Company Overview: St Barbara Ltd is an Australia-based gold mining company. The Company’s assets include the Leonora Operations in Western Australia, the Simberi Operations in Papua New Guinea, and the Atlantic Gold Operations in Nova Scotia, Canada. Leonora Operations include the Gwalia mine, which is located approximately three kilometers (km) south of the town of Leonora, Western Australia. The Simberi Operations occur on the eastern half of the Simberi island covered by approximately 2,560 hectare Mining Lease (ML136). The Atlantic Gold operation is located in Moose River Gold Mines, near Middle Musquodoboit, approximately 60km north east of Halifax, Nova Scotia. The Gwalia mine has operations with approximately 2.1 million ounces of gold in reserves at a grade of 6.4 grams per ton. Ore at Simberi is sourced from various pits, including the Sorowar Pit. The Atlantic Gold operation has a combined estimated of approximately 1.9 million ounces of gold in reserves at a grade of 1.12 grams per ton.
 

SBM Details
 
SBM’s Bottom-line Witnessed a CAGR of ~38% over FY15-19: St Barbara Limited (ASX: SBM) has an engagement in mining, exploration, development and sale of gold. The group has two operational business units, i.e., Simberi Operations and Leonora Operations, which are managed separately due to their separate geographic regions. The company generates revenues from the sale of gold and silver, and recognises it at the time when control (physical or contractual) is transferred to the buyer.

Looking at the historical financial performance over FY15 to FY19, total revenue of the company has grown with a compound annual growth rate (CAGR) of 4.68%. The bottom-line grew at a CAGR of 38.05% in the period FY15-FY19. Total revenue improved from $550 Mn in FY15 to $660.4 Mn in FY19, and net profit improved from $39.7 Mn in FY15 to $144.2 Mn in FY19. Cash balance at the end of FY19 was reported at $880 million as compared to $226.44 million in the previous year. The cash component included equity raised of worth $479.558 million with an additional $10 million in deposits held to maturity, along with a deposit of restricted cash and reported within trade receivables of worth $2.4 million.
 
Delay in completing the final raise bore has impacted the forecast development rates at Gwalia for the second half of FY20, and is expected to result in the mining sequence not returning to higher grade areas in the center of the orebody until the end of the financial year. In Simberi, increase in transitional material as the oxide mineralization nears completion, is expected to impact the recovery. The company has provided revised updates for FY20 production guidance at Gwalia, Simberi and Atlantic, along with All-In Sustaining Costs. Group exploration expenditure has been kept unchanged at the range of A$31 and A$41 million.
 

Historical Data on cash, deposits and debt (Source: Company Reports)
 
Q2FY20 Key Highlights for the period ended December 31, 2019: Consolidated gold production for the period was reported at 94,159 ounces at All-In Sustaining Cost (AISC) of A$1,364 per ounce as compared to 87,569 ounces at AISC of A$1,421 per ounce in the previous quarter. The average realized gold price for the second quarter was reported at A$1,960 per ounce, as compared to A$1,948 per ounce in the previous quarter. Gold production for Gwalia (Australia) for the period was reported at 42,022 ounces at AISC of A$1,471 per ounce as compared to 38,153 ounces at AISC of A$1,559 per ounce in the previous quarter. Gold production for Simberi (PNG) for the period was reported at 23,070 ounces at AISC of A$1,851 per ounce as compared to 27,061 ounces at AISC of A$1,603 per ounce in the previous quarter. The increase in AISC can be attributed to fewer ounces produced from a lower milled grade of 1.08 g/t Au.

Gold production for Atlantic Gold (Canada) was reported at 29,067 ounces at AISC of A$823 per ounce as compared to 22,355 ounces at AISC of A$970 per ounce in the previous quarter.

Cash position as on December 31, 2019 was reported at A$791 million, as compared to A$76 million in the previous quarter, following growth capex of $15 million, exploration expense of $10 million and income tax payments of $24 million. Operational cash contribution in the second quarter was reported at A$66 million, as compared to A$44 million in the previous quarter.


Consolidated Gold Production Data (Source: Company Reports)

FY19 Key Highlights for the period ended June 30, 2019: Statutory net profit after tax for the period was reported at $144.16 million as compared to $227.00 million in the previous year. Cash flows from operations for the period was reported at $213.21 million as compared to $300.55 million in the previous year. This reflected an increase in sustaining capital expenditure in 2019 at Gwalia and Simberi. Growth capital for the period was reported at $75.44 million as compared to $37.13 million in the previous year. Total dividends for FY19 was reported at $62.61 million as compared to $51.41 million in the previous year. Underlying net profit after tax, representing net profit excluding significant items for the period was reported at $141.73 million, as compared to $201.89 million in the previous year.

Cash on hand and deposits held to maturity as on June 30, 2019, was reported at $890.20 million, as compared to $342.64 million in the previous year. The increase in cash can be attributed to net proceeds from new shares issued to fund the acquisition of Atlantic Gold of $479.60 million. After excluding the net proceeds from the equity issue and movements in deposits held to maturity, net cash generated during the year was reported at $63.65 million, as compared to $176.05 million in the previous year.


FY19 Key Metrics (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 38.06% of the total shareholding. Van Eck Associates Corporation holds the maximum interest in the company at 12.16%, followed by The Vanguard Group, Inc., holding 5.00% of the stake in the company.


Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, the company had a gross margin, EBITDA margin and net margin of 51.5%, 44.3% and 21.8%, better than the industry median of 41.1%, 29.1% and 11.0%, respectively, implying decent fundamentals for the company. Its ROE for FY19 stood at 15%, better than the industry median of 12.3%, which implies that the company generated a decent return for its shareholders than its peer group. Its Current ratio for the year stood at 10.07x, better than the industry median of 1.75x, which implies that the company is in a better position to address its short-term obligations. Its return on invested capital for FY19 was reported at 14.2%.


Key Metrics (Source: Thomson Reuters)

Recent Update:
On January 23, 2020, the company’s joint venture partner Alice Queen Limited (ASX: AQX) informed the market about its exploration activities across all its projects. It highlighted that its exploration programs for 2020 have commenced with drilling underway at both Horn Island, Qld and Yarindury, NSW. The Horn Island and Northern Molong projects are expected to give a boost to Alice Queen’s strategy to increase the shareholder’s value in 2020. At Horn Island, while the company is managing a parallel process to progress the areas excluded from the JV towards a production decision, it is continuing to earn into the JV through exploration for large-scale gold mineralization. Moreover, the company is ramping up exploration activities across its Northern Molong prospects, following the success by Alkane Resources in the Northern Molong Belt region in 2019.

The drilling program recommenced at Yarindury in early January, and with ongoing additional land access efforts, drilling is now underway at the site of Mineral Resource at Horn Island.

Key Risks: The company is susceptible to business risks such as fluctuations in the United States Dollar, spot gold price, hedging risk, government regulation, operating risks and hazards, weather conditions, production cost estimates, change in input costs, risks associated with exploration and development such as preciseness in estimates for ore reserves and mineral resources, etc.

Consolidated FY20 Guidance: Gold Production has been estimated at 370 to 400 koz at AISC of A$1,330/oz to A$1,420/oz, as compared to the previously stated guidance of 380-420 koz at AISC of A$1,240 to A$1,330/oz. Sustaining capex has been estimated at A$79 to A$88 million, as compared to the previously stated A$77 to A$87 million. Growth capex has been estimated at A$51 to A$59 million. Exploration cost for FY20 has been estimated at A$31 to A$41 million, where A$7 – A$9 million will be allocated for Leonora (Shift in focus from Gwalia Deep Drilling to region and Greater Gwalia), A$8 – A$12 million for PNG (Simberi Oxides/Sulphides and Porphyry), A$5 – A$7 million for Pinjin, Lake Wells & Back Creek (AC, RC and diamond drilling of identified targets) and A$11 – 13 million for Atlantic Gold Canada (Moose River Corridor and South West Region).

Revised FY20 guidance for the Gwalia production has been estimated at 170 to 180 koz at AISC of A$1,470 to A$1,540/oz, as compared to the previously stated production guidance of 175 to 190 koz at AISC of A$1,390 to A$1,450/oz. Sustaining capital expenditure has been kept unchanged at A$60 to A$65 million and growth capital expenditure has also been kept unchanged at A$32 to $38 million. The change in guidance can be attributed to delayed completion of final raise bore impacts forecast development rate.

At Simberi, grade and tonnage issues in quarter two of FY20 have led to a reforecast of guidance, where FY20 guidance has been revised to 105 to 115 koz at AISC A$1,500 to A$1,645/oz, as compared to previously stated guidance of 110 to 125 koz at AISC of A$1,285 to A$1,450/oz. Sustaining capital expenditure for FY20 has been estimated at A$6 million, as compared to the previously stated guidance of A$4-5 million. Growth capital expenditure for the period has been estimated at $5 million, as compared to the previously stated guidance of A$3-4 million.

FY20 production guidance for Atlantic has been kept unchanged at 95 to 105 koz at AISC of A$900 to A$955/oz. Sustaining capex has been kept unchanged at A$13-17 million, and growth capex has also been kept unchanged at A$10-12 million, plus A$4 million for land acquisition.


Consolidated Production, Costs & Guidance Summary (Source: Company Reports)

Gold Outlook: At the time of writing, gold spot (XAU/USD) was trading at US$1,567.66 (16:24 (UTC+11)). On technical analysis front, the gold price is trading above 20 EMA, 50 EMA and 200 EMA on the monthly chart, indicating bull trend. Moreover, it is trading above an important support level of ~US$1,376.

Current macro-economic concern particularly novel coronavirus has planted a sense of worry among global investors community, which can be easily seen from shifting of investment exposure into safe assets such as gold, US dollar and Japanese yen. Outlook for gold for medium-term scenario looks stable.


Monthly Candle Stick Chart of Gold Spot Price (XAU/USD) (Source: Thomson Reuters)


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA based Valuation

EV/EBITDA Multiple Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Analysis:
Monthly Chart:

(Source: Thomson Reuters)

Weekly Chart:

(Source: Thomson Reuters)

On both the monthly and weekly charts, the stock is trading above a strong support level of $2.425. Stochastic Oscillator indicates that the stock may enter into an oversold region, which suggests the probability of an increase in buying pressure for the medium term.

Note: EMA – Exponential Moving Average

Stock Recommendation: SBM’s stock generated a positive YTD return of 1.47%, while in the span of one year, it has generated a negative return of 43.13%. Currently, the stock is trading close to its 52-week low of $2.430, proffering an opportunity for share accumulation. Considering the company’s production in December quarter of FY20, FY19 top-line and bottom-line performance, profitability margins, FY20 guidance and current trading levels, we have valued the stock using EV/EBITDA based relative valuation method and arrived at a target price of higher single-digit upside (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$2.770 as on 11 February 2020.
 
 
SBM Daily Technical Chart (Source: Thomson Reuters)

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