Company Overview: 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. The company owns 50% of the world-class Gruyere gold mine, which was developed in 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. The company also owns 100% interest in Southern Project Area that hosts the Gilmour Resource along with the Smokebush, Yaffler South, Toppin Hill and Hopwood prospects.

GOR Details

Financial Growth Supported by Tier-one Gold Operation at Gruyere: 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. As on 16 March 2020, the company’s market capitalisation stood at ~$1.04 billion. The company is a 50:50 joint venture partner in a tier-one gold operation at Gruyere. Last year, i.e., FY20, the company completed its first full year of operations at its Gruyere Gold Mine, resulting in a free cash flow of $105.51 million, which bolstered the company’s cash reserves and enabled the full repayment of the $130.4 million of total borrowings. Over the period of 2017 - 2020, the company’s bottom-line has improved significantly, rising from a net loss of $7.7 million in 2017 to an NPAT of $80.8 million.

NPAT Trend (Source: Refinitiv, Thomson Reuters)

Looking ahead, GOR is focused on unlocking the full potential of the process plant at Gruyere Gold Mine with the aim of lifting annual throughput to a targeted 10 Mtpa. At Yamarna, GOR will continue its systematic targeting and exploration activities to advance its high-priority Milestone 1 targets. The company’s 3-year outlook represents a 35% to 50% increase in annual gold production to a sustainable 350,000 ounces by 2023, demonstrating higher head grades and increased throughput.

Decent Rise in FY20 Revenue and NPAT: During the year ended 31 December 2020, the produced 258,173 ounces of gold, which is well within the FY20 guidance of 250,000-270,000 ounces (100% basis). Over the year, the company sold 126,434 ounces of gold, realising a total revenue of $294.7 million, significantly higher than $75.4 million in FY19. EBITDA for the full-year stood at $170.6 million, up from an EBITDA loss of $9.8 million in FY19. Consolidated net profit after tax for FY20 stood at $80.8 million, up from the net loss of $4.7 million in FY19. During the year, the company was able to pay down all its borrowings and generate over $105 million in free cash flow. As at 31 December 2020, the company had cash and short-term deposits of $126.4 million.

FY20 Results (Source: Company Reports)

Key Metrics: The company’s profitability margins in FY20 have improved over the previous year, demonstrating the improved production performance in FY20, which resulted in increased free cashflow and NPAT. For FY20, GOR’s gross margin stood at 47.1%, up from 44.2% in FY19. EBITDA margin for FY20 stood at 51.2%, up from 22.5% in FY20. ROE for FY20 stood at 21.4%, up from -1.4% in FY19. Current ratio for FY20 stood at 2.75x, up from 1.25x in FY20, demonstrating that the company has improved its ability to pay its short-term obligations.

Top 10 Shareholders: The top 10 shareholders together form around 31.42% of the total shareholding while the top four constitutes the maximum holding. Van Eck Associates Corporation and The Vanguard Group, Inc. are holding a maximum stake in the company at 12.44% and 5.00%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Inaugural Dividend Policy: In September 2020, GOR’s Board had approved an inaugural Dividend Policy which targets an annual aggregate dividend payout of 15%-30% of free cash flow for each calendar year in two half yearly payments.  In-line with this policy, the company has recently declared a fully franked maiden dividend to shareholders for the six months ended 31 December 2020 of 1.5 cents per share to be paid on 14 April 2021. The ex-date for the dividend is 25 March 2021. GOR is planning to establish a Dividend Reinvestment Plan (DRP) in due course; however, the DRP will not apply to the maiden dividend.

Installation of Renewable Energy Hybrid at Gruyere: In December 2020, the company announced installation of a renewable energy hybrid microgrid at the Gruyere Gold Mine. The installation is expected to increase the mine’s power capacity to enable plant throughput up to a targeted 10 million tonnes per annum. Further, it will help in reducing carbon emissions by an estimated 16,000 tCO2-e per annum.

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 Gold prices. The company’s current and future activities are subject to various laws and statutory regulations governing all aspects of the business.

Outlook: Looking ahead, the company is focused on optimising and growing Gruyere production at a minimal cost. Further, it intends to maintain its strong focus on meaningful organic growth from its 100% owned Yamarna Exploration Project.  As part of its 2021 exploration programme, the company has already commenced aircore drilling at Yamarna and diamond drilling is scheduled to start later in the March 2021 quarter.

In FY21, the company expects to increase its gold production to 260,000 – 300,000 ounce with all-in-sustaining costs (AISC) of between A$1,225 – A$1,350 per attributable ounce. The discovery budget for FY21 is around $27 million. GOR continues to maintain a healthy balance sheet to ensure it has the capacity to fund new mine development and invest in value accretive opportunities.  Due to the increasing throughput rates and higher head grades, the company’s annual production over the next three years is expected to increase significantly to around 350,000 ounces by 2023.

3-Year Production Guidance (Source: Company Reports)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 six months, the stock has corrected by 27.27% and is trading below the average 52-weeks price band of $0.805 and $2.02. On the technical analysis front, the stock has a support level of ~$1.042 and resistance of ~$1.459. We have valued the stock using EV/EBITDA 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 premium to its peer average EV/EBITDA, considering the improved gold price environment, and modest outlook. We have taken peers like Resolute Mining Ltd (ASX: RSG), Newcrest Mining Ltd (ASX: NCM), Westgold Resources Ltd (ASX: WGX), etc. Considering the company’s decent FY20 financial and operational performance, modest 3-year production outlook, healthy balance sheet, current trading level and valuation, we give a “Buy” recommendation on the stock at the closing price of $1.190, up by 0.421% as on 16 March 2021.  

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

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