Silver Lake Resources Limited

SLR Details

Acquisition of Harte Gold Corp: Silver Lake Resources Limited (ASX: SLR) is an explorer and producer of gold and gold/copper concentrate in Western Australia. It operates segments of Mount Monger operations and Deflector operations. 

• On 21 February 2022, SLR completed the acquisition of Harte Gold Corp (“Harte Gold”, ASX: HRT). It now holds ~100% interest in the Sugar Zone mine and related ~81,287-hectare land holdings in Northern Ontario for a final consideration of ~US$102 million.
• On 21 February 2021, SLR issued ~17.66 million shares for ~$30.60 as the consideration for acquiring an aggregate ~2.0% NSR (net smelter royalty) to be paid by HRT on production from the Sugar Zone mine and on the complete Sugar Zone property.
• HRT reported a closing cash position of ~C$6.5 million, ~C$10.3 million of payables balance, and no debt.
• As per the announcement on 31 January 2022, the Ontario Superior Court of Justice approved SLR’s bid to acquire Harte Gold Corp. as per the CCAA (Companies’ Creditors Arrangement Act) (Canada).
• On 8 December 2021, SLR signed a subscription agreement to purchase Harte Gold Corp. (TSX: HRT) and entered a contract to provide a C$10.8 million debtor-in-possession loan (the DIP Loan) to HRT in a proceeding as per the CCAA.

Share-Buy Back Program: The SLR Board recently approved for an on-market buy-back of shares for up to 10% of shares on issue in the next 12 months. Under the program, SLR plans to buy-back ~912.48 million shares from 24/2/2022 - 23/2/2023.

1HFY22 Results (Ended December 2021):

• SLR reported gold sales of ~126,718 ounces (oz) gold equivalent in 1HFY22 versus ~130,354 oz in 1HFY21.
• The 1HFY22 EBITDA stood at ~$157.6 million compared to ~$160.1 million in 1HFY21 at a consistent EBITDA margin of ~51%.
• The NPAT declined to $44.5 million in 1HFY22 relative to ~$65.8 million in 1HFY21, due to higher scale of the Deflector operations and increase in depreciation and amortisation (D&A) charges in the period.
• The group’s gold production for 1HFY22 stood at ~128,956 ounces, up by ~8% YoY.
• SLR held ~$277.9 million cash and bullion as of 31 December 2021 depicting an underlying cash build of ~$40.1 million and ~$101.9 million related outflows due to the acquisition of Harte Gold Corp.

Key Metrics Highlights, 1HFY22 Vs 1HFY21; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of new exploration targets, correct resource estimation, accrual of synergies from acquisitions. It faces volatility in gold prices, demand, cost estimates, and production. 

Outlook:

• SLR plans to initiate a strategic review of operations, and growth potential at the Ontario based Sugar Zone mine and the associated landholdings package.
• The company is well placed to deliver gold sales guidance of ~235,000 - ~255,000 ounces for FY22. The copper sales are estimated at ~600 – ~1,000 tonnes at an AISC ranging from $1,550 - $1,650 per ounce.

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: The stock of SLR gave a positive return of ~32.71% in the past six months and a positive return of ~29.81% in the past year. The stock is currently trading above the 52-weeks’ average price level band of $1.265 - $2.050. The stock of SLR has a support level of ~$1.600 and a resistance level of ~$2.200. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price with a correction of mid double-digit (in % terms). The company might trade at a slight discount than its peers,  considering the decline in financial performance of 1HFY22, and the risks of acquisition, exploration, and resource estimation on projects.  For this purpose of valuation, a few peers like Ramelius Resources Ltd (ASX: RMS), Panoramic Resources Ltd (ASX: PAN), AngloGold Ashanti Ltd (ASX: AGG) have been considered. Considering the current trading levels, decent returns in the past months, the indicative downside in valuation, and associated key business risks, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $1.835, as of 21 February 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

SLR 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.

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