Company Overview: St Barbara Limited (ASX: SBM) is an experienced gold producer with mining operations in Australia, Canada, and Papua New Guinea (PNG). The company’s strategy is focused on diversifying the production base to create a portfolio of sustainable long-life operations. The company’s operations include - 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.

SBM Details

Long-term Outlook Supported by Production Related Improvements and Cost Reductions: 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 18 May 2021, the company’s market capitalisation stood at ~$1.45 billion. During the first half of FY21, SBM launched Building Brilliance program, an integrated company transformation program that will create sustainable value in everything the company does for its people, communities and its shareholders. Since its launch in September 2020, the program has delivered significant operational efficiencies and cost reductions.  From 2016 to 2020, the company’s sales revenue and EBITDA have grown at a CAGR of 7.92% and 3.25%, respectively.

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

Looking ahead, the company is focused on growing production from the Leonora Province and deliver brownfield projects in Simberi and Atlantic. SBM plans to maximise the value from its current operations through productivity improvements and cost reduction. Further, the company’s ongoing Building Brilliance Program is on track to deliver significant performance uplifts at its Atlantic and Gwalia operations. During the March 2021 quarter, the company had realised several production-related improvements, including a record milling month and improved gold recovery at Atlantic, and ‘filling the mill’ at Leonora. SBM expects this performance to continue in Q4FY21 as well, supported by excellent development rates at Gwalia and the early transition of Macmahon as the new underground mining contractor.

Decent Performance in March 2021 Quarter: During March 2021 quarter, the company achieved cost reductions and made decent progress with regards to its brownfield project pipeline. For the quarter, the company reported consolidated gold production of 82,303 ounces with AISC of A$1,649 per ounce. Over the quarter, the company sold 71,329 ounces of gold. As at 31 March 2021, the company had cash at bank of A$100 million and total debt of A$102 million.

Combined Quarterly Gold Production (Source: Company Reports)

Decent Growth in H1FY21 Underlying EBITDA: 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. For H1FY21, SBM reported total gold production of 162,660 ounces at a Group All-in Sustaining Cost of A$1,605 per ounce. Cash contributions from operations stood at $99.635 million in H1FY21, up from $87.095 million in the previous corresponding period (pcp). Statutory net profit after tax stood at $37.46 million in H1FY21. For H1FY21, the company has paid a fully franked interim dividend of A$0.04 per share.

H1FY21 Results (Source: Company Reports)

Key Metrics: Gross margin for FY20 stood at 50.4%, slightly 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%. Current ratio for FY20 stood at 4.41x, down from 10.07x in FY19.

Profitability Metrics & Liquidity Profile; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 38.37% 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 10.89% and 5.08%, respectively, as also highlighted in the chart below:

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

Simberi Sulphide Feasibility Study Highlights: SBM recently announced the results of the Simberi Sulphide Feasibility Study, which highlighted a robust project with decent financial returns. The Feasibility Study has indicated a life of mine average sulphide gold production of 160 koz per annum with an initial capital expenditure of US$170 million, including expansion capital. If compared to the 2020 Pre-Feasibility Study, the nameplate capacity of Sulphide plant increased from 2.7 to 3.0 Mtpa. Notably, the company’s Board has approved US$13 million of pre-investment capital for the Simberi Sulphide Project. The final investment decision is targeted for March 2022.

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.

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: SBM intends to grow its production by around 45% from 382 koz in FY20 to 535-570 koz in FY25. Under its Building Brilliance program, the company has made a detailed plan to deliver $80 to $120 million annual cash contribution by FY23. The company has recently revised its FY21 consolidated guidance to between 330,000 and 360,000 ounces, which is lower than the previous guidance of 370,000 to 380,000 ounces. From its Atlantic operations, the company expects the production to be in the range of 100,000 and 110,000 ounces and All-In Sustaining Cost (AISC) between A$958 and A$1,050 per ounce. SBM has reduced the production guidance of Leonora Operations from ~175,000 ounces to 150,000 and 160,000 ounces, mainly due to the lower grade in the short-term, based on mine position and timing. The FY21 guidance for Simberi operations is now forecasted between 80,000 and 90,000 ounces (previously 95,000 ounces), with AISC between A$1,790 and A$2,030 per ounce (previously A$1,720 and A$1,810 per ounce) as the operations are impacted by the ore availability.

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 18.68%. The stock is trading lower than the average 52-week price level band of $1.810 and $3.980, offering a decent opportunity for accumulation. We have valued the stock using the 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 peers, considering the decent performance in March 2021 quarter, ongoing cost reduction initiatives, and expected benefits from the Building Brilliance program. We have taken peers like OceanaGold Corp (ASX: OGC), Regis Resources Ltd (ASX: RRL), and Red 5 Ltd (ASX: RED). Considering the company’s diversified portfolio of gold operations, healthy balance sheet, ongoing focus on cost reduction, decent performance in March 2021 quarter, modest long-term outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the closing price of $1.865, down by 9.025% as on 18 May 2021, owing to the update regarding the downgrade in the FY21 consolidated production guidance.

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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