Company Overview: 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. The company also owns 100% of the Touquoy Mine and surrounding exploration tenements. The company’s strategy is focused on developing or acquiring gold deposits in order to diversify the Group’s production base to create a portfolio of sustainable long-life operations.

SBM Details

Outlook Supported by Productivity Improvements and Cost Reduction Initiatives: St Barbara Limited (ASX: SBM) is a gold exploration and production company with operations in Australia, Canada and Papua New Guinea. As on 20 April 2020, the company’s market capitalisation stood at ~$1.51 billion. Currently, the company is focused on maximising production at the lowest possible cost from its Gwalia, Simberi and Atlantic Gold operations. Through its Building Brilliance program, SBM intends to reduce costs at its operations while increasing throughput. SBM has a decent track record of producing gold from its operations and generating revenue. From 2016 to 2020, the company’s sales revenue has grown at a CAGR of 7.92%. Over the same period, the company’s EBITDA has grown at a CAGR of 3.25%.

5-Year Performance (Source: Company Reports)

Looking ahead, the company is focused on maximising the value from its current operations through productivity improvements and cost reduction. At Leonora, SBM plans to maximise mill throughput through operational improvements and low capital options. Moreover, SBM expects its Building Brilliance Program to deliver FY21 target cash contribution from productivity and cost reduction initiatives. At Atlantic, the improved shutdown planning is on track to deliver 30% reduction in mill downtime. With its diversified portfolio of gold operations, healthy balance sheet, ongoing focus on cost reduction, the company seems well-positioned to deliver sustainable returns to its shareholders.

Decent Growth in H1FY21 Underlying EBITDA: For the half-year ended 31 December 2020, the company reported total gold production of 162,660 ounces at a Group All-in Sustaining Cost of A$1,605 per ounce. During the period, the company saw record production at Atlantic Gold of 53,919 ounces. Cash contributions from operations stood at $99.635 million in H1FY21, up from $87.095 million in the previous corresponding period (pcp). One of the important milestones of H1FY21 was the successful acquisition of Moose River Resources Incorporated (MRRI) to consolidate 100% ownership of the Touquoy Mine and surrounding tenements. Underlying EBITDA for H1FY21 stood at $151 million in H1FY21, up 17% on pcp. Statutory net profit after tax stood at $37.46 million in H1FY21. As at 31 December 2020, the company had cash of $119 million and debt of $101 million. For H1FY21, the company has paid a fully franked interim dividend of A$0.04 per share.

H1FY21 Results Highlights (Source: Company Reports)

FY20 Results Highlights: For 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. 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.  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.

Gold production and AISC Trend (Source: Company Reports)

Key Metrics: Gross margin for FY20 stood at 50.4%, down from 51.5% in FY19. EBITDA margin for FY20 stood at 43.4%, down from 44.3% in FY19. Net margin for FY20 stood at 13.1%, down from 21.8% in FY19. Current ratio for FY20 stood at ~4.41x, down from ~10.07x in FY19.

Past 5-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 20.49% of the total shareholding while the top four constitutes the maximum holding. Van Eck Associates Corporation and LSV Asset Management are holding a maximum stake in the company at 3.87% and 3.25%, respectively, as also highlighted in the chart below:

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

Acquires 70% Interest in Lake Wells Gold Project: SBM recently acquired 70% interest in the tenements comprising the Lake Wells Gold Project following the satisfaction of the expenditure commitment under the Earn-In and Joint Venture Agreement with Australian Potash Limited (APC). APC and SMB will now work together to continue the exploration, development and mining of mineral resources on the project.

Appointed Macmahon as Underground Mining Contractor at Gwalia: On 3^rd March 2021, SBM announced that it has appointed Macmahon Holdings Ltd as the underground mining contractor at the Gwalia mine at Leonora Operations in Western Australia. The contract is initially for five-years period, however, SBM has an option to extend for a further three-year period. It is expected that the appointment of Macmahon will improve the performance of the Gwalia mine.

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: In FY21, the company is focused on delivering the Simberi Sulphide Feasibility Study for Board review, and advancing the Leonora Province plan, including regional exploration. Under its Building Brilliance program, the company has made a detailed plan to deliver $80 to $120 million annual cash contribution by FY23. The initiatives under Building Brilliance program have already started to drive improvements in operations efficiency and unit cost.

The company’s consolidated gold production in FY21 is expected to be between 370 to 410 koz with AISC of between $1,360 to $1,510/oz. From Atlantic, the company expects the production to be in the range of 100 to 115 koz. From Gwalia, the production is expected to be between 175 to 190 koz. The production from Simberi is expected to between 95 to 105 koz. The company’s exploration expenditure in FY21 is expected to be in the range of $30 – $35 million.

Annual Production Outlook (Source: Company Production)

Valuation Methodology: EV/Sales 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 SBM has corrected by 7.11%. The stock is trading lower than the average 52-week price level band of $3.980 and $1.910, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of $1.925 and resistance of $2.665. 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 a slight premium to its peers, considering the rising cash balance, decent production performance in H1FY21, and ongoing cost reduction initiatives. We have taken peers like OceanaGold Corp (ASX: OGC), Regis Resources Ltd (ASX: RRL), and Resolute Mining Ltd (ASX: RSG). Considering the company’s decent performance in H1FY21, healthy balance sheet, modest outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the closing price of $2.09, down by 2.337% as on 20 April 2021.

SBM 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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