Company Overview:  Resolute Mining Limited (ASX: RSG) is a 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 also owns Bibiani Gold Mine in Ghana.  Mako is a high-quality, open-pit gold mine that RSG has owned and operated since August 2019. The company is currently listed on the Australian Securities Exchange (ASX) as well as on London Stock Exchange (LSE).

RSG Details

Operational Consistency and Debt Repayment to Drive Future Growth: Over the past thirty years, Resolute Mining Limited (ASX: RSG) has produced gold from 10 mines in Africa and Australia, establishing itself as a major gold producer with extensive experience.  Despite the challenges created by the COVID-19 pandemic, RSG was able to report improved financial and operational performance, demonstrating the strength and resilience of its operations.

• Operational Consistency: RSG continued its solid operational performance in Q1FY21 as well with improved performance from the Syama Gold Mine’s sulphide operation and consistent performance at Mako Gold Mine in Senegal.
• Debt Reduction: As at 31 March 2021, the company had net debt of US$222.8 million, down from US$230.4 million as at 31 December 2020. With the help of operating cash flow and asset sale proceeds, the company plans to further reduce its net debt.
• Strategic investments in Africa: RSG’s objective is to establish a portfolio of investments in emerging gold explorers of Africa to provide the potential for medium-term growth opportunities.
• Accelerating exploration at Syama: The company is focused on accelerating exploration for the discovery of additional oxide resources to extend mine life at Syama Gold Mine.

FY20 Result Highlights:

• Rise in Revenue: During FY20, RSG earned total revenue of US$618 million, up ~15% on the previous year, driven by an increase in gold sales and higher gold price achieved during the period.
• Rise in Production: For FY20, RSG reported total production of 395,136 ounces, up from the production of 384,732 ounces in FY19.
• Rise in EBITDA: EBITDA for FY20 stood at ~US$247 million, up 169% on FY19, due to increased revenue and improved operating cost performance.
• Sales of Ravenswood Gold Mine: RSG completed the sale of Ravenswood Gold Mine on 31 March 2020 with up to A$300 million proceeds.

Revenue and EBITDA Trend (Source: Analysis by Kalkine Group)

Key Takeaways from March 2021 Quarter: 

• Improved Performance from Syama Gold Mine: Syama’s sulphide gold production for the March 2021 quarter stood at 37,217 ounces. Notably, this is the highest production since 2016.
• Decline in Quarterly Production: RSG reported total production of 85,668 ounces for Q1FY21, down by 5% on the previous quarter, reflecting expected lower production from Mako.
• Cash and Debt Scenario: As at 31 March 2021, the company had cash of US$87.2 million, bullion of US$18.8 million, and total borrowings of US$328.8 million.

Key Metrics:

Due to increased revenue and improved operating cost performance, RSG witnessed decent improvement in its FY20 profitability metrics. Gross margin for FY20 stood at 17.3%, up from 9.2% in FY19. EBITDA margin for FY20 stood at 37.1%, up from 11.4%. Current ratio for FY20 stood at 1.94x in FY20, up from 0.79x in FY19, demonstrating that the company has improved its ability to pay short-term obligations. Debt to equity ratio for FY20 stood at 0.43x, down from 0.76x in FY19, demonstrating the company’s focus on reducing its debt obligations.

Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 57.59% of the total shareholding, while the top four constitute the maximum holding. ICM Limited and Van Eck Associates Corporation are holding a maximum stake in the company at 12.58% and 9.69%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Latest Developments:

• Termination of Bibiani Sale Agreement: On 20 April 2021, Chifeng Jilong Gold Mining Co. Ltd terminated the agreement for the sale of the Bibiani Gold Mine. Following this, RSG returned US$5 million deposit whilst reserving all its rights. RSG is now looking for options for the successful development or sale of Bibiani.
• US$20 Million Debt Repayment: On 9 June 2021, the company announced that it has repaid US$20 million in advance of its first scheduled debt repayment, reducing Revolving Credit Facility (the RCF) balance to US$130 million.
• Change of Company Secretary: Following the resignation of Amber Stanton as Company Secretary, RSG has appointed Richard Steenhof as the new Company Secretary with effect from 23 July 2021.
• Appointment of CFO: On 1^st July 2021, the company announced the appointment of Doug Warden as its new Chief Financial Officer (CFO) effective from 1 September 2021.

Key Risks:

• Fluctuations in Gold Prices: RSG is exposed to the risks associated with the fluctuations in the price of gold as it could impact the company financial performance.
• COVID-19 Uncertainties: The COVID-19 pandemic has the potential to disrupt the company’s operations as it could cause temporary suspension at mines and could also result in added restrictions.
• Foreign Currency Risk: The company’s operations are located in South Africa. It exposes it to the risks of fluctuations in the foreign currency exchange rates.

Outlook:

Looking ahead, the company is focused on consistent delivery of operational outcomes and creating sustainable value for all its stakeholders. For FY21, the company expects its total production to be in the range of 350,000oz to 375,000oz at an AISC of between US$1,200/oz and US$1,275/oz. From Mako, the company expects the production to be between 115,000oz to 120,000oz at an AISC of US$1,175/oz to US$1,225/oz. From Syama Sulphide operations, the production is expected to be in the range of 155,000oz to 170,000oz at an AISC of US$1,200/oz to US$1,275/oz.

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 provided a return 27.12%. The stock is currently trading lower than the average 52-week price level band of $0.415 - $1.497, offering a decent opportunity for accumulation. 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 peers, considering the decline in total production from Q3FY21, uncertainty surrounding the impact of COVID-19 pandemic and gold price fluctuations, and negative ROE. We have taken peers like St Barbara Ltd (ASX: SBM), Regis Resources Ltd (ASX: RRL) and OceanaGold Corp (ASX: OGC). Considering the company’s decent operational and financial performance in FY20, modest outlook, debt reduction focus, associated key risks, current trading level and valuation, we give a “Speculative Buy” rating on the stock at the current market price of $0.595, down by 2.460% as on 13 July 2021.

RSG Daily Technical Chart, Data Source: REFINITIV

Note: The yellow color line indicates the price trend, the purple color represents RSI (14-period).

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.

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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