Chaarat Gold Holdings Ltd (LON: CGH) – Remarkable year-on-year growth of around 21% in Q1 FY21 production.

Chaarat Gold Holdings Ltd (LON: CGH) is an FTSE AIM All-Share listed Company, which is engaged in gold mining. Moreover, CGH owns Kapan operating mine in Armenia and the Tulkubash & the Kyzyltash Gold Projects in the Kyrgyz Republic. Headquartered in London, the Company operates with around 1,000 employees located in the UK, US, Russia, Kyrgyzstan, and Armenia. CGH expects to produce around 50k ounces of gold per year over the next decade.

(Source: Company presentation)

Growth Prospects

• Investment agreement with Çiftay: On 21 June 2021, the Company had entered into an investment agreement with Tulkubash mining contractor, Çiftay, to simplify the structure of the partnership by replacing an existing joint venture agreement.
• Encouraging results for the Tulkubash Feasibility Study: CGH had projected the first gold from Tulkubash during H2 FY23 due to longer than expected COVID-19 related delays and political turbulence. Furthermore, the average annual gold production would be around 95,190 ounces, and silver production would be about 140,940 ounces.
• Accretive Capital Raising: CGH had a proven track record of accretive capital raising with continued access to financing markets. Moreover, the Company had shown a substantial reduction of net debt from USD 64.5 million as of 31 December 2020 to USD 12 million driven by a funding package completed in February 2021.

Key Risks

• Environmental Risk: The Company may face reputational damage arising from environmental hazards associated with the activities.
• Financial Risk: Several financial risks associated with fluctuation in the foreign exchange & interest rates, availability of adequate working capital, and credit defaults.
• Volatile commodity price: The high volatility in gold, silver, and zinc price could have an adverse impact on the top-line revenue of the Company.
• Principal Risks: The performance can be significantly impacted by the principal risks of lack of exploration success, failure to grab new venture opportunities, lack of health and security policies.

Gold Industry Dynamics

• Global gold ETFs had shown a marginal inflow of around 2.9 tonnes during June 2021 after showing a healthy inflow during May 2021.
• The inflow into North American and Asian Funds got offset by outflows from European funds.
• The global Asset under Management stood at 3,624 tonnes, around 7% lower than the October 2020 record of 3,909 tonnes.
• Large government stimulus tends to support gold as it can be used as a hedging instrument against inflation and currency debasement. Moreover, the European Central Banks needed to see higher core inflation before tightening the policy and changing the outlook.
• Gold price recently surged to a four-week high after U.S. Federal Reserve Chair Jerome Powell had hinted of an economic recovery.

Overall, Gold Future price had recently shown an uptick driven by economic recovery hopes, weaker US dollar, and lower bond yields. However, there is a high risk of the Fed’s rate hike expectations.

 (Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price is sustaining above the 20-days exponential moving average of USD 1,809.00, indicating an upside direction for the commodity. The momentum indicator RSI (14-period) is trading ~51.13 level. Moreover, the MACD line remained above the signal line, indicating positive momentum in the commodity price. The next important support level is at USD 1,750.00. 

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 299.86 million shares as of 30 June 2021.   

Q1 FY21 Operational Update (as of 26 April 2021)

(Source: Company result)

• CGH had shown robust growth of around 21% in production from 13,353 gold equivalent ounces in Q1 FY20 to 16,174 gold equivalent ounces during Q1 FY21.
• The standalone EBITDA contribution had increased from USD 2 million in Q1 FY20 to USD 6.9 million for Q1 FY21.
• The All-in-sustaining cost ("AISC”) remained USD 1,024 /oz during Q1 FY21, while it was USD 1,074 /oz for an equivalent period of the prior year.
• The project financing remained on track to close in May 2021.

FY20 Financial & Operational Highlights (for the twelve months ended 31 December 2020, as on 08 April 2021)

(Source: Company result)

• Driven by commodity prices and increased production, CGH had reported significant growth of around 12.5% in revenue during FY20.
• On the profitability front, the Company had witnessed a positive turnaround and reported group EBITDA of around USD 9.3 million for FY20, while it was negative USD 12.8 million for FY19.
• With regards to the balance sheet, CGH had strengthened the cash position as it stood at around USD 31.2 million as of 01 March 2021 after the successful fund-raising activity completed in February 2021.
• The total FY20 production stood at 58.20 koz of gold equivalents, an increase of around 6% from the prior year.

Financial Ratios (FY20)

Share Price Performance Analysis

 (Source: REFINITIV; Analysis done by Kalkine Group)

On 19 July 2021, at 12:30 PM GMT, CGH’s shares were trading at GBX 20.88, down by around 4.22% from the previous day closing price. Stock 52-week High and Low were GBX 42.00 and GBX 20.88, respectively.

From a technical perspective, a 14-day RSI of ~38.82 is inching towards the oversold zone, indicating an upside potential in the stock price. Moreover, the stock is hovering around the lower Bollinger band, indicating an upside potential in the stock price.

Over the last five years, CGH’s stock price had delivered a positive return of around 155.91%, while the FTSE AIM All-Share index (benchmark index) had produced a return of about 67.20%. 

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

Business Outlook Scenario

CGH had produced a strong Q1 FY21 on the operational front. Moreover, the Company remained on track to deliver 57 koz (“kilo ounces”) of gold equivalents in 2021. Furthermore, the third-party ore supply would remain stable during the remainder of 2021. The financial performance during H1 FY21 would be expected to remain significantly ahead of H1 FY20, considering several factors like higher-grade areas, constant third-party ore supply, and increased commodity prices. Meanwhile, the East Flank drilling campaign had begun during May 2021, with a resource statement expected to release by the end of 2021. Overall, the key areas of focus of CGH would be to raise funds for the Tulkubash project and refinancing of the convertible loan notes.

Considering the progress of exploration activities, improvement in profitability, modest revenue growth, decent balance sheet, strong liquidity profile, strong production growth during Q1 FY21, 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 20.88 (as on 19 July 2021 at 12:30 PM GMT), with lower-double digit upside potential based on 8.34x Price/NTM cash flow (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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