Highland Gold Mining Ltd (LON: HGM) – Stockpiling Ore Production in Advance to Mitigate any Potential Peril

Highland Gold Mining Ltd (LON: HGM) is a FTSE AIM 100 listed Gold Mining Company, which consolidates, acquires, and develops a portfolio of gold mining projects with higher quality in the Russian Federation.

The Company will organize its annual general meeting on 30^th July 2020.

Recent News
2^nd June 2020: For the consideration of USD 15 million plus a royalty, the Group decided to dispose of early-stage gold exploration property, Kayenmivaam.

Operating Results – Q1 FY20 (for the three months ended 31 March 2020)
In this update, the Company stated that its sales and production were unaffected by the COVID-19 pandemic. During the first quarter, 63,482 oz of gold and gold equivalent was produced by the Company through its four operating mines. The Group’s sales and production were not impacted by covid-19 and realised an average gold price for USD 1,593/oz for the period. The net debt as on 31st March 2020 stood at USD 254 million and gross debt of USD 326 million. During the period, the Company appointed Michael Monaghan as COO (Chief Operating Officer) with an experience of more than 4 decades.

Share Price Performance
 
Daily Chart as on 18^th June 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

HGM’s shares were trading at GBX 228.00 on 18^th June 2020 (before the market close at 8.10 AM GMT+1), which was down 0.44% against the last day closing price. Stock's 52 weeks High is GBX 282.20 and Low is GBX 150.00.

From the technical standpoint, 3 days, 9 days, and 14 days relative strength index of the stock was favourable, and the price could rise further from the current trading level.

Valuation Methodology

*Peer: Kaz Minerals PLC, Petropavlovsk PLC, Polyus PAO, and Centamin PLC.

*1 USD = 0.796851 GBP
 
Growth Catalysts and Risk Assessments
The Company is not facing any material disruption to its supply chain due to the remote location of its mines. Moreover, it is investing in expansion projects, which would enhance its production rates. The Company is looking to maximise portfolio output by deploying cost minimising programs.

However, the Company witnessed a 19 per cent decline in head grade at the processing plant in Q1 FY20. Moreover, the directors identified certain risk related to COVID-19 which can lead to complete production shutdown, perils to employee health, and delay in supply of materials and equipment.

Conclusion
Overall, the Group did not witness any impact on sales due to the Covid-19 pandemic. The Company realised an average gold price for US$1,593/oz for the period and raised long-term debt of USD 60 million at lower interest cost. The Group appointed Michael Monaghan as COO (Chief Operating Officer), which will provide strength to the management team and helps in the operational performance. The recent increase in the gold prices in the global markets will improve financial performance and bring operational stability. As per guidance for FY20, the Company is projecting a total production of gold and gold equivalents to be in the range of 290,000 oz to 300,000 oz. Moreover, the Company is stockpiling two to three months of ore, to mitigate any risk to production.
 
Based on the above rationale, we have given a “Speculative Buy” recommendation at the current price of GBX 226.60 (as on 18th June 2020, before the market close at 8.32 AM GMT+1), with lower double-digit upside potential based on 3.74x NTM EV/Sales (approx.) on FY20E sales (approx.).
 
 
Resolute Mining Ltd – Operating with Solid Production Result

Resolute Mining Limited (LON: RSG) is a Perth, Australia-headquartered gold producer, with operations in Africa and Australia, spanning across three gold mines.

Recent News
On 11^th June 2020, the Company said it announced a Prospectus, which has been published and approved by the UK Financial Conduct Authority.

Quarterly Update (for the period ended 31^st March 2020)
On 20^th April 2020, the Company provided the quarterly update, with a solid production result for the March 2020 Quarter, while achieving important debt refinancing objectives and completed the Ravenswood asset sale.As per the production and sales, the Gold poured increased by 5% to 110,763oz at an AISC (All-In Sustaining Cost) of US$1,007/oz (December 2019 Quarter: 105,293 oz at an AISC of US$ 1,419/oz). Gold sales increased by 12% to 102,008oz at an average realised gold price of US$1,407/oz (December 2019 Quarter: 90,731oz at an average realised gold price of US$1,421/oz).

The Group has been strongly supported by new and existing investors. The agreement with Taurus in January 2020 to buyout existing 1.1 per cent royalty over Mako removes encumbrance and secures full benefit of Mako’s positive cashflows for Resolute.

Resolute Mining had completed US$300 million senior debt refinancing and ~A$194 million equity raising, with higher cost debt repaid. Some other facts - the cash and bullion of US$96 million; total borrowings of US$308 million; and net debt of US$212 million.

Share Price Performance

1-Year Chart as at June-18-2020, before the market close (Source: Refinitiv, Thomson Reuters)

Resolute Mining’s shares were trading at GBX 57.98 on 18^th June 2020 (before the market close at 8:05 AM GMT+1), which was up 4.17% against the last day closing price. Stock 52 weeks High and Low are GBX 119.50/GBX 29.50.

From the technical standpoint, its shares were trading well above its short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology 

*Currency Exchange rate taken for 1 AUD = 0.547874.

Valuation Metrics

(Source: LSE)

As on 29^th May 2020, Price to Book multiple of the RSG was 1.2x, which was lower as compared with the Mining industry. Hence, it is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Catalysts and Key Risks
In Mako, the Group has sustained high margin production. In Syama, the strengthening sulphide recoveries, Tabakoroni Underground PFS (Pre-Feasibility Study), and oxide resource growth were visible. Strengthen the financial position with surplus cash to be used for deleveraging. The COVID-19 mayhem poses a challenge and inherent risks to the international mining companies.

Conclusion
In the latest update, the Group said it had started 2020 with a robust operating result, delivering 100,000 ounces from Mako and Syama at a combined AISC of US$918/oz.The March 2020 Quarter signifies a turning point in the business with the completion of the sale of the Ravenswood Gold Mine. It resulted in a lower cost profile and record tonnages achieved from the Syama Underground Mine. The Company has also generated strong positive operational cash flows, while investing in growth projects and exceeded production guidance. However, the Group is focusing on generating free cash flow from its operations and optimising its asset portfolio, which would contribute to delivering value for shareholders.

Based on the above rationale, we have given a “Speculative Buy” recommendation at the current price of GBX 57.98 (as on 18th June 2020, before the market close at 8:00 AM GMT+1), with lower double-digit upside potential based on 4x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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