Chaarat Gold Holdings Ltd (LON: CGH)

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.

On 04 April 2022, the Company expects to release FY21 results.

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.
• Kyzyltash Project Update: The drilling for obtaining core for metallurgical testing of Kyzyltash had already begun. Furthermore, the metallurgical test results are expected from SGS Lakefields by late Q2 2022.

Gold Industry Dynamics

• Growth Catalysts: Gold price would be supported by several factors such as rising inflation worldwide, market volatility associated with Russia-Ukraine geopolitical tensions, and robust demand from central banks and jewellery.
• Gold ETF: Meanwhile, Gold ETF had witnessed an year-on-year drop of around 5% to 3.57 kilo tonnes during 2021. While the Asset under management declined year-on-year by almost 9% to USD 209 billion at the end of 2021. The losses of 2021 were dominated by North American funds.
• Challenges: Gold price will face two key challenges during FY22 - higher nominal interest rates and a potentially stronger dollar.

 (Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,905.00) is sustaining above the 20-days exponential moving average of USD 1,868.20, indicating an upside direction for the commodity. At the same time, the MACD line has given the bullish crossover against the signal line.

Key Risks 

• 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.
• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine can continue to weigh on the equity market.

Key Fundamental and Shareholders Statistics of Chaarat Gold Holdings Ltd.

Andersson (Martin) is the most significant shareholder as it holds nearly 311.49 million shares as of 31 December 2021.          

FY21 Production Highlights (for the 12 months ended 31 December 2021 as of 09 February 2022)

(Source: Company Filings)

• Robust Production: The overall production witnessed a substantial improvement of around 7.50% during FY21. Moreover, the gold production volumes remained around 18.9% ahead of the prior year levels.
• Fatalities: CGH reported a Lost time injury frequency rate ("LTIFR") of 0.74 (per one million hours worked) for FY21 against 0.37 in 2020.

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

(Source: Company Filings)

• Top-Line Business: The increased production, including third-party ore, drove revenue higher by around 61% to USD 48.1 million during H1 FY21.
• Turnaround into Profitability: 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.
• Balance Sheet: 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.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 28 February 2022, at 09:43 AM GMT, CGH’s shares were trading at GBX 18.04, down by around 1.31% against the previous day closing price. Stock 52-week High and Low were GBX 31.48 and GBX 17.10, respectively.

On a daily chart, the stock price is sustaining between the lower Bollinger band and middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Also, the 14-RSI at around 41.56 indicates that the stock is approaching the oversold territory, which suggest trend reversal in the near term.

On a YTD basis, CGH’s stock price has delivered a negative return of ~6.92%, and it has outperformed the FTSE AIM All-Share index (benchmark index) with a return of negative 15.33% and FTSE All-Share Precious Metals & Mining index (benchmark sector) with a return of negative 17.77%.

Valuation Methodology: Price/Earnings Approach (FY21E) (Illustrative)

Business Outlook

The Company has shown a robust top-line & bottom-line business performance during H1 FY21. Moreover, the Company’s FY21 overall production remained 10% ahead of the guidance with a solid year-on-year increase in the gold production. Meanwhile, CGH has anticipated FY22 production of Kapan mine ranging from 50 koz to 53 koz. The management would remain focused on exploring debt financing opportunities for the Tulkubash project and seek to conclude it by the second half of 2022. Overall, the Company aimed to raise production capacity and generate long term returns for the shareholders.

Considering the solid fundamentals, positive industry dynamics, robust production, decent guidance, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Chaarat Gold Holdings Ltd at the current price of GBX 18.04 (as of 28 February 2022 at 09:43 AM GMT), with lower-double digit upside potential based on 40.28x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

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 unfavorable movement in the stock prices.

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