Company Overview: St Barbara Limited (ASX: SBM) is a gold exploration and production company with operations in Australia, Canada and Papua New Guinea. Incorporated and listed in 1969 as Endeavour Oil, the company was initially focussed on mineral exploration, however, following a change in management in July 2004, the company shifted its goal to be an Australian based gold producer and explorer. The company’s assets include Leonora Operations in Western Australia, Atlantic Gold Operations in Nova Scotia, Canada and Simberi Operations in Papua New Guinea. The company also owns 100% of the Touquoy Mine and surrounding exploration tenements.

SBM Details

Growth Backed by Diversified Portfolio of Gold Operations: St Barbara Limited (ASX: SBM) is a gold production company with a diversified portfolio of gold operations including Leonora Operations in Western Australia, the Simberi operations in Papua New Guinea, and the Atlantic Gold Operations in Nova Scotia, Canada. As on 19 January 2021, the market capitalisation of the company stood at ~$1.56 billion. The company is focused on actively adding, managing and progressing assets in all phases of the ‘growth pipeline’ from exploration through feasibility and construction to production. Further, the company intends to maximise production at the lowest possible cost from Gwalia, Simberi and Atlantic Gold.

Over the period of 2016 to 2020, the company’s top-line has witnessed a CAGR of 7.92%. Over the same period, the company’s EBITDA has grown at a CAGR of 3.25%.

Sales and EBITDA 5-Year Performance (Source: Company Reports)

The company is currently focused on replenishing its resources through near-mine exploration while building options for future Greenfield growth. At its Simberi Operations, SBM is pursuing sulphide project feasibility study. Further, the company will prioritise development at its Gwalia operations in order to allow more operational areas to support greater production rates in the medium-term. Looking ahead, SBM is focused on progressing its integrated company transformation and identifying and prioritising a range of productivity improvements and cost-savings. With its growth projects, conservative financial management, relentless cost focus, etc., the company seems well-positioned to deliver sustainable returns to shareholders.

FY20 Result Highlights: During the year ended 30 June 2020, the company produced 381,887 ounces of gold at an All-in Sustaining Cost (AISC) of A$1,369 per ounce. During the year, the company was focused on investigating highly prospective near mine targets at Simberi and targets on the surrounding islands, continuing the deep drilling program at Gwalia and regional exploration in Australia. One of the important milestones of FY20 was the completion of the acquisition of Atlantic Gold in Nova Scotia, Canada, which opened up significant opportunities for the company in North America. Revenue for FY20 stood at $827.72 million, up from $650.32 million in FY19, driven by the higher average realised gold price and the inclusion of Atlantic Gold’s operations.  For FY20, SBM maintained total fully franked dividend of A$0.08 cents per share, consistent with previous years. The final dividend of $0.04 cents per share was paid on 29 September 2020.

Gold production and AISC Trend (Source: Company Reports)

Key Ratios: Gross Margin for FY20 stood at 50.4%, higher than the industry median of 38.3%. Further, EBITDA margin and net margin stood at 43.4% and 13.1%, respectively, in FY20. Current ratio for FY20 stood at 4.41x, higher than the industry median of 1.74x, demonstrating that the company is well-equipped to pay its short-term obligations.

Key Ratios Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 34.67% of the shareholding. Van Eck Associates Corporation and L1 Capital Pty Ltd. hold the maximum interest in the company at 10.89% and 5.00%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Launched Building Brilliance: The company recently launched Building Brilliance, an integrated company transformation program that will create sustainable value in everything the company does, for its people, communities and its shareholders. Through Building Brilliance, the company is identifying opportunities to lift performance by safely increasing productivity, reducing costs and empowering its people to ultimately increase the value delivered to employees, communities and shareholders. SBM plans to deliver A$80 million to A$120 million annual cash contribution by FY23. SBM has already delivered results in mining productivity at Simberi, development at Leonora and processing rates at Atlantic.              

Q1FY21 Result Highlights: For Q1FY21, the company reported total gold production of 72,990 ounces at an All-In Sustaining Cost (AISC) of A$1,711 per ounce. From Atlantic Gold, the company reported production of 27,226 ounces, down from 29,209 ounces in the previous quarter, due to lower mill grades and slightly lower recovery. From Gwalia operations, the company reported production of 22,625 ounces with Average mined grade of 8.1 g/t Au. Simberi gold production for Q1FY21 stood at 23,139 ounces. Operational cash contribution stood at A$27 million in Q1FY21. During the quarter, the company repaid A$200 million debt. SBM ended the quarter with cash at bank of $93 million and total debt of A$105 million.

Quarterly Production Results (Source: Company Reports)

Key Risks: SBM is exposed to the risk related to the volatility in the gold prices as it creates revenue uncertainty. Further, the company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. As the company’s operations are located in different jurisdictions, its operations are exposed to the risk associated with the changes in the laws or rules in any of the jurisdictions and its financial performance may also get impacted by the change in the foreign currency exchange rates.

Outlook: During Q2FY21, the company was focused on unlocking value in its organisation, improving safety, delivering cost savings and improving its productivity. Currently, the company is in the process of translating identified opportunities into a comprehensive implementation plan. The company intends to reduce its costs while increasing throughput and recovery through Building Brilliance program. Further, the company is focused on executing its brownfield expansion projects. SBM also plans to acquire assets with a scalable production outlook and capture portfolio synergies.

The company intends to grow its production by 40% from 382 koz in FY20 to 520-570 koz in FY25. For FY21, the company expects its total gold production to be in the range of 370,000 to 410,000 ounces at an AISC of between A$1,360 and A$1,510 per ounce. The company intends to maintain production at Atlantic and Simberi while steadily increasing production at Gwalia. From Atlantic Gold, SBM expects its FY21 production to be between 100,000 and 115,000 ounces with AISC between A$955 and A$1,100 per ounce. From Gwalia, the company expects FY21 production to be in the range of 175,000 and 190,000 ounces with AISC of between A$1,435 and A$1,560 per ounce. SBM’s sustaining capital expenditure is expected to be in the range of $97 million and $115 million in FY21. In terms of capital management, SBM is focused on maintaining dividends and utilising available franking credits.

Annual Production Outlook (Source: Company Production)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last three months, the stock of SBM has corrected by 23.46% and is trading below the average of its 52-week price band of $1.615 and $3.980, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$2.02 and resistance of ~$2.981. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). For the purpose, we have taken peers like Regis Resources Ltd (ASX: RRL), OceanaGold Corp (ASX: OGC), Gold Road Resources Ltd (ASX: GOR), etc. Considering the company’s diversified portfolio of gold operations, ongoing integrated transformation program, FY21 guidance, long-term outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.250, up by 1.351%, as on 19 January 2021.

SBM Daily Comparative Chart (Source: Refinitiv, Thomson Reuters)

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