Company Overview: Silver Lake Resources Limited (ASX: SLR) is an ASX-listed gold producer, involved in the exploration, mine development, mine operations and the sale of gold and gold/copper concentrate in Australia. The company has 6 mines and 2 processing facilities in operation across its Deflector and Mount Monger operations. Mount Monger Gold Camp is the company’s cornerstone asset, located 50 km southeast of Kalgoorlie in the prolific Eastern Goldfields district of Western Australia. The company has a significant potential for organic growth from its portfolio of highly endowed and prospective tenement holdings.


SLR Details
 

  
Demonstrated Ability to Convert Operating Performance to Cash: Silver Lake Resources Limited (ASX: SLR) is a mid-tier gold company operating in the Eastern Goldfields and Murchison districts of Western Australia. The company is believed to have significant potential for organic growth from its portfolio of highly endowed and prospective tenement holdings. In the past five years, the company has executed a strategy to maximise the value of its assets, through investment to embed options to sustain growth, whilst generating cash. From 2015-2019, the company’s revenue has increased at a CAGR of 12.83% and its gross profit has increased at a CAGR of 34.44%. The company has established a 5-year track record of meeting guidance. Currently, SLR has a pipeline of high-grade development projects within its established mineralised corridors and infrastructure to support long-term production visibility and opportunities to increase mine grades at both operations. The company’s gold production in FY20 is expected to improve significantly, as compared to FY19.


Cash performance (Source: Company Reports)

The company has enjoyed a strong balance sheet and cashflow generations in FY19 and is well placed to progress the pipeline of advanced exploration targets. In January 2020, the company completed the acquisition of Egan Street Resources Limited, providing a near term development opportunity to introduce a new high-grade ore source to an upgraded Deflector processing facility. As a result of the company’s deliberate operating and investment strategy over the past four years at Mount Monger, Silver Lake Resources Limited now has a high value, near-term projects at Mount Monger including Easter Hollows, Santa and Tank, all of which have the potential to produce sustainable higher margin ounces over the next 12-24 months. Going forward, the company will continue to invest in exploration while focusing on advancing high priority targets at Mount Monger.

FY19 Results Highlights: In FY19, the company’s gold production increased by 6% to 166,695 ounces gold equivalent with gold sales of 171,322 ounces, up 13% on FY18. For the year, the company reported underlying NPAT of $16.7 million and operating cash flow of $80 million. At Mount Monger, Ore Reserves expanded by 24% to 492,000 ounces and at Deflector, Ore Reserves increased by 75% net of FY19 mine production to 343,000 ounces. Over the year, the company broadened its exposure to greenfield exploration opportunities through investments in Encounter Resources and Sarama Resources, both of which have significant landholdings in established mining provinces with proven mineral endowments.

Strong operating performance in H1FY20: In the first half of FY20, the company witnessed strong performance across its assets with strong underground grades at Mount Monger and record quarterly mill throughput at Deflector. For the period, the company recorded a net profit after tax of $44.6 million, which is around 1,014% higher than the previous corresponding period (pcp). Further, the company reported a 372% growth in EBITDA to $116.8 million. The revenue for the period totalled $258.8 million from the sale of 127,459 ounces of gold equivalent, significantly higher than the revenue recorded in pcp, reflecting the contribution of the Deflector Operation since its acquisition in April 2019 and improved commodity prices.


1H FY20 Financial results snapshot (Source: Company Reports)

In H1FY20, the company’s cashflow from operations increased by 232% to $99 million and cash and bullion grew by $55 million to $186 million. In addition, the company had $10.3 million of gold in circuit and concentrate on hand and listed investments of $5.2 million at period end.  As at 31 December 2019, the company’s hedge book stood at 154,532 ounces at average price of A$1,900/oz for delivery over 2H FY20 - FY22. The company’s cost of sales increased to $194.5 million in H1FY20, as compared to pcp, reflecting the inclusion of costs associated with the Deflector Operation.

From the three Mount Monger Mining Centres, the company mined 956,674 tonnes of ore at a grade of 3.2 g/t Au for 99,358 contained ounces. Mount Monger underground mine production in H1FY20, stood at 316,735 tonnes at 5.7 g/t for 58,337 ounces. During the half-year period, the company invested $13.2 million in exploration to advance the high-grade projects within established and proven mineralised corridors proximal to established infrastructure.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 34.67%. Paradice Investment Management Pty. Ltd. and Ruffer LLP hold the maximum interest in the company at 6.90% and 6.27%, respectively.
 

