Company Overview: Regis Resources Limited (ASX: RRL) is an Australian gold mining company with operations at the Duketon Gold Project in the North-Eastern Goldfields of Western Australia and the McPhillamys Gold Project in the Central Western region of New South Wales. The Duketon Gold Project consists of two operating centres being the Duketon South Operations (DSO) and the Duketon North Operations (DNO). RRL also owns 30% of the Tropicana gold mine, which is one of Australia’s five largest producing gold mines.

RRL Details

Long-term Growth Supported by Growing Production Base: Regis Resources Limited (ASX: RRL) is a high-margin gold producer and explorer with operations in North-Eastern Goldfields of Western Australia. Over the last decade, the company has achieved continued exploration success and targeted acquisitions that have helped it in maintaining consistent production and achieving reserve growth. RRL recently completed a 30% interest in the Tropicana Gold Project (Tropicana) which has further diversified its production base. RRL is also an Australian gold industry leader on dividend payment metrics, as it has a track record of paying decent dividends to its shareholders. Since 2013, the company has paid $509 million in dividends. Despite the challenges created by the COVID-19 pandemic, RRL was able to report 8% revenue growth in H1FY21, demonstrating the resilience of its operations.

Revenue Trend (Source: Company Reports)

Looking ahead, the company expects to witness stronger production performance in H2FY20 as compared to H1FY21 and is on track to achieve its FY21 production guidance of 355,000 - 380,000 ounces. In the next few years, RRL expects its production to further uplift to 400,00oz pa, supported by internal development options. The company is currently developing Garden Well underground mine, which is expected to become the second underground mine at the Duketon operations. Further, the company is advancing its exploration programs on potential areas at Duketon Project for the identification of both new mineralisation and expansions of current mineral resources.

H1FY21 Results Highlights: For H1FY21, the company reported a profit after tax of approximately $84.8 million and operating cash flows of $147.8 million. Gold production for H1FY21 stood at 172,977 ounces at an AISC of $1,356 per ounce. Gold sales revenue for H1FY21 stood at $400.88 million, up by 8% on pcp. For H1FY21, the company has paid an interim dividend of 4 cents per share. Over the period, the company consolidated its land holding in the Duketon Greenstone Belt by acquiring a valuable resource and tenement package (including the Ben Hur resource) from Stone Resources Australia Limited. As at 31 December 2020, the company had cash and bullion of $220.0 million.

Net Income Trend (Source: Analysis by Kalkine Group)

Q3FY21 Results Highlights: For the March 2021 quarter, the company reported total gold production of 85,748 ounces, comprising 22,088 ounces of production from Duketon North Operations and 63,660 ounces of production from Duketon South Operations. Gold sales for the March 2021 quarter stood at 67,383oz at an average price of $2,014/oz, generating total revenue of $135.7 million. Cash flow from operations stood at $67.2 million in Q3FY21, down from A$100.1 million in Q2FY21, mainly due to lower gold prices.

Key Metrics: For H1FY21, the company reported gross margin of 32.4%, down from 37.3%. EBITDA margin for H1FY21 stood at 49.7x, up from 49% in H1FY20. Current ratio for H1FY21 stood at 2.68x, up from 2.34x in H1FY20.

Growth Profile & Liquidity Profile (Source: Analysis By Kalkine Group)

 Top 10 Shareholders: The top 10 shareholders together form around 31.78% 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 9.64% and 5.16%, respectively, as also highlighted in the chart below:

(Source: Analysis By Kalkine Group)

Completes 30% Acquisition of Tropicana:  On 31 May 2021, the company completed the acquisition of a 30% interest in the Tropicana Gold Project (Tropicana) from IGO Limited. To complete the acquisition, RRL has paid cash consideration of ~A$889 million (post adjustments) to IGO. Notably, the Tropicana is one of Australia’s five largest producing gold mines. This acquisition has further diversified RRL’s existing production base, and it is expected to provide RRL with a larger-scale, longer-term financial and operating platform to pursue internal and external growth opportunities. The acquisition was partially funded by an equity raising of A$650 million, which was completed on 10 May 2021. Further, the company has also utilised a A$300 million three-year loan facility provided by Bank of America.

Change in Hedge Structure: Over the last two years, RRL has been steadily reducing its hedge book and as at 28 May 2021, it had around 320,000 ounces of gold hedged on a spot deferred basis at an average price of approximately A$1,626 per ounce. On 28 May 2021, the company announced that it is changing its hedge structure and it is now moving to flat forward hedging. With flat forward hedging, the company can now forecast its revenue more accurately as its revenue from ounces delivered into the hedge book are now fixed and not subject to market movements.

Key Risks: The company is exposed to the risks related to the ongoing management of open pit geotechnical impacts, plant performance and reliability and the contractor productivity improvement project. Further, the company is exposed to the risks related to the COVID-19 pandemic as it could cause temporary restrictions in the operations.

Increase in Mineral Resource and Ore Reserve: The company has recently declared an increase in its Group Mineral Resources and Ore Reserves. Total Ore Reserves as at 31 December 2020 stood at 4.0 million ounces, up 11% as compared to 3.6 million ounces as at 31 March 2020. Further, the total Mineral Resources increased by 5% to 8.1 million ounces compared to 7.7 million ounces as at 31 March 2020.

Outlook: For FY21, the company expects its gold production to be in the range of 355,000 – 380,000oz for an AISC of A$1,230 - 1,300/oz. Growth capital for FY21 is expected to be between $60 – $70 million and exploration spend is expected to be around $28 million. Considering the addition of Tropicana mine to the company’s production base, rising Mineral Resource and Ore Reserve, robust balance sheet, reduced hedge book, and decent production profile, the company seems well placed for long-term growth.

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

Source: 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: The stock is currently inclined towards its 52-weeks low price of $2.500, offering a decent opportunity for accumulation. We have valued the stock using an EV/Sales 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 some premium to its peer median EV/Sales (NTM trading multiple), considering the company’s decent performance in H1FY21, expected production growth in coming years, and robust balance sheet.  We have taken peers like St Barbara Ltd (ASX: SBM), Northern Star Resources Ltd (ASX: NST), Resolute Mining Ltd (ASX: RSG), etc. Considering the company’s decent performance in H1FY21, growing reserve base, recent acquisition of 30% interest in Tropicana, modest outlook, current trading level, and valuation, we give a “Buy” rating on the stock at the current market price of $2.660, up by 0.377% as on 1 June 2021.

RRL Daily Technical Chart, Data Source: REFINITIV

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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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