Company Overview: Gold Road Resources Limited (ASX: GOR) is an Australian gold production company with Tier 1 mine and exploration projects in Yamarna Greenstone Belt in Western Australia. The company is a 50:50 joint venture partner in a tier-one gold operation at Gruyere. The company also owns 100% interest in Southern Project Area which hosts the Gilmour Resource along with the Smokebush, Yaffler South, Toppin Hill and Hopwood prospects. At Yamarna, the company is conducting an industry-leading exploration strategy to discover the next multi-million-ounce gold deposits.  

GOR Details

Maintains Low-Cost Production: Gold Road Resources Limited (ASX: GOR) is a mid-tier gold production and exploration company with exploration projects located in Western Australia’s north-eastern Goldfields. As on 15 December 2020, the company’s market capitalisation stood at ~$1.07 billion. The company owns 50% of the world-class Gruyere gold mine, which was developed in a Joint Venture with Gold Fields Ltd. Further, the company also controls 100% of tenements covering ~4,500 square kilometres across Yamarna with a Mineral Resource of 0.3 million ounces. For over 11 years, the company has maintained its low-cost production. Over the last four years, the company has witnessed significant improvement in top-line, with revenue rising from $1.73 million in FY16 (year ended 30 June 2020) to $75.44 million in FY19 (year ended 31 December 2019). Over the same period, the company also witnessed significant improvement in its normalised EBITDA, as it grew from negative $4.80 million to positive $17.00 million.

Revenue and Normalised EBITDA Trend (Source: Company Reports)

The company’s financial performance was further enhanced in H1FY20 as its Gruyere Project was in operation for the full six months having attained commercial production on 1 October 2019. Looking ahead, the company is focused on working with its JV partner, Gold Fields Ltd, to further enhance Gruyere. On average, Gruyere is expected to produce 300,000 ounces (100% basis) annually for at least 12 years, making it one of Australia’s largest and lowest-cost gold mining operations. Further, the company is focused on discovering the next multi-million-ounce gold deposits at Yamarna. The company plans to maintain a strong liquid balance sheet to make sure that it has the capacity to fund new mine development and to invest in value accretive opportunities.

H1FY20 Results Highlights: For the six months ended 30 June 2020, the company reported a record consolidated net profit after tax for the half-year of $23.4 million, up from a loss of $16.9 million in H1FY19, reflecting the Gruyere Project being in operation for the full six months having attained commercial production on 1 October 2019. Further, the company reported an EBITDA of $61.0 million from an EBITDA loss of $23.0 million in H1FY19. Over the period, the company sold 60,400 ounces at an average gold price of $2,237 per ounce, generating gold sales revenue of $135.1 million. Exploration costs expensed and written off during the period were $11.1 million, up from $8.4 million in FY19. During H1FY20, Gruyere mined a total of 3.9 Mt of ore at an average grade of 1.06 g/t for 134,356 contained ounces (100% basis). Cash inflow from operating activities stood at $59.6 million in H1FY20. The company ended H1FY20 with cash and cash equivalents of $73.6 million.

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 35.22%. Van Eck Associates Corporation and The Vanguard Group, Inc. hold the maximum interest in the company at 12.44% and 5.00%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company reported a net margin of 17.3%, higher than the industry median of 11.5%. The ROE for H1FY20 stood at 6.6%, higher than the industry median of 4.6%. The company’s current ratio for H1FY20 stood at 2.09x, higher than 1.82x of Industry, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

September 2020 Quarter Results: During the September 2020 quarter, the company continued aircore, RC and diamond drilling on new targets in the Southern Project Area, including the Savoie, Beefwood, Hirono, and Kingston prospects. Over the quarter, Gruyere delivered production of 55,919 ounces of gold (100% basis) at an All-in-Sustaining Cost (AISC) of A$1,488 per attributable ounce to GOR. The company sold 31,480 ounces of gold during the quarter at an average price of A$2,420 per ounce, generating a sales revenue of $76.2 million. During the quarter, the company’s net cash and equivalents increased by $18.9 million to $103.0 million and its debt was reduced to zero as it made a final debt repayment of $25 million.

September 2020 Quarter Highlights (Source: Company Reports)

Power Expansion Initiatives at Gruyere: The company recently announced power expansion initiatives at the Gruyere Gold Mine to increase the mine’s power capacity to enable plant throughput upto a targeted 10 million tonnes per annum (mtpa). The expansion will also result in increased annual cash flow generation for the business and will drive additional unit cost reductions as Gruyere is further defined as a tier-one, low-cost and long-life gold producer.

Key Risks: The company is exposed to the risk related to COVID-19 pandemic and associated impacts. Moreover, the company’s results could also be impacted by the fluctuations in the Gold prices. Gold Road Resources Limited recognises climate change as a serious challenge to society and the environment, exposing to the climate-change related risks.

Outlook: Looking ahead, the company is focused on discovering new gold deposits at Yamarna (100%), to create shareholder value through organic growth. Further, the company is focused on growing its resources at Gruyere. For FY20, the company had set an exploration budget of $26 million, spread across the company’s exploration areas. 

The company is targeting an annual aggregate dividend payout of 15%-30% of free cash flow for each calendar year in two-half yearly payments. GOR expects to declare an inaugural dividend for 6-month period ended 31 December 2020. For December 2020 quarter, the company expects to report higher production and lower cost. For the full year FY20, the company expects total production to be in the range of 250,000-270,000 ounces with an AISC of between A$1,250-A$1,350/oz.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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 Month

Stock Recommendation: Over the last three months, the stock of GOR has corrected by 27.87% and is currently inclined towards its 52-weeks low of $0.805, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$1.00 and resistance of ~$1.48. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). For the purpose, we have taken peers like Regis Resources Ltd (ASX: RRL), Saracen Mineral Holdings Ltd (ASX: SAR), AngloGold Ashanti Ltd (ASX: AGG), etc. Considering the company’s decent performance in H1FY20, its FY20 guidance, robust debt-free balance sheet, current trading levels, and valuation, we give a “BUY” recommendation on the stock at the current market price of $1.20, down by 1.640% on 15 December 2020.

GOR Daily Technical Chart (Refinitiv, Thomson Reuters)

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