Fresnillo Plc - Continued Focus on Costs to Maintain Healthy Margins

Fresnillo Plc (LON: FRES) is a Mexico-based leading precious metals company. The Company produces mainly gold and silver from mines.

Q1 Production Highlights (29^th April 2020)

(Source: Company Website)
 
Led by a lower volume of ore processed at Saucito and a lower ore grade at San Julián Disseminated Ore Body (DOB), the silver production for the current quarter decreased by 4% to 13.2 moz (including Silverstream) against the previous quarter (Q4 FY19), while it was flat (+0.7%) as compared with the corresponding period of the last year (Q1 FY19). The gold production was reduced by 6.7% in Q1 FY20 against the Q1 FY19, driven by a lesser extent, lower ore grade at Herradura and at San Julián (veins) and a lower volume of ore processed at both Herradura and Noche Buena. Due to higher ore grades at both Fresnillo and Ciénega, the quarterly by-product lead production surged by 14.7% against the same period last year (1Q19). The quarterly by-product zinc production rose by 4.2% against the first quarter of 2019, driven by higher ore grades at both Ciénega and Fresnillo, partially offset by a lower ore grade at San Julián (DOB).

Share Price Performance

Daily Chart as of June 5^th, 2020, after the market close (Source: Refinitiv,Thomson Reuters)

Fresnillo Plc shares closed at GBX 717.40 at the time of writing after the market close on 5^th June 2020. Stock's 52 weeks High is GBX 921.20 and Low is GBX 456.51.

From the technical standpoint, 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the stock price.

Valuation Methodology

*Peers: Antofagasta Plc, Hochschild Mining Plc, South32 Ltd and Polymetal International Plc.
*Currency Exchange rate taken for 1 USD = 0.78943
 
Growth Catalysts
Fresnillo Plc has a decent business model, and strong liquidity position makes it an attractive value proposition among the minerals and mining sector. The company is also continuously improving and reshaping via acquisitions to increase its operational performance.

Conclusion
The company has shown a decent production performance in the first quarter of 2020. In Q1 FY20, the gold and silver production was in line with the expectations. The Group’s development pipeline is progressing well, construction of new mines is on track. FRES is also working on dilution control and raising development rates which could improve the overall performance of the business. In the unprecedented crisis created by COVID-19, Fresnillo continues to keep its guidance (full-year production) under constant review.

Based on the above rationale and supported by valuation done using the above method, we have given a "HOLD" recommendation at the closing price of GBX 717.40 (as on 5^th June 2020).

Highland Gold Mining Ltd – World class Asset Base, with Strong Management Team

Highland Gold Mining Limited (LON: HGM) is a gold mining company which consolidates, acquires and develops a portfolio of gold mining projects with higher quality in the Russian Federation.

Recent News
On 2^nd June 2020, Highland Gold Mining announced the signing of an agreement for the sale of Kayen (Kayenmivaam) licence for USD 15 million of cash consideration with additional royalty.

Operating Results for Q1 Financial Year 2020
On 22^nd April 2020, Highland Gold Mining released an update on operating results for Q1 FY2020 ending 31^st March 2020. The company produced 63,482 oz of gold and gold equivalent in the first quarter of FY2020 from four operating mines versus 71,961 oz in Q1 FY2019. The group’s sales and production were not impacted by covid-19 and realised an average gold price for US$1,593/oz for the period. HGM drew down a long-term debt of USD 60 million from open credit lines at 3.36 per cent of an average interest rate of in March. The net debt as on 31^st 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. The group expect its total production to be in between 290,000 oz to 300,000 oz of gold and gold equivalent in FY2020.

Share Price Performance

Daily Chart as of June 5^th, 2020, after the market close (Source: Refinitiv,Thomson Reuters)

Highland Gold Mining Ltd shares closed at GBX 223.20 at the time of writing after the market close on 5^th June 2020. Stock's 52 weeks High is GBX 282.20 and Low is GBX 150.00.

From the technical standpoint, 14-day RSI is currently hovering in an oversold zone, and stock price can increase further.

Valuation Methodology
 

*Peers: Polymetal International Plc, Kaz Minerals Plc, Centamin Plc and Petropavlovsk Plc.

*Currency Exchange rate taken for 1 USD = 0.78944.
 
Growth Catalysts
The Company is investing in expansion projects, which would enhance its production rates. The company is looking to maximise portfolio output by deploying cost minimising programs.

Conclusion
Despite the decline in the production for the first quarter of the financial year 2020. 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 also helps in the operational performance. The recent increase in the gold prices in the global markets will improve financial performance and bring operational stability. The group expects its total production to be in between 290,000 oz to 300,000 oz of gold and gold equivalent in FY2020.

Based on the above rationale, we have given a “Speculative Buy” recommendation at the closing price of GBX 223.20 (as on 5^th June 2020), with lower double-digit upside potential based on 2.60x NTM EV/Sales (approx.) on FY20E sales (approx.).

Resolute Mining Ltd – Low Cost and High-Quality Output Across Africa and Australia

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

Quarterly Update for the Period Ended 31st March 2020 – Reflecting Solid Production Result
As per the production and sales, the Gold poured increased by 5% to 110,763oz at an AISC of US$1,007/oz (December 2019 Quarter: 105,293 oz at an AISC of US$ 1,419/oz). Syama and Mako deliver 99,717oz at an AISC of US$918/oz. In the March 2020 Quarter, the gold recovered increased by 15% to 119,683oz as compared with the previous quarter (December 2019: 104,433oz). 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 company had completed US$300 million senior debt refinancing and ~A$194 million equity raising, with higher cost debt repaid. Some more facts reported as on 31st March 2020 -the cash and bullion of US$96 million; total borrowings of US$308 million; and net debt of US$212 million. The repayment was funded by a successful A$194 million equity raising comprising two-tranche placement and share purchase plan launched in January 2020. 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.

Share Price Performance

Daily Chart as of June 5^th, 2020, after the market close (Source: Refinitiv,Thomson Reuters)

Resolute Mining Ltd shares closed at GBX 58.66 at the time of writing after the market close on 5^th June 2020. Stock's 52 weeks High is GBX 119.50 and Low is GBX 29.50.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

*Peers: Ariana Resources Plc, Centamin Plc, Trans-Siberian Plc and Caledonia Mining Corporation Plc
*Currency Exchange rate taken for 1 AUD = 0.55006.
 
Growth Catalysts
 
In Syama, the strengthening sulphide recoveries, Tabakoroni Underground PFS (Pre-Feasibility Study), and oxide resource growth. In Mako, the group has sustained high margin production. Strengthen financial position with surplus cash to be used for deleveraging.
 
Conclusion
 
In light of COVID-19, the company’s mining and processing continuing as normal and had not reported any cases of COVID-19 across sites or offices. In the fiscal year 2019, the Group’s revenue has increased by about 50 per cent as compared to the fiscal year 2018. The company, in recent time, has generated strong positive operational cash flows while investing in growth and exceeded production guidance. In line with the development expectations, the company expects to increase production at lower costs and reported that exploration programs in Mali continued to report decent results. The company is focusing on generating free cash flow from its operations and optimising its asset portfolio, which would contribute to delivering value for shareholders. The exciting exploration results are representing the potential for organic growth opportunities in the upcoming periods.
 
Based on the above rationale, we have given a “Speculative Buy” recommendation at the closing price of GBX 58.66 (as on 5^th June 2020), with lower double-digit upside potential based on 10.00x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken fromRefinitiv, Thomson Reuters.
*The “Speculative Buy” recommendation is valid for the current price as covered in the report as on 8th June 2020.

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