Trans-Siberian Gold PLC (LON: TSG) – Increased production guidance despite reporting 28.6% reduction in debt.

Trans-Siberian Gold PLC (LON: TSG) is a FTSE AIM All-Share listed Company, which delivers stable gold production and high-grade mining operations from its wholly-owned Asacha Gold Mine in Far East Russia. It also holds a license for the exploration and development of one of the largest gold fields in South Kamchatka, the Rodnikova deposit. The Group aims to become a premier mid-tier gold producer with a strategy based on three pillars – pursue selective accretive M&A opportunities, utilising the stable platform for future growth, and enhance existing operations.

 In January 2021, the Company expects to provide its production update for Q4 FY20.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

During Q3 FY20, the Group reported continued progress and stable gold production. Subsequently, the operational performance was robust. Moreover, the Company has a high liquidity position and low leverage with net debt/equity of 0.36x (as of 30 June 2020), reflecting the ability to pursue upcoming market opportunities. Furthermore, FY20 has been a year of transition to East Zone from the Main Zone of the Asacha Gold Mine, which holds significant potential to process high-grade ore and generate attractive free cash flow from operations. In terms of dividend, the Company has a proven track record of returning considerable capital to its shareholders. It has returned $40 million to shareholders so far.

However, the Company is also exposed to various risk and uncertainties. It is exposed to financial risk with fluctuations in Gold price and exchange rates. Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow. The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs.

Industry Outlook Dynamics

In November 2020, gold-backed ETFs and similar products reflected first net outflows in the past 12 months and second-largest monthly outflows ever. As the gold price has its worst monthly move of -6.3% to US$1,763/oz, Gold ETF holdings also plunged 107 tonnes in November. The Gold prices lingered below US$1,900 per oz since lack of additional US fiscal stimulus kept the US dollar firm. However, the Covid-19 pandemic has led to unparalleled money printing and low-interest rates globally, which shall put gold on track for registering its best year in a decade as it appeals investors as a hedge against currency debasement and inflation. In Q3 FY20, global Gold demand dipped by 19% year-on-year to 892 tonnes, as consumer sentiments remained depressed. This represented the lowest quarterly demand since Q3 2009. The YTD demand was 2,972 tonnes, which was 10% lower against the same period in 2019.

In terms of growth catalysts, the uncertainties arising from US-China trade tension and Brexit, followed by dented economic indicators after Covid-19 outbreak, has further encouraged investors to reconsider Gold as a traditional hedging tool in times of turmoil. Moreover, the economic downturn has devalued the Forex market, which is compelling investors to switch to more tangible metal resources. Furthermore, central banks have been adding to the gold reserves since the financial crisis.

Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment.

The chart below shows the performance of Gold Future Prices over the past 3 years, which was trading at US$1,832.60/oz on 18 January 2021, reflecting around 38.99% growth over the last 3 years.

 (Source: Refinitiv, chart created by Kalkine Group)

However, the scale and continually evolving nature of coronavirus pandemic are causing unprecedented disruption to the supply chain. It can lead to reduced gold production as small-scale refineries and fabricators also halted their operations during H1 2020. With travel restrictions, logistical and supply concerns can deplete the dealer inventories for coins and small bars. Moreover, the supply from gold producers can decline as only US$4.4 billion was spent on exploration in 2019 against US$11.8 billion in 2012. Consequently, there were only three gold discoveries in 2019 as compared to 42 major gold discoveries in 2000. In short, there would be less gold, if a lesser amount is invested on exploration. Also, the allocation to gold could go down if real interest rates rise dramatically.

Recent Developments

On 6 January 2021: The Company announced that it had reported 2 fatalities at its Asacha Mine area, in which two employees died. Therefore, it has suspended almost all mining operations at Vein 25.

2020 Production Guidance Update (as on 15 December 2020)

• The Company has increased its 2020 production guidance and expects to be in the range of 44,000-45,000 ounces of gold doré.
• In the 11 months ended 30 November 2020, the Company has produced approximately 40,297 ounces of gold doré.
• Despite a challenging year, the Company has made a significant progress in 2020, with the East Zone of the Asacha Mine transition.

