Stocks’ Details

OceanaGold Corporation

Update on Philippines Legal Proceedings: OceanaGold Corporation (ASX: OGC) is a multinational gold producer with assets located in New Zealand, Philippines and the United States. The company’s assets include the Waihi Gold Mine and the Macraes Goldfield Mine in New Zealand; the Haile Gold Mine in the US and the Didipio Gold-Copper Mine located on the island of Luzon in the Philippines. The Governor of Nueva Vizcaya had issued an order to pause the operations at Didipio Mine pending renewal of the Financial or Technical Assistance Agreement (FTAA). In response to this, the company had filed an application in the Philippines Court in July 2019 as a temporary measure to allow interim operations of the Didipio Mine, however, as per social media, the Court of Appeals has now denied the application. If the Court has actually denied the application, the company has assured that it will continue to defend its right to operate the Didipio Mine while it completes the FTAA renewal process. Currently, the company is working with the National Government to finalise the renewal of the FTAA.

Q1FY20 Results Highlights: For Q1FY20, the company reported revenue of US$138.2 million with EBITDA of US$42.4 million. During the quarter, the company produced 80,707 ounces of gold at consolidated AISC of US$1,218 per ounce on sales of 91,388 ounces of gold. The gold production was down by 25% on Quarter-on-quarter basis, mainly due to planned lower production from Haile and Macraes. At the end of the March quarter, the company had a cash balance of US$177.4 million.

Q1FY20 Financial Summary (Source: Company Reports)

What to Expect: The company is advancing its organic growth projects, with first production from the Martha Underground expected in the Q2 FY21. Further, it is progressing the Waihi District Study which will highlight the initial value of the Waihi District. The company intends to release its June quarter results on 30 July 2020. The company has maintained its FY20 guidance, as per which, it anticipates total gold production to be in the range of 360,000-380,000 ounces at a consolidated AISC ranging from US$1,075- US$1,125 per ounce sold.

Key Risks: The company’s mining operations are subject to a number of risks and hazards, including environmental hazards; industrial accidents; labour disputes; catastrophic accidents; fires, etc. The continued risks associated with COVID19 could also impact the company’s operational performance in the short run. Further, the company’s mineral properties are subject to the risks inherent in operating in a foreign country.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the last three months, the stock of OGC has increased by 63.55% and is trading higher than the average of its 52-weeks trading range of $1.455 - $4.45. Currently, the company is focused on managing its near-term risks and planning for the long-term while investing in organic growth opportunities. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in percentage terms). For the purpose, we have taken peers like Northern Star Resources Ltd (ASX: NST), St Barbara Ltd (ASX: SBM), and Gold Road Resources Ltd (ASX: GOR). Considering the aforesaid facts, the company’s progress in advancing its organic growth projects, and FY20 guidance, we give a “Hold” recommendation on the stock at the current market price of $3.250, down by 7.143%, on 13 July 2020, owing to the update on Philippines Legal Proceedings.

Galaxy Resources Limited

Multi-year Offtake Extension with Yahua: Galaxy Resources Limited (ASX: GXY) is a global lithium company with a diversified portfolio of world-class lithium assets. On 13 July 2020, the company announced a three-year offtake extension with long term major customer Sichuan Yahua Industrial Group (Yahua) for a minimum of 120,000 dmt per annum of high-quality spodumene concentrate from Galaxy’s Mt Cattlin Operation. Yahua is going to buy another 30,000 dmt during the remainder of 2020. This agreement extension underpins GXY’s Mt Cattlin Operation as a reliable, high-quality product that is qualified in major lithium supply chains throughout China and Japan.

Sal de Vida Advances to Design Phase: On 7 July 2020, the company announced that it has advanced its lithium brine project, Sal de Vida into the design phase despite the impact of COVID-19 restrictions. The company has de-risked the project and has commenced the front-end engineering design (FEED) for the wellfield, brine distribution and ponds. The company is currently working on design and procurement work for the next expansion of the accommodation camp which will ultimately take the capacity to the final level required for both the construction phase and full-scale operations.

