Company Overview: Resolute Mining Limited (ASX: RSG) is an experienced gold mining company that has spent over 30 years in the exploration and development of gold mines in Australia and Africa. The company operates multiple long-life, high-margin assets including the Syama Gold Mine in Mali and the Mako Gold Mine in Senegal. The company also owns Bibiani Gold Mine in Ghana. RSG is listed on London Stock Exchange as well as on the Australian Securities Exchange, providing improved access to gold and African-focused institutional investors.

RSG Details 

Operating a Portfolio of High-Margin Assets: 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 aspires to be a leader in mining innovation and aims to create sustainable economic growth in Africa. 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. From the financial year 2016 to 2019, the company’s top-line has grown at a CAGR of 5.78%, rising from $554.6 million at the end of FY16 to $654 million in FY19.  In FY19, the company produced 384.7k ounces of gold at an All-In Sustaining Cost (AISC) of US$1,090 per ounce.

Revenue Trend (Source: Company Reports)

In the March 2020 quarter, the company produced decent operating and production results, placing it well to achieve its FY20 production guidance. The company is scheduled to release its June quarter results on 22 July 2020. Amid COVID-19 pandemic, the company has implemented several measures to mitigate the impact of the virus across all aspects of the company’s operations. Till now, the company’s production has not been impacted by the COVID-19 or the related restrictions. However, any further escalation of COVID-19 has the potential to impact gold production, earnings, cash flow and the Company’s balance sheet.

Going forward, the company is focused on accelerating its drilling activities to increase its resource base in pursuit of mine life extension opportunities. This year, the company expects the production figures to improve further with FY20 production target set at 430k ounces of gold at an All-In Sustaining Cost of US$980 per ounce. The company is looking to spread its wings and capitalise on exciting new opportunities to develop and operate large-scale, low-cost, long-life Resolute gold mines.

FY19 Performance Highlights: During the year ended 31 December 2019 or FY19, the company achieved several crucial milestones including the commissioning of the Syama Underground Mine; acquisition of Toro Gold Limited; getting listed on the London Stock Exchange, adding the Mako Gold Mine in its portfolio and achieving commercial production rates from the Syama Underground Mine. Over the year, the company also completed the Ravenswood strategic review culminating in the sale of the project and significantly progressed its strategic review of Bibiani.

In FY19, the company produced 384,731oz of gold (poured) from its operating mines 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. During the year, the company also reported encouraging exploration results across its portfolio taking RSG’s Global Mineral Resource inventory to 19.1 million ounces of gold which is inclusive of 7.4 million ounces of gold in Ore Reserves. The company reported Underlying EBITDA from continuing operations of $208 million and underlying net profit after tax from continuing operations of $25 million.

FY19 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 53.69%. 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)

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. For FY19, the company reported a current ratio of 0.79x with debt to equity ratio of 0.76x.

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.

March Quarter Update:  The company entered 2020 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. The emergence of COVID-19 pandemic during the quarter forced the company to implement new protocols and operating procedures to mitigate the impact of COVID-19. Despite this, the company was able to produce decent results for the quarter with gold production at 110,763 ounces at an AISC of US$1,007/oz. Further, the company reported gold sales of 102,008 ounces at an average realised gold price of US$1,407/oz.

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. 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. Over the period, the Mako Gold Mine poured 42,186oz of gold.

Over the quarter, the company simplified its capital structure, reduced its borrowing costs and improved its financial flexibility through the completion of debt and equity capital raising activities. At the end of the March quarter, the company had cash and bullion of US$96 million with net debt of US$212 million.

March 2020 Quarter Production Summary (Source: Company Reports)

Material Improvements to Mako’s Gold production and Mine Life: In an update provided on 20 July 2020, the company informed that the successful extension exploration drilling programs, mine design improvements, and optimisation of mine scheduling work undertaken at the Mako Gold Mine in Senegal (Mako) have resulted in material improvements to an updated Life of Mine Plan (LOM). The Life of Mine gold production from Mako has increased by 39% from 890,000 ounces in the original mine plan to 1.24 million ounces in the updated plan. Further, the Mine life has been extended by two additional years out to early 2027.

Earlier, the company was expecting to produce a further 700,00 ounces of gold from Mako at an average AISC of US$840/oz. However, as per the updated LOM, the company now expects to mine a further 900,000oz of gold from Mako until early 2027 at an expected average AISC over this period of US$900 per ounce. For the next five years, the company expects average annual production from Mako to be around 140,000 ounces of gold. The exploration activity at Mako in 2020 has been limited due to COVID19 restrictions, however, the exploration programs are expected to recommence in the near term.

Key Risks: The COVID-19 pandemic poses a few risks and challenges to global mining companies like RSG. The challenges presented by COVID-19 continue to change on a daily basis. Although the company has been able to maintain its production levels despite the challenging operating conditions, any further escalation of the COVID-19 pandemic could negatively impact gold production, earnings, cash flow and the company’s 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 and/or loss of licence to operate. Its operations could also be impacted by the negative environmental incident and critical operational or informational technology failure.

What to expect: Looking ahead, the company intends to spread its wings and capitalise on exciting new opportunities to develop and operate large-scale, low-cost, long-life Resolute gold mines. For FY20, the company expects its consolidated production to be around 430,000oz at an All-In Sustaining Cost (AISC) of US$980/oz. The company has maintained its Group level cost guidance at US$980/ounces, reflecting production costs incurred at Ravenswood and the uncertainty related to potential increases in corporate costs associated with managing the impacts of COVID-19. 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.  

At Mako Gold Mine, the company is focused on maintaining high productivity and cash flow generative operations. For the next five years, the company expects Mako to report an average annual production of 140,000 ounces. The company intends to operate Syama Underground Mine at full capacity while continuing high margin oxide operations. The company also intends to define mine plan for future Tabakoroni Underground Mine. The company is scheduled to release its June quarter results on 22 July 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters) 

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

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

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

Stock Recommendation: The stock of RSG went up by 35.2% in the past three months and is trading slightly below the average of its 52-week trading range. Despite the COVID-19 challenges, the company has been 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 an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). Considering the company’s recent capital raising, improvements to Mako’s gold production and mine Life, decent production performance, its FY20 guidance, and long-term potential of the company, we give a “Buy” recommendation on the stock at the current market price of $1.240, up by 2.479% on 21 July 2020.

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

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