Top 10 Shareholders (Source: Thomson Reuters)

Expansion of Mineral Resources at Deflector: After completing the recent round of drilling results, a maiden Mineral Resources Estimate was announced for the Deflector South West mineralisation. Following the incorporation of results from an accelerated Silver Lake drilling program of 82 drill holes (26,333 metres), the company reported Maiden Deflector South West Mineral Resources Estimate (DSWMRE) of 634kt @ 14.9 g/t gold and 0.6% copper for 304,000 ounces gold and 3,600 tonnes copper. This DSWMRE represents a 300 metre strike extension immediately to the south and south west of the 2019 DMRE.


Maiden Mineral Resources Estimate (Source: Company Reports)

High-grade mineralisation identified at Mount Monger: The company’s exploration strategy at Mount Monger targets established and proven mineralised corridors to identify the next generation of mines proximal to existing mining and services infrastructure and to deliver extensions to existing mines. The company is focused on the progression of three discoveries through to advanced exploration projects: Easter Hollows at the Daisy Mining Centre; Santa at the Mount Belches Mining Centre; Tank South at the Aldiss Mining Centre. The recent drilling results of Mount Monger provide further support for these discoveries and the potential for extensions beyond known mineralisation. Recently, the ongoing Easter Hollows drilling returned outstanding high-grade assays, supporting the decision to commence development to access the Easter Hollows lodes between the 520RL and 660RL.

Additional Work at The Mount Monger Gold Operations: On 3rd April 2020, the company noted the announcement made by Macmahon Holdings Limited (ASX: MAH) wherein it confirmed that it has signed contracts with Silver Lake Resources for additional work at the Mount Monger gold operations in Western Australia. These contracts are expected to extend GBF’s tenure at Mount Monger to March 2023 and will add around $200 million to its order book.

A Quick look at Key margins: The company’s gross margin in H1FY20 stood at 24.9%, significantly higher than 11% reported in pcp. The EBITDA margin for H1FY20 was also higher than the pcp and stood at 41.4%. For the same period, the company reported a net margin of 17.2%, higher than the industry median as well as the margin reported in pcp. This demonstrates, the company’s improving profitability over the period.  The company has a current ratio of 3.2x, higher than the industry median of 1.7x, reflecting that the company is well positioned to pay its short-term obligations.  SLR has a ROE of 8.5%, higher than the industry median of 4.7%. 


 Key Metrics (Source: Thomson Reuters)

What to expect: At Deflector, the company is now focussed on infilling and extending mineralisation identified by the successful FY19 exploration program which extended Deflector style mineralisation to the south and west beyond the current Mineral Resource envelope. The recently acquired Rothsay project is now included in the Deflector Operation segment. It is expected that the ore from Rothsay will enhance financial returns from the upgrade of processing infrastructure at Deflector to support the growing operation and mine life. 

Guidance: Silver Lake Resources Limited recently increased its FY20 group sales guidance to 240,000 - 250,000 ounces gold equivalent at a lower AISC of A$1,300/oz – A$1,350/oz. From Mount Monger, the company expects its gold sales to be in between 135,000-140,0000 ounces gold equivalent and from Deflector the company expects the gold sales to be in the range of 95,0000-100,000 ounces.


FY20 Guidance (Source: Company Reports)


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

EV/Sales Multiple Approach (Source: Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the past six months, SLR's stock has provided a return of 53.19% to its shareholders. The stock is currently trading above the average of 52-week low and high of $0.715 and $1.795, respectively. In H1FY20, the company reported strong performance across both of its assets with solid revenue and NPAT growth. We have valued the stock using EV/Sales multiple based relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). For the purpose, we have taken peers like Ramelius Resources Ltd (ASX: RMS), Saracen Mineral Holdings Ltd (ASX: SAR) and Regis Resources Ltd (ASX: RRL), etc. Considering the company’s strong performance during H1FY20 performance, profitability margins, leverage ratios, increased guidance and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.510, up 4.861% on April 07, 2020.
 
 
SLR Daily Technical Chart (Source: Thomson Reuters)

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