Condor Gold Plc

Condor Gold Plc (LON: CNR) is an UK based AIM and TSX listed gold exploration and development Company. It operates projects in Nicaragua. Further, the Company has a large commercial reserve on its 100% owned La India Project in Nicaragua (La India).

Rationale for Valuation – Speculative Buy at GBX 37.00

• In the last six months, the Company has delivered a sparkling return of ~54.90%, which was higher as compared to the FTSE AIM All-Share Index.
• The debt-equity ratio was nil in the past three years, reflecting that CNR is less leveraged as compared to the industry.
• The increase in gold prices in the global markets will improve financial performance and bring operational stability.
• Condor operates a new mine at La India by making significant progress with land acquisition, engineering and other technical studies.
• From the technical standpoint, shares are trading well above the short-term support level of 200-day (GBX 36.00) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The financial performance is highly dependent on the Gold price, and the Gold market is cyclical and sensitive to the economic changes and numerous factors, which are beyond the Company’s control.
• The Global COVID-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation cost.
• Similarly, fluctuation in exchange rates can impact revenue and operating costs.

Recent News

On 27 October 2020, the Company announced that it had commenced a ground investigation program, which consists of 58 test pits and 20 geotechnical drill holes on the Water Retention Reservoir, TSF (Tailings Storage Facility) and Processing Plant site at La India Project, Nicaragua.

Financial Highlights (for the six months to 30 June 2020 (H1 FY20), as on 14 August 2020)

(Source: Company Website)

• In June 2020, the Company had raised £6.6 million by way of a private placement of new ordinary shares.
• In the six-month period, CNR has made good progress and operate a new mine at La India.
• Turning to the financial results for H1 FY20, the profit stood at £968 thousand after currency translation differences.
• During the period, the gross proceeds of £7.7 million were raised via a private placement and exercises of warrants.
• On 30 June 2020, the cash and cash equivalents stood at £7.5 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

According to the World Gold Council data on the exchange-traded fund (ETF), gold-backed ETFs have delivered a strong flow for consecutive nine months in September 2020. The gold was trading at US$1,882.35/oz on 29 October 2020 (before the market close). On 10 July 2020, the Company announced the purchase of 400,000 ordinary shares by Jim Mellon (a Director), which is at the price of 38 pence per ordinary share. Condor has 1.12M oz gold open pit Mineral Resources permitted for extraction.

From open pit material, CNR is targeting production of 120,000 oz gold for 7 years, which compares to the PFS (Pre-Feasibility Study) of 79,300 oz gold per annum for the same period. The objective stays to begin site preparation and place a deposit on a processing plant by the end of 2020.

Overall, the Company is in a good position to emerge stronger in the future. Moreover, the fundamentals of the Gold stocks are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption. The stock made a 52-week low and high of GBX 18.00 and GBX 62.00, respectively.

Based on the decent growth prospects, we have given a “Speculative Buy” stance on Condor Gold at the current market price of GBX 37.00 (as on 29 October 2020 before the market close at 9:50 AM GMT).

Resolute Mining Ltd

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

Rationale for Valuation – Speculative Buy at GBX 42.54

• As per valuation metrics, EV/Sales Value multiple of the Resolute Mining Ltd is currently lower as compared to the corresponding multiple of the Metals and Mining sector.
• The Company is strongly supported by new and existing investors as well as from banking syndicate, including existing financiers.
• It has shown a continued strong performance from Syama oxide and Mako operations. Also, the Company witnessed recovery from the Syama sulphide operations.
• For FY20, the Company is expected to meet the guidance, with costs at the upper end and gold production at the lower end of the revised guidance range.
• From the technical standpoint, 90-day RSI stood at ~40.22, which is supporting the upside movement.

Key Risks

• The inability to integrate the acquired business successfully could lead to inefficiencies and can impact prospective returns.
• The growth trajectory can also be impacted by various factors, such as increasing freight rates, and operational risk regarding production stoppages or equipment failures.
• The scale and continually evolving nature of COVID-19 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 in FY20.

Trading Update (for the period ended 30 September 2020, as on 22 October 2020)

(Source: Company Website)

• During the September quarter, the Company's performance reflects the consistent performance of the Mako Gold Mine in Senegal. However, it also reflects the impact of industrial action at the Syama Gold Mine in Mali in the September quarter.
• The Company delivered a consistent safety performance with 1.12 of Total Recordable Injury Frequency Rate (TRIFR).
• Led by the impact of industrial action at Syama, the total gold production decreased by 19% to 87,303 ounces (oz) as compared to the June quarter.
• The Company has a decent balance sheet, with cash and bullion of US$106 million and net debt of US$234 million on 30 September 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

For FY20, the costs are expected at the higher end of guidance of US$980 per ounces to US$1,080 per ounces and production is expected at the lower end of the guidance of 400,000 ounces to 430,000 ounces. In Syama and Mako, the Company’s operations are performing well and have achieved throughput and recovery at forecast levels in October 2020. The Company has a robust liquidity profile to meet the short-term obligations in the near term. Resolute completed a number of balance sheet strengthening activities, which have improved the Company's financial position. Meanwhile, the Company’s operations were in line with the guidance and produced 218,000 ounces of gold. The stock made a 52-week low and high of GBX 29.50 and GBX 81.07, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Resolute Mining at the current market price of GBX 42.54 (as on 29 October 2020, before the market close at GMT 10:07 AM), with lower double-digit upside potential based on 8.00x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.).

*All forecasted figures and Peers/Industry information have been taken from Refinitiv, Thomson Reuters.

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