Chaarat Gold Holdings Ltd (LON: CGH): On track to achieve the FY21 production target of 57,000 gold equivalent ounces

Chaarat Gold Holdings Ltd (LON: CGH) is an FTSE AIM All-Share listed Company, focused on gold mining. Moreover, CGH owns Kapan operating mine in Armenia and the Tulkubash & the Kyzyltash Gold Projects in the Kyrgyz Republic. The Company had anticipated producing around 50k ounces of gold per year over the next decade.

(Source: Company presentation)

Growth Prospects

• Accelerated Progress of Tulkubash Project: The Bankable feasibility study had shown encouraging project economics for the project. Moreover, the exploration programmes begun in May 2021 progressed well within budget and under the targeted timelines. Meanwhile, the project is expected to deliver the first gold by the second half of 2023.
• Appointment of new Chief Executive Officer (“CEO”): CGH had appointed mining veteran Mike Fraser as the new CEO. Moreover, he will join the Board with effect from 17 January 2022.
• Kyzyltash Project Update: The drilling for obtaining core for metallurgical testing of Kyzyltash had already begun. Furthermore, the testing would start in late 2021.
• Improved All-In-Sustaining Cost ("AISC"): CGH had shown a decline in AISC from USD 1,076 per ounce in H1 FY20 to USD 1,063 per ounce during H1 FY21.

Key Risks

• Increase in Injury Case Rate: The Recordable injury case rate (per one million hours worked) rose to around 1.43 during H1 FY21 when compared with 0.70 for H1 FY20.
• Failure to Discover Substantial Reserves: The failure in discovering substantial reserves could adversely affect the CGH’s future performance as exploration and development are capital-intensive activities.
• Financial Risk: CGH is exposed to the financial risks associated with fluctuation in the foreign exchange & interest rates, availability of adequate working capital, and credit defaults.
• Increase in US Dollar & Rising Treasury Yields: The strengthening of the US dollar and rise in the treasury yields may create pressure on the gold price.

Gold Industry Dynamics

• The Central Banks held around 35,527 tonnes of gold as of July 2021, approximately 17.6% of the above-ground gold stock.
• The geopolitical uncertainty and prolonged lower interest rates had made gold strategically important for the central banks.
• The Federal Reserve hinted of tapering to begin sooner than expected by December 2021. Moreover, the tapering would take US Dollar out of the market and put pressure on the gold price.
• Nonetheless, the jobless claims numbers released last week went up for the third week in a row and reignited the hopes of delay in tapering.
• Meanwhile, the critical US jobs data releasing by the end of this week would provide more clarity on the timeline of bond tapering.
• Global gold ETFs had shown a net outflow of around 22.4 tonnes during August 2021, equivalent to USD 1.30 billion, after showing a marginal inflow during June 2021 and July 2021.
• The global Asset under Management stood at 3,611 tonnes during August 2021, equivalent to USD 211 billion, around 0.6% lower than the prior month.

 (Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,758.30) is sustaining between the lower Bollinger band and the middle Bollinger band, indicating an upside direction for the commodity. The momentum indicator RSI (14-period) is trading at ~46.31 levels. 

Now, we will analyze the Key Fundamental Statistics & Shareholding Pattern of Chaarat Gold Holdings Ltd.

Andersson (Martin) is the most significant shareholder as it holds nearly 305.31 million shares as of 30 September 2021.        

H1 FY21 Financial & Operational Highlights (for six months ended 30 June 2021 as of 09 September 2021)

(Source: Company result) 

• The increased production, including third-party ore, drove revenue higher by around 61% to USD 48.1 million during H1 FY21.
• The Company had witnessed a favourable turnaround in profitability as it reported a profit after tax of USD 1.4 million in H1 FY21 compared to a loss after tax of negative USD 13.5 million for the H1 FY20 period, supported by the improved operating performance at Kapan and lower overhead costs.
• With regards to the balance sheet, CGH had increased the cash balance from USD 5.90 million as of 30 June 2020 to USD 24.6 million as of 30 June 2021.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

  (Source: REFINITIV; Analysis done by Kalkine Group)

On 04 October 2021, at 09:15 AM GMT+1, CGH’s shares were trading at GBX 22.00, down by around 4.35% from the previous day closing price. Stock 52-week High and Low were GBX 33.90 and GBX 20.20, respectively.

From a technical perspective, the MACD line remained above the signal line, indicating an upside potential in the stock price. Moreover, the stock is hovering between the lower Bollinger band and middle Bollinger band, indicating an upside potential in the stock price. Meanwhile, the 14-days RSI stood at ~44.17.

Over the last three months, CGH’s stock price had delivered a positive return of around 3.91%, while the FTSE AIM All-Share index (benchmark index) had produced a return of negative 2.70% and the FTSE All-Share Industrial Metals & Mining index generated a return of negative 11.96%. 

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook

After witnessing robust top-line & bottom-line business performance during H1 FY21, CGH remained on track to deliver 57 koz (“kilo ounces”) of gold equivalents in 2021. Meanwhile, the East Flank drilling campaign had progressed well according to the schedule. The management would remain focused on exploring debt financing opportunities for the Tulkubash project and seek to conclude it by the end of 2021. In addition, CGH is also looking for alternative debt refinancing opportunities with respect to the approximately USD 26 million debt outstanding from the 2021 Convertible Bonds due on 31 October 2021. Overall, the Company aimed to raise production capacity and generate long term returns for the shareholders.

Considering the favourable turnaround in profitability during H1 FY21, modest revenue growth, improved cash balance, decent exploration pipeline, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Chaarat Gold Holdings at the current price of GBX 22.00 (as on 04 October 2021 at 09:15 AM GMT+1), with lower-double digit upside potential based on 8.96x Price/NTM cash flow per share (approx.) on FY21E cash flow per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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