the last one year, the company’s profitably margins have improved over the previous year, reflecting increased gold price and consistent operational performance. Gross margin for FY20 stood at 38.9%, up from 37.2% in FY19. EBITDA margin for FY20 stood at 54%, up from 47.8% in FY19. Current ratio for FY20 stood at 2.74x in FY20.

Past 5-year’s Growth Profile and Profitability Metrics for Year Ending 30 June 2020

Top 10 Shareholders: The top 10 shareholders together form around 33.12% of the total shareholding while the top four constitutes the maximum holding. Van Eck Associates Corporation and The Vanguard Group, Inc. are holding a maximum stake in the company at 10.83% and 4.96%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group, Data

December 2020 Quarter Highlights: During December 2020 quarter, the company witnessed decent performance across a number of key areas, resulting in improvements in safety, production and costs. For the quarter, the company reported total production of 91,411oz, up from 81,567oz in the June 2021 quarter. During the quarter, the company sold 112.1koz of gold at an average price of A$2,351/oz, generating a total revenue of A$263.4 million. One of the important milestones of the quarter was receiving the Board approval for the commencement of Garden Well Underground Project, an underground mine which is expected to have a total material mined of ~1.85Mt at 3.2g/t Au. The company has commenced work on the portal with first development expected to commence in the March quarter. Cash flow from operations stood at A$100.1 million for the December quarter, up from A$84.7 million in the prior quarter. The company ended the quarter with a cash and bullion of $220 million.

Production Performance (Source: Company Reports)

Board Approval Received for Garden Well South Underground Mine: In line with the company’s goal of delivering increased shareholder value through organic growth projects, RRL’s Board recently approved the development of a new underground mine under the current Garden Well open pit. It is expected that this new underground mine will help the company’s Duketon operation to become a reliable 400koz per annum producer. The processing of first underground development ore is scheduled for the December 2021 quarter with stope production to commence in the June 2022 quarter.

Key Risks: The company is exposed to the risks associated with the fluctuations in the prices of gold. Further, the company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. RRL is occasionally exposed to foreign currency risk when long lead items are purchased in a currency other than Australian dollars.

Outlook: As a result of the company’s decent performance in Q1FY21 and Q2FY21, the company’s total production for H1FY21 stood at 172,978 ounces with AISC of A$1,356 per ounce.  Looking ahead, the company expects its production rate to lift to the second half of FY21. The company’s FY21 production guidance is maintained with production of 355,000 – 380,000oz for an AISC of A$1,230 - 1,300/oz. Growth capital expenditure for FY21 is expected to be between $50-60 million. With a robust balance sheet, decent operating cashflows, 7.7 million ounces of resources including 3.6 million ounces in reserves and an enviable internal growth path in established Australian mining districts, RRL seems well placed for long-term growth.

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

Data Source: Refinitiv, Thomson Reuters, 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 of RRL has corrected by 9.68% and is trading lower than the average of its 52-weeks’ price band of $2.9 - $6.180, offering a decent opportunity for accumulation.  On the technical analysis front, the stock has a support level of ~$3.09 and resistance of $4.06. We have valued the stock using 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 might trade at a premium as compared to its peer average EV/Sales (NTM trading multiple), considering improved gold price scenario, commencement of work at Garden Well Underground Project, accelerated development work at Duketon, and also taking into account the that the company has been commanding a premium in the past 3-years over its peer median. We have taken peers like Evolution Mining Ltd (ASX: EVN), St Barbara Ltd (ASX: SBM), OceanaGold Corp (ASX: OGC), etc. Considering the company’s improving top-line and bottom-line, decent performance in H1FY21, healthy balance sheet, outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the closing price of $3.48, down by 0.572% as on 16 February 2021.

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

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