Saracen Mineral Holdings Limited

SAR Details
 
Top-line and Bottom-line Growth over H1 FY20: Saracen Mineral Holdings Limited (ASX: SAR) is engaged in gold mining, processing & sales and mineral exploration. As on 23 March 2020, the market capitalization of the company stood at ~$3.28 billion. For the six months ended 31 December 2019, the company reported underlying net profit after tax (NPAT) of 80.2 million, up 84% on the previous corresponding period (pcp), driven by the 45% jump in sales revenue to $409.9 million and increased gold sales of 206,277 ounces at an average sale price of A$1,984/oz. Over the period, the company’s EBITDA increased by 71% to $178.6 million and statutory NPAT increased by 61% to $69.1 million.


Half Year Results Summary (Source: Company Reports)

Shift into the Next League of Gold Miners: In November 2019, the company acquired 50% Super Pit for US$750 million which allowed it to emerge with a vastly different production profile, cashflow projections and balance sheet. Saracen has shifted to another level in the league of global gold producers with the key benefits that bring for scale, asset diversity and cashflow. Recently, SRG Global Ltd announced that it has been awarded a significant five-year, circa $70m contract with Saracen to provide services at Saracen’s Thunderbox and Carosue Dam operations, both located in Western Australia. The services to be provided include specialist drill and blast services, explosives management and grade control drilling.

What to Expect: The company intends to maintain a conservative balance sheet and therefore it is placing a strong emphasis on debt reduction. Saracen is on track to meet its FY20 production guidance of +500,000oz. Moreover, its strong balance sheet supports aggressive exploration to continue growing Reserves beyond 7.0Moz. 

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation

Price to Earnings Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: For H1FY20, the company reported an EBITDA margin of 47.4% which is higher than the industry median of 36.2%. For the same period, the company has reported a net margin of 16.8% which is also higher than the industry median of 14.3%. Further, the company has a ROE of 7.2%, higher than the industry median of 4.7%. Considering the strong key metrics, strong half-year performance and decent outlook, we have valued the stock using the price to earnings based relative valuation method and arrived at a target price which is offering an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers like Northern Star Resources Ltd (ASX: NST), Regis Resources Ltd (ASX: RRL), Newcrest Mining Ltd (ASX: NCM), etc. Hence, we recommend a “BUY” rating on the stock at the current market price of $2.970 on 23 March 2020.

 
SAR Daily Technical Chart (Source: Thomson Reuters)
 

Evolution Mining Limited

EVN Details
 
Record Half-year Financial Results: Evolution Mining Limited (ASX: EVN) is involved in the exploration, mine development, mine operations and the sale of gold and gold/copper concentrate in Australia.  In the first half of FY20, Evolution reported a record half-year statutory net profit after tax of $147.2 million and record underlying net profit after tax of $149.1 million, underpinned by the half-year gold production from Evolution’s asset portfolio of 362,857 ounces at an All-in Sustaining Costs (AISC) of A$1,041 per ounce. On the back of strong half-year financial performance, the company declared a dividend of 7.0 cents per share fully franked, which is double than the dividend announced in pcp, reflecting the consistent dividend program of the company.


Dividend Summary (Source: Company Reports)

Expansion of Group Mineral Resources: On 12 February 2020, the company released the Annual Mineral Resources and Ore Reserves (MROR) estimates of its assets, which reflected the delivery of significant growth and further upside opportunity at its long life, low cost assets. As per the Resource statement, the Group Mineral Resources as at 31 December 2019 are estimated at 15.2 million ounces of gold and 934,000 tonnes of copper compared with the estimate at 31 December 2018 of 14.73 million ounces of gold and 982,000 tonnes of copper.

Board Changes: The company recently announced Board Changes, as per which, Mr. Colin Johnstone has resigned from the position of Non-Executive Director and Ms. Vicky Binns and Mr. Peter Smith have been appointed as Non-Executive Directors effective 1 April 2020.

Guidance: For FY20, the company expects to report a group production of around 725,000 ounces of gold with AISC expected to be in the range of AA$940 – A$990 per ounce. From Cowal, the company expects to have a Gold production of around 255 – 265koz. From Ernest Henry, it expects Gold production of 87.5 – 92.5koz and copper production of 19-21kt with AISC to be in between A$590 – A$540 per ounce.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation 

EV/EBITDA Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, (NTM: Next Twelve Months)

Stock Recommendation: As per ASX, the stock of EVN is trading close to its 52-week low of $3.04, proffering a decent opportunity for accumulation. For H1FY20, the company reported net margin of 16.4%, which is higher than the industry median of 14.3%. For the same period, the company reported Return of Equity of 6.1% which is higher than the industry median of 4.7%. The company has a current ratio of 2.15x which is higher than the industry median of 1.7x. This demonstrates that the company is better positioned to pay its short-term debts than its industry peers. Considering the strong H1FY20 results, decent guidance, decent liquidity position, and current trading levels, we have valued the stock using EV/EBITDA multiple based relative method and arrived at a target price which is offering an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers like Newcrest Mining Ltd (ASX: NSM), Northern Star Resources Ltd (ASX: NST) and Alkane Resources Ltd (ASX: ALK), and arrived at a target price which is offering an upside of lower double-digit (in % terms). Hence, we recommend a “BUY” rating on the stock at the current market price of $3.650, up by 0.829%, on 23 March 2020. 

 
EVN Daily Technical Chart (Source: Thomson Reuters)

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