Q3 and 9M Production & Operations Update (ended 30 September 2020, as on 22 October 2020)

(Source: Company Website)

• In the first nine months of 2020, the Company has achieved record revenues of $51.3 million, with the gold prices continued strong performance.
• In Q3 FY20, the gold revenue surged by 6.5% QoQ to USD 21 million, with an increase of 9.2% QoQ in average realised gold price. While, in 9M FY20, gold revenue surged by 16.7% YoY.
• The Company has reported a stable average gold grade at 7.4 g/t in Q3 and 6.8 g/t in 9M.
• Total gold doré production increased to 11,570 oz in Q3 as compared with the previous quarter (Q2 FY20: 11,419 oz) However, in the first nine months of 2020, total gold doré production decreased to 29,848 oz. as compared with the corresponding period of the last year.
• In 9M FY20, the Gold recovery rate remained stable at 94.2% (on a YoY basis).
• During the period, it has shown 1 minor lost-time injury.
• Overall, in Q3 FY20, the Company's operational performance was broadly in-line with the previous quarter, with stable gold production.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 29 September 2020)

(Source: Company Website)

• During the period, the Company has made solid explorational progress, with completing the 25,000-metre drilling programme at the Asacha licence area.
• In H1 FY20, the revenue was in line with 2019 and delivered record performance, with gold sales of USD 29.1 million and silver sales of USD 0.8 million.
• The adjusted EBITDA increased to USD 15.4 million as compared with the corresponding period of the last year (H1 FY19: USD 14.4 million).
• The Board has declared an interim dividend per share of 8 USD cents (around USD 7 million). It has a proven track record of returning capital to the shareholders.
• The Company has shown a strong balance sheet, with high liquidity and a 28.6% YoY decrease in debt.
• During the period, it has generated an attractive free cash flows from the operations, with Gold dore production of 18,278 oz , Silver in dore production of 47,466 oz and Refined gold production of 17,149 oz.
• Moreover, the fundamentals of the Company are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

Financial Ratios

Share Price Performance Analysis

On 18 January 2021 (before the market close, at 8:50 AM GMT), Trans-Siberian Gold PLC shares were trading at GBX 107.45, down by 0.97% against the previous day closing price. Stock 52-week High was GBX 134.50 and Low of GBX 37.00.

From a technical perspective, 14-day RSI (38.72), 100-day SMA (102.40) and 100-day EMA (103.40) is currently supporting an upside move, which means the stock price could increase in the short term.

In the last one year, Trans-Siberian Gold PLC’s stock return has outperformed the benchmark index and the sector as it has delivered a positive ~86.96% return as compared to ~20.33% return of FTSE AIM All-Share Mining index and ~23.50% return of FTSE Gold Mines Index.

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

Business Outlook

TSG has produced 40,297 ounces (oz) of gold in the 11 months ended 30 November 2020, and therefore, it has raised its production guidance for FY20 and expects to deliver 44,000 and 45,000 ounces of gold doré. It reflects a testament to the grades and quality amidst a challenging operating environment. Moreover, by the end of H1 FY20, cash balance was also increased by 31% year-on-year, while its net debt/EBITDA metric remained conservative against peer group of gold producers. Therefore, the Company looks forward to a promising year ahead.

However, as Gold has moved sharply higher in the past few months, the price may experience some consolidation in the near term. Nevertheless, if quantitative easing and other factors encourage investors to treat Gold as money, the potential for Gold price outperformance is extremely high over the next five to ten years. Therefore, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

 (Source: Presentation, Company Website)

Considering a strong performance in Q3, increased FY2020 production guidance, decent dividend yield, operational conditions improving towards normal levels, robust financial & liquidity position, higher profitability margins, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Trans-Siberian Gold at the current price of GBX 107.45 (as on 18 January 2021, before the market close at 8:50 AM GMT), with lower-double digit upside potential based on 6.93x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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