Capricorn Metals Ltd

CMM Detail

Commencement of Karlawinda Gold Project: Capricorn Metals Ltd (ASX: CMM) engages in gold exploration, development and project evaluation business in Australia and Madagascar. The market capitalisation of the company as of 23 June 2021 stood at ~$672.03 million. As per a recent announcement, the company has commenced commissioning at the Karlawinda Gold Project with all preparational activities. 

Q3FY21 Financial Performance: During the quarter, the company has spent $36.6 million on KGP development. CMM has spent $129.3 million in project development expenditure and estimate the development cost within the budget of $165-$170 million. Additionally, the company has recorded net cash used in operating activities at $37.609 million. The cash position of the company stood at $19.2 million in Q3FY21. 

Q3FY21 Cashflow from Operating Activities (Source: Company Reports)

Outlook: During the quarter, the company has strategically invested in DiscovEx Resources Ltd by placing $1.2 million shares in the company. It expects first gold production from the KGP project in the June 2021 quarter.

Key Risk: CMM is exposed to climatic risk, labour availability risk, logistic risk, technology risk and capital inadequacy risk. Therefore, the company should find alternative methods to mitigate these challenges.

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

Source: 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: As per a recent announcement, the company has appointed Mr Bernard De Araugo as a non-executive director who provides metallurgical consulting services to the processing services industry. The stock of CMM is trading above to its average 52-weeks’ levels of $1.300-$2.370. The stock of CMM gave a positive return of ~24.09% in the past three months and a negative return of ~3.09% in the past one week. On a technical analysis front, the stock of CMM has a support level of ~$1.70 and a resistance level of ~$2.06. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price with a correction of high single-digit (in % terms). We believe the company can trade at some premium to its peer median EV/Sales (NTM trading multiple), considering the strategic investment and expected economic recovery. For this purpose, we have taken peers such as Regis Resources Ltd (ASX: RRL), Dacian Gold Ltd (ASX: DCN), Westgold Resources Ltd (ASX: WGX), to name a few. Considering the current trading levels, recent rally in the stock price, labour availability and the key risks associated with the business, we suggest investors to book profits and give a 'Sell' rating on the stock at the current market price of $1.880, down by ~2.084% as on 23 June 2021.

CMM Daily Technical Chart, Data Source: REFINITIV 

Red 5 Limited

RED Details 

Business Update: Red 5 Limited (ASX: RED) deals in exploring, producing, and mining gold deposits and mineral properties in the Philippines and Australia. The market capitalisation of the company as of 23 June 2021 stood at ~$422.33 million. As per a recent announcement, the company has awarded the 16-year life-of-mine King of the Hills (KOTH) Gold Project to Macmahon Contractors Pty Ltd (Macmahon) which is a subsidiary of civil and mining contractor Macmahon Holdings.

Gas Supply Contract for Koth: The company has integrated for Gas Supply Agreement with Alinta Sales Pty Ltd (Alinta Energy) and Gas Transport Agreement with APA Operations Pty Ltd (APA). The gas supply agreement with Alinta Energy has an initial term of three years, commencing from March quarter of 2022, along with an option to extend the contract for a further period of two years.

Q3 FY21 Financial Performance Update: During the quarter, the company has recorded a total of 19,047 ounces of gold from Darlot Gold Mine, compared to 21,534 ounces in Q2FY21. RED has seen a decline in sales of gold at 19,011 ounces in Q3FY21 against 22,412 ounces in Q2FY21. The company has reported negative free cash flow used in operations at ~$6.9 million in Q3FY21. The company invested ~$2.5 million at Darlot and Great Western for growth exploration programs and paid $27.3m in KOTH construction activities. The company's cash in hand and bullion stood at $79.7 million as of 31 March 2021.

Q3FY21 Gold Production (Source: Company Reports) 

Outlook: The KOTH Mining Proposal has got approval from the Department of Mines, Industry Regulation and Safety (DMIRS) and expected work approval from the Department of Water and Environmental Regulation (DWER) for the Power Station construction in June.  

Key Risk: The labour availability, shortage of machine operators and truck drivers has impacted the mining activities and could lead to a delay in delivering products. Therefore, the company should look to secure skilled resources for operating underground and open-pit mines. 

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

Source: 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 Recommendations: As per a recent update, the company has provided revised production guidance for the Darlot Gold Mine, FY2021 to 74,000 – 78,000 ounces (previously 80,000 –85,000 ounces). The stock of RED gave a positive return of ~15.62% in the past one month and a negative return of ~43.34% in the past one year. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average EV/Sales (NTM trading multiple), considering the decline in sales and revised FY21 production guidance. For this purpose, we have taken peers such as Silver Lake Resources Ltd (ASX: SLR), Perseus Mining Ltd (ASX: PRU), to name a few. Considering the current trading levels and indicative valuation, healthy balance sheet, gas supply contracts and agreements and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.1825 (as mentioned in chart below).

RED Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: 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. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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