Company Overview: Silver Lake Resources Limited (ASX: SLR) is an Australian based intermediate gold producer that wholly owns and operates the Deflector and Mount Monger gold camps. The Deflector is a shallow, narrow vein, high-grade gold, and copper underground mine located in the southern Murchison region of Western Australia. The Mount Monger goldfield, which is located within the Kalgoorlie terrane subdivision of the Eastern Goldfields Province, produces gold from the Daisy Complex and Cock-eyed Bob underground mines.

SLR Details

Robust Production from Asset Base to Support Outlook: The strategy of Silver Lake Resources Limited focuses on maximising the value of its established asset base, investing in its highly endowed gold camp and embracing cost-effective, leading-edge exploration technologies at Mount Monger. SLR has a track record of generating decent cashflows. During H1FY21, the company reported operating cash flow of $160.5 million, significantly up from $99.2 million in H1FY20, supported by higher gold sales and higher average realised gold sale price. SLR recently completed its Deflector Carbon in Pulp (CIP) project and declared commercial production at Rothsay.

• Development of Deflector Region to Support Production and Free Cashflow: The ramp-up of Rothsay throughout and advancement of combined underground development at deflector region is expected to result in production growth and increased free cash flow in FY23 based on the prevailing gold price.
• Creating Operating Flexibility at Mount Monger: Supported by the investment in ore stockpiles and exploration success over multiple years, SLR is able to create operating flexibility at Mount Monger. At Mount Monger, SLR expects to maintain sales within the 5-year average range for FY22.
• Well-Funded to Support Growth: With a cash and bullion balance of $330 million and nil debt in its balance sheet (as of 30 June 2021), the company seems well placed to efficiently fund growth. In FY22, the company expects all its exploration and capital to be internally funded through operating cash flow.

Q4FY21 and FY21 Operational Highlights:

• Achieved FY21 Production Guidance: For the June 2021 quarter, the company reported total production of 64,302 ounces gold equivalent, taking the total FY21 production to 249,177 ounces gold equivalent, which is at the top end of the FY21 guidance range of 240,000 to 250,000 ounces.
• Rise in Ore Stockpiles: Over the June quarter, Mount Monger stockpiles increased by ~17,000 ounces to ~115,500 ounces, reflecting increased open pit ore production from Aldiss.
• Substantial Progress at Deflector Region: Over the year, SLR successfully constructed and commissioned the deflector Carbon in Pulp (CIP) circuit and associated infrastructure. It also commenced ore commissioning of the Deflector CIP circuit.
• Robust Balance Sheet: Over the June quarter, the company’s cash and bullion balance grew by $10 million to $330.2 million. At the end of FY21, the company had zero debt on its balance sheet.

H1FY21 Financial Highlights:

• Increase in Revenue: For H1FY21, the company reported revenue of $316.3 million, up 22% on H1FY20, reflecting a 4% increase in gold ounces sold and higher realised commodity prices in the period.
• Rise in EBITDA: The company reported EBITDA of $160.0 million in H1FY21, up 37% on H1FY20, driven by the increase in the total revenue.
• Increase in Capital Expenditure: Due to the ramp-up of growth projects in the Deflector region, the capital expenditure grew to $88.0 million in H1FY21, compared to $42.6 million in H1FY20.

Net Profit Trend (Source: Analysis by Kalkine Group)

Key Metrics: Due to the rise in the gold sales and higher average realised prices in H1FY21, the company saw improved profitability margins in the period, as compared to H1FY20. Gross margin for H1FY21 stood at 31.9%, up from 24.9% in H1FY20. Net Margin for H1FY21 stood at 20.8%, up from 17.2% in H1FY20. Current ratio for H1FY21 stood at 3.59x, up from 3.20x in H1FY20, demonstrating that the company has improved its ability to pay short-term obligations. Cash cycle for H1FY21 stood at 19.4 days, lower than 60.9 days in H1FY20. 

Liquidity Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 33.35% of the total shareholding, while the top four constitute the maximum holding. Van Eck Associates Corporation and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 10.72% and 6.41%, respectively, as also highlighted in the chart below:   

(Source: Analysis by Kalkine Group)

Resumption Of Full Operations at Daisy Complex: During June 2021, an underground contractor at the company’s Daisy Complex mine at Mount Monger was passed away. Following this, the underground operations at the Daisy Complex mine was temporarily suspended. As per the announcement on June 21, 2021, Daisy Complex returned to full operations.

Key Risks:

• Access To Skilled Labour Resources: The COVID-19 pandemic has impacted the company’s access to interstate and overseas labour resources on which it relies. This could impact the company’s productivity and costs.
• Commodity Prices: The company is exposed to the risks related to the fluctuations in the prices of gold and copper, as it could directly impact the company’s top line.

Outlook: For FY22, the company expects its gold sales to be in the range of 235,000 to 255,000 ounces and copper sales to be between 600 – 1,000 tonnes at an AISC range of A$1,550 to A$1,650 per ounce. At Deflecter, the FY22 gold sales is expected to be 10-20% higher than FY21, reflecting higher milled grades and increased recoveries. For Mount Monger, the company has set FY22 sales guidance at 125,000 to 135,000 ounces with an average AISC range of A$1,750 to A$1,850 per ounce. The company believes that its historical stockpile build, and mill constrained operating plan will provide it the operating flexibility to deliver FY22 guidance.

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

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 has corrected by ~16.12% and is trading lower than the average 52-week price level band of $1.280 - $2.645, offering an opportunity for accumulation. We have valued the stock using 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 a slight discount than its peers, considering the uncertainty surrounding the COVID-19 pandemic and its impact on the mobility of skilled labour, and uncertainty in capital expenditure plans. We have taken peers like OceanaGold Corp (ASX: OGC), Ramelius Resources Ltd (ASX: RMS), St Barbara Ltd (ASX: SBM), etc. Considering the company’s decent production performance in FY21, robust balance sheet, modest long-term production outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $1.520, as on 3^rd August 2021, 1:30 PM (GMT+10), Sydney, Eastern Australia.

SLR Daily Technical Chart, Data Source: REFINITIV

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.

Technical Indicators Defined:

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.

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