Hochschild Mining PLC

Hochschild Mining PLC (LON: HOC) is a FTSE 250 index quoted Mining Company, which focuses on gold and silver deposits.

Upcoming Event: On 19 January 2022, HOC expects to release production results for Q4 FY21.

Rationale for Valuation – SPECULATIVE BUY at GBX 118.80

• Clarification from Peruvian Government: HOC unveiled based on its discussion with senior members of the Cabinet and representatives from the mining industry that, Inmaculada and Pallancata mines would continue to operate without uncertainty.
• Solid Production: The gold production witnessed a year-on-year rise of around 49%, and the silver production had shown a year-