Company Overview: Aurelia Metals Limited is an exploration and mineral development company. The Company operates through segments, including Hera-Nymagee project and other exploration projects. The Hera-Nymagee project includes the gold and base metal Hera deposit, and the copper discovery at the Nymagee copper deposit. The Hera-Nymagee Project is located approximately 100 kilometers southeast of Cobar in western New South Wales (NSW). The Hera Project produces gold-silver dore and a bulk concentrate, which includes lead and zinc. The Doradilla project is a tin project. The Company is also engaged in exploration for copper, gold and tin on a number of tenements in the Lachlan Fold Belt of NSW. The Doradilla Project represents an exploration target for nickel, copper, silver, bismuth, zinc and indium. The Tallebung tin field is located over 70 kilometers north-west of Condoblin, NSW, and includes a series of alluvial and deep lead tin deposits, as well as tin-tungsten hard rock lodes.


AMI Details

Major investments expected in H2CY19 for mine upgradation: Aurelia Metals Limited (ASX: AMI) is involved in the gold, copper, lead and zinc production and mineral exploration from Hera and Peak mines. Its revenue is majorly derived from bullion and base metal sales. Its sales revenue for FY18 (ended on June 30, 2018) increased by 127% to $248.60 Mn on $109.3 Mn in FY17. Backed by higher growth in revenues, EBITDA for FY18 also increased by 182% to $136.72 Mn as compared to FY17. Bottom-line for FY18 at $99.11 Mn witnessed a whopping growth of 413% on FY17.  Moving on, the production in the quarters ended March and June 2019 was impacted by reduced contribution from Chronos Au at Peak. However, with decent profitability margins, strong cash balance in hand along with zero debt status, the company is expected to deliver a sustainable return for its shareholders in the forthcoming year.

Group’s present strategy includes optimising existing operations via increasing development rates, Pb/Zn circuit upgrades, mine life extensions and increasing efficiencies at mines. Second half of calendar year 2019 is expected to see major investments in the business which will include upgrading of Peak plant, acceleration of UG (underground) development and access to Kairos (Peak Deeps) and exploration spending. It aims to deliver higher Peak throughput and lower unit costs from first half of calendar year 2020.


Quarterly Production Highlights (Source: Company Reports)

June’19 Quarter Key Highlights: Group’s quarterly gold production stood at 22,864 oz as compared to 23,323 oz in the March quarter, with All-In Sustaining Cost (AISC) of $1,537 per oz. Gold Production at Peak and Hera mine stood at 9,000 oz at AISC of $1,752/oz and 13,864 oz at AISC of $1,122/oz, respectively.

On full-year basis, Group’s FY19 gold production stood above the stated guidance at 117,521 oz at an AISC of A$1,045/oz. Production at Peak and Hera mines for FY19 stood at 59,496 oz at AISC of A$1,143/oz and 58,025 oz at AISC of A$809/oz, respectively.


June ’19 Quarter Gold Production Metrics (Source: Company Reports)

AMI’s cash balance stood at $104.3 Mn at the end of June Quarter: The Company generated sales revenue of $63 Mn, of which precious metals accounted for ~61%, and the remaining 39% was contributed by base metals sales. The sales revenue was $4 Mn lesser than the previous quarter, primarily due to the result of reduced gold sales, partially offset by higher base metal sales from both the mines. The net site cash flow (before corporate costs and growth capital expenditure) for the quarter period stood at $9.4 Mn, wherein $1.2 Mn was contributed from Peak mine and $8.2 Mn was contributed from Hera mine. Group’s cash at the end of June ’19 quarter stood at $104.3 Mn as compared to $108.6 Mn. It reported no debt at the end of the June quarter period.

Capital Expenditure for the June quarter stood at $24 Mn, where capex for Hera and Peak were reported at $4 Mn and 20 Mn, respectively. The Capex comprised $11.9 Mn of sustaining capital, predominantly mine development and minor process sustaining capital, and $12.1 Mn of growth capital. Growth capital was primarily associated with the Plant Upgrade at Peak ($9.6M), and exploration drilling (2.4 Mn).


June 2019 Quarter Summary (Source: Company Reports)

H1FY19 Financial Highlights: The sales revenue for the group for the period increased by 140% on pcp to $165.46 Mn. Group’s EBITDA for the period increased by 131% on pcp to $72.31 Mn. The profit for the period increased by 44% on pcp to $26.41 Mn. At the end of the half-year period, the group moved from net debt to net cash, with ~$108 Mn cash balance on hand.


