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. GOR holds 50% ownership interest in 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 owns 100% interest in the Southern Project Area that hosts the Gilmour Resource along with the Smokebush, Yaffler South, Toppin Hill and Hopwood prospects.

GOR Details

Long-term Outlook Supported by the Rising Production from Gruyere Gold Mine: 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 of 5 May 2021, the company’s market capitalisation stood at ~$1.08 billion. The company owns 50% of the world-class Gruyere gold mine, and it also controls 100% of tenements covering ~4,500 km² across Yamarna with a Mineral Resource of 0.3 million ounces. During FY20, GOR company completed its first full year of operations at its Gruyere Gold Mine, resulting in a free cash flow of $105.51 million. This allowed the company to pay its maiden fully franked dividend of 1.5 cents per share, representing 17% of free cash flow for the six-month period from July to December 2020.

Looking ahead, the company is focused on the systematic exploration of the Yamarna Belt and unlocking the full potential of the process plant at Gruyere Gold Mine. GOR is of the view that there is potential for significant growth in free cash flow with AISC maintained at low levels. The production from the Gruyere gold mine is expected to rise from 258,173 ounces produced in 2020 to a sustainable 350,000 ounces by 2023 (on a 100% basis), supported by higher grade and throughput.

Gruyere Gold Production Outlook (Source: Company Reports)

March 2021 Quarter Highlights: During March 2021 quarter, Gruyere delivered gold production of 66,213 ounces (on a 100% basis), down from 70,794 ounces delivered in the December 2020 quarter, reflecting an increase of gold in circuit.  Due to the higher processing costs and higher sustaining capex arising from the pebble crusher upgrade, the GOR’s All-in-Sustaining Cost (AISC) grew to A$1,386 per attributable ounce in March 2021 quarter, higher than A$1,265 per ounce in December 2020 quarter. Total gold sales for the March quarter stood at 32,100 ounces at an average price of A$2,138 per ounce. As of 31 March 2021, the company had cash and cash equivalents of $149.8 million with no drawn debt.

Operating Performance (Source: Company Reports)

FY20 Performance Highlights: During FY20, Gruyere’s full-year production came in at 258,173 ounces (on a 100% basis), which is well within the FY20 guidance of 250,000-270,000 ounces (100% basis). During the year, GOR 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. 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 paid a fully franked maiden dividend to shareholders for the six months ended 31 December 2020 of 1.5 cents per share.

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. 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. The 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.

Past 3-year Financial Performance For Year Ending 31 December, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 30.31% 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 11.34% and 5.00%, respectively, as also highlighted in the chart below:

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

Change of Director’s Interest: Recently, one of the company’s Directors, Timothy Carl NETSCHER, who holds a direct and indirect interest in the company, acquired 320,000 fully paid ordinary shares of the company for a total consideration of $412,800 via on-market trade of shares.

Key Risks: The company’s current and future activities are subject to various laws and statutory regulations governing all aspects of the business. The company is exposed to the risk related to the COVID-19 pandemic and associated impacts. Moreover, the company’s results could also be impacted by the fluctuations in gold prices.

Outlook: Currently, the company is progressing towards an updated Gruyere Ore Reserve, which is expected in the second half of 2021. For FY21, the company expects gold production from Gruyere to be in the range of 260,000 – 300,000 ounces (130,000 – 150,000 ounces attributable). GOR’s ASIC for FY21 is expected to be between A$1,225 – A$1,350 per attributable ounce. As per the company’s 3-year production outlook, the company expects a 35% to 50% increase in annual production to a sustainable circa 350,000 ounces per annum by 2023. Further, the company expects higher head grades and increased throughput to have a favourable impact on production and AISC. The increased throughput rates are expected to be supported by the company’s ongoing mine to mill optimisation programme that includes the blending of softer oxide ore with harder fresh rock ore and adopting higher intensity blasting practices on fresh rock ore.

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 three months, the stock of GOR has provided a return of ~4.09%. The stock is currently trading lower than the average 52-week price level band of $1.040 and $2.020, offering a decent opportunity for accumulation. We have valued the stock using the 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 stock can trade at a premium to its peer average EV/EBITDA (NTM trading multiple), considering the improved results in FY20, expected production uplift from Gruyere, and modest long-term outlook. We have taken peers like Evolution Mining Ltd (ASX: EVN), St Barbara Ltd (ASX: SBM), Ramelius Resources Ltd (ASX: RMS), etc. Considering the company’s rising cash balance, its low-cost operations, expected production growth from Gruyere mine, current trading level and valuation, we give a “Buy” recommendation for the stock at the current market price of $1.295, up by 4.858% as of 4 May 2021.

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

Note: 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.

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