March Quarter Update: During the March 2020 quarter, the company reported production volume of 14,306 dry metric tonnes of lithium concentrate at a 6.06% Li₂O final product grade. The company processed 154,457 wet metric tonnes of ore during the quarter at a head grade of 1.03% Li₂O. As at 31 March 2020, the company was debt-free with cash and financial assets of US$129.6 million. In the June quarter, the company expects Lithium concentrate production volume to be between 25,000 – 30,000 dmt. The company expects to release its Q2 earnings release on 23 July 2020.

March Quarter Results (Source: Company Reports)

Key Risks: The company is exposed to foreign exchange risk on its financial assets and liabilities. The company holds various financial instruments that expose it to credit risk, liquidity risk and market risk. Further, the company is also exposed to risks relating to additional funding requirements, metal prices, exploration, development and operating risks, competition, production risks, regulatory restrictions, including environmental regulation and liability and potential title disputes.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Due to Covid-19 restrictions, the market conditions in the lithium sector have remained challenging, however, recently announced stimulus packages by different Governments are expected to accelerate the pace at which electric vehicles are adopted globally, which will create a surge in lithium demand. The company currently seems well-placed to execute its growth strategy and meet the expected lithium demand surge. The stock of GXY has corrected by 28.88% in the last six months and is inclined towards its 52-week low, offering a decent opportunity for accumulation. 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 percentage terms). For the purpose, we have taken peers like Pilbara Minerals Ltd (ASX: PLS), Altura Mining Ltd (ASX: AJM), and Mineral Resources Ltd (ASX: MIN). Considering the company’s operational progress in relation to the development of Sal de Vida project, its expected June quarter results, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the market price of $0.875, up by 6.061%, on 13 July 2020, owing to its announcement regarding multi-year offtake extension with Yahua.

St Barbara Limited

Q4 FY20 Production Update: St Barbara Limited (ASX: SBM) is a gold producer and explorer with a diversified portfolio of gold operations. In an update provided on 7 July 2020, the company informed that its FY20 consolidated gold production stood at 381,887 ounces, in-line with full-year guidance of 370,000 to 400,000 ounces. In the fourth quarter alone, the company produced 108,612 ounces of gold, reflecting a strong focus on Gwalia’s production profile and the positive impact of the Atlantic Gold operations. During Q4 FY20, the company generated net cash of $86 million, taking the full year cash at bank and term deposits to $406 million.

Q4 FY20 Production Update (Source: Company Reports)

SBM Confirms FY21 Horn Island Work Program: Last year in June, Advanced gold explorer, Alice Queen Limited (ASX: AQX) had entered into a joint venture (JV) with SBM in relation to the development of Horn Island JV, located in the Torres Strait, North Queensland. Recently, on 30^th June 2020, AQZ notified that SBM has confirmed plans to complete FY21 work program on the Horn Island JV, under which, a two-stage diamond drill program of up to 14 holes for 4,500m has been designed to test two DDIP high priority targets near the Horn Island gold resource.

What to Expect: The company is currently working to deliver on its current assets as it reviews its business and operating model to ensure an exciting future for St Barbara. The company currently maintains a strong focus on Gwalia’s production profile, Atlantic Gold Operation’s future pipeline of projects and a potential extended future for Simberi. On 29 July 2020, the company is expected to release a detailed report on Q4 FY20. This report will include production costs, cash flow details, FY21 guidance and an update on the Company’s growth projects. FY20 full-year results are expected to be released on 24^th August 2020.

Key Risks: The company is exposed to the risk of volatility in the gold price which can create revenue uncertainty. If the gold price suffers a significant decline, or the operations do not meet future production levels, there may be the potential for future impairment write-downs at any of the operations. Further, there is a risk that the company may not be able to deliver the amount of gold required under its hedging arrangements.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: SBM is in a decent financial position as all its operations continue to generate positive net cash flows. Over the last three months, the stock of SBM has increased by 44.62% on ASX and is inclined towards its 52-weeks high price of $4.055.  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 percentage terms). For the purpose, we have taken peers like Regis Resources Ltd (ASX: RRL), OceanaGold Corp (ASX: OGC), and Resolute Mining Ltd (ASX: RSG), etc. Considering the company’s decent June quarter production results, financial position, and expected increase in the valuation, we give a “Hold” recommendation on the stock at the market price of $3.590, down by 1.102% on 13 July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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