H1FY19 Financial Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 42.61% of the total shareholding. Mitsubishi UFJ Financial Group Inc and AustralianSuper hold maximum interest in the company at 8.01% and 6.31%, respectively. Recently, Mitsubishi UFJ Financial Group, Inc. and Carol Australia Holdings Pty Limited became the substantial holder of the company with the voting rights of 8.01% and 6.02%, respectively, effective from August 2, 2019.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its EBITDA margin and net margin for H1FY19 stood at 47.5% and 16.0%, better than the industry median of 35.8% and 13.3%, respectively, which implies decent fundamentals for the company. Its current ratio for H1FY19 stood at 2.49x, better than the industry median of 1.88x, which implies the company is in a better position to address its short-term obligations. Its ROE for H1FY19 stood at 13.4%, better the industry median of 6.8%, which implies the company generated a better return for its shareholders than its peer group. Its debt to equity ratio for H1FY19 indicates that the company utilizes its own funds to fuel its operations.


Key Metrics (Source: Thomson Reuters)

Key Risks: The company is exposed to certain risks such as business risks which include fluctuations in the commodity prices, wrong estimation in the Ore Reserves and Resources, mining risks (accidents), insurance risks (circumstance driven), production & cost estimation, etc.
What to expect: As per the report, Group gold production for FY20 is expected to be 85 to 95koz (lower than the FY19 actual production of 118 koz) at an All-In-Sustaining-Cost (AISC) estimated at A$1,050 to A$1,250/oz. Production for other base metals is expected to increase in FY20 in comparison to FY19.


FY20 Production and AISC Guidance (Source: Company Reports)

The December 2019 quarter is expected to be particularly weak as a result of lower forecast grades at Peak combined with partly restricted throughput resulting from planned tie-ins for the Peak Pb/Zn plant upgrade. The June 2020 quarter should benefit from the expected strong lift in throughput at Peak following targeted completion of the Pb/Zn plant upgrade in the March 2020 quarter, with a concurrent increase in treatment of high-grade Chronos Pb/Zn material.

Gold Production at Hera and Peak: Hera gold production for FY20 is expected to be 33 to 36koz. FY20 All-In Sustaining costs (AISC) at Hera is expected to be lower than FY19. This is due to the lower gold grade forecast to be offset by lower operating costs and higher expected base metal credits as compared to FY19.

Peak gold production for FY20 is expected to be 52 to 59koz. FY20 All-In Sustaining costs (AISC) at Peak is expected to be higher than FY19. This is due to the lower expected gold grade relative to FY19. The unit operating costs are expected to improve because of increase in operating underground development meters in FY20, which is five times the level undertaken in FY19.

Moreover, ongoing accelerated underground development is expected to deliver access to the base of Kairos (Peek Deeps) towards the end of FY20, which will provide the company a strong potential for prioritisation and mining of high margin tonnes from Kairos during FY21.

Group’s Capital Expenditure Expectation: Group sustaining capital expenditure for FY20 is expected to be A$45-50M, with the majority associated with Peak mine development capital.

Group growth capital expenditure (Mining & Plant) for FY20 is expected to be approximately A$40M. This expenditure is strongly weighted to 1H FY20, being predominantly associated with the Pb/Zn plant upgrade at Peak (approx. A$38M residual forecast capital spends in FY20). Group exploration expenditure for FY20 is currently budgeted at A$15Mn.

Group’s Hedge Position: AMI’s total hedge position stands at 56,000 oz gold at an average delivery price of A$1,809/oz. This comprises 35,000 oz gold deliverable at an average price of A$1,748/oz for the first five months of the year, and 21,000 oz gold deliverable at an average price of A$1,911/oz from December 2019 to June 2020.

Gold Outlook: Gold Spot (XAU/USD) at the time of writing was trading at US$1,516.28 (on August 13, 2019, 1:51 PM (UTC+10)). It recently broke an important resistance level at ~US$1,366 on the weekly timeframe chart, since then the gold has risen by ~11%. As the geopolitical tensions are yet to stabilise, gold is expected to see more investments pouring in the coming times (setting apart some minor corrections).
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Approach (NTM):

Price to Earnings Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months
Stock Recommendation: On the backdrop of decent cash position, respectable margins, and ongoing projects, it is expected that the company would be emphasizing on improving its bottom-line performance. Considering the present scenario, decent outlook for gold is likely to help the company to improve its margins further. Aurelia Metals’ share is presently trading towards its 52-week low level of $0.390, and given the present scenario, the current trading level might be considered as an opportunity for stock accumulation. Looking at the business prospects over the long-term, we have valued the stock using a relative valuation method, Price to Earnings multiple and have arrived at a target price of double-digit growth (in %). Hence, in view of the aforesaid parameters and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $0.490 per share, up 6.522% on August 13, 2019.

 
AMI Daily Technical Chart (Source: Thomson Reuters)

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