Company Overview: Resolute Mining Limited (ASX: RSG) is an explorer, developer, and operator of gold mines in Australia and Africa. 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. The company owns multiple long-life, high margin assets, including the Syama Gold Mine in Mali, the Mako Gold Mine in Senegal, and the Bibiani Gold Mine in Ghana. RSG has also established a portfolio of strategic investments in highly prospective, well managed, African-focused gold exploration companies to provide a pipeline of future development opportunities.

RSG Details

Operating with Multiple High Margin Assets: Resolute Mining Limited (ASX: RSG) is a gold production company with multiple long life, high margin assets in Australia and Africa. The company has over 30 years of experience as an explorer, developer, and operator of gold mines and over this period it has gained significant operation expertise which provides a strong foundation for its future success. In order to achieve its vision of becoming an innovative, multi-mine, low cost, African-focused gold producer, the company continues to adopt new methods, systems and technology to improve its performance. Over the last four years, the company’s top-line has grown at a CAGR of 5.78%.

4-years Revenue Growth (Source: Company Reports)

In the first two quarters of FY20, the company has reported decent production performance despite the challenging operating conditions presented by COVID-19 scenario. In response to COVID-19, the company has implemented a comprehensive companywide response plan and is continuously monitoring developments relating to the pandemic and adapting the company’s response accordingly. As per the recent June quarter report, there are no negative impacts on gold production from the COVID-19 scenario. With decent YTD production performance, the company seems well-placed to deliver its FY20 production guidance of 430,000oz. Going forward, the company intends to maintain its focus on improving production and deliver lower costs at Syama while it evaluates further value enhancements and exciting exploration opportunities.

FY19 Result Highlights: For the year ended 31 December 2019 or FY19, the company reported total gold production of 384,731oz at an All-In Sustaining Cost (AISC) of A$1,577/oz. The company delivered total revenue of $770 million and an underlying EBITDA of $208 million in FY19. During the year, the company generated a healthy operating cash flow from continuing and discounting operations of $142 million. The company incurred a net loss of $113 million in FY19, compared to a net profit of $34 million in FY18.

In June 2019, the company listed itself on the London Stock Exchange which raised its profile in global capital markets and has facilitated improved access to gold and African-focused institutional investors. During the year, the company 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.

In FY19, the company achieved several key 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. 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.

FY19 Result Highlights (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. The company has a current ratio of 0.79x. The company’s debt to equity multiple stood at 0.76x in FY19, as compared to the industry median of 0.13x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

March 2020 Quarter Highlights: During the March 2020 quarter, the company was able to produce solid operating results, despite the emergence of COVID-19 pandemic. During the quarter, the company poured 110,763oz of gold at an AISC of US$1,007/oz. The company recovered 119,683oz of gold during the quarter, up 15% on the previous quarter. From Syama, the company reported total gold production of 57,531oz at an AISC of US$1,083/oz. At Mako, 42,186oz of gold was poured during the quarter at an AISC of US$694/oz.

Over the quarter, RSG simplified its capital structure, reduced its borrowing costs and improved its financial flexibility through the completion of debt refinancing and equity capital raising activities. 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.

June 2020 Quarter Update: For the June 2020 quarter, the company reported total gold production of 107,183oz at an AISC of US$1,033/oz. The Syama Underground Mine and Syama Sulphide operations reported production of 35,248oz, up 64% over the previous quarter. This performance was driven by higher mill throughput, head grades, and improved recovery that were up 21%, 8% and 5%, respectively. The Mako gold mine reported production of 43,478oz of gold at an AISC of US$821oz.

The company’s exploration and drilling programs continued throughout the quarter at Syama; however, the company’s exploration field programs in Senegal and Guinea were paused due to logistical impacts of the COVID-19 pandemic. At the end of the June quarter, the company had cash and bullion of US$88 million, total borrowings of US$307 million and net debt of US$220 million.

Operating Performance Snapshot (Source: Company Reports)

Updated Life of Mine Plan for Mako: In July 2020, the company completed an updated Life of Mine Plan (LOM) for Mako. As per the updated LOM, the total production from Mako has increased by 39% from 890,000 ounces to 1.24 million ounces and the mine life has been extended by further two years.  The company now expects to mine a further 900,000 ounces of gold from Mako until early 2027 with an average AISC of US$900 per ounce.

Increased Holding in OKU: Recently, the company increased its substantial holding Oklo Resources Limited (ASX: OKU) from 9.79% to 10.79%. RSG now holds 54,322,752 ordinary shares of OKU.

Key Risks: Further escalation of the COVID-19 pandemic, and the implementation of further government-regulated restrictions or extended periods of supply chain disruption, has the potential to 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 and/or loss of licence to operate.  

What to Expect: The company is focused on improving production and delivering lower costs at Syama in the second half of 2020. At Mako gold mine, the company continues to evaluate opportunities to generate additional value. At Bibiani Gold Mine, the company is progressing a strategic review focused on evaluating plans to recommission the mine, assess capital requirements, evaluate funding alternatives, and investigate expressions of interest from third parties seeking to acquire the asset.

For FY20, the company has maintained its production guidance of 430,000oz at an AISC of US$980/oz, reflecting asset level performance for Syama and Mako together with Ravenswood’s actual production during the March quarter. Further, the company has maintained group level cost guidance at US$980/oz, reflecting production costs incurred at Ravenswood and the uncertainty related to potential increases in corporate costs related to the impacts of COVID-19. In H2FY20, the company is also focused on reducing its net debt. The company expects to release its H1FY20 results on 26 August 2020.

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: On the technical analysis front, the stock of the company has a support level of ~A$1.05 and a resistance level at ~A$1.44. Over the last three months, the stock of RSG has increased by 11.89% on ASX and is trading higher than the average 52-week trading range. With decent production results in the first two quarters of FY20, the company seems well-placed to achieve its FY20 production guidance. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price with 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). Considering the company’s resilient performance amid COVID-19, its decent operational and financial performance in FY19, FY20 guidance, we give a “Buy” recommendation on the stock at the current market price of $1.345, up by 5.906% on 18 August 2020.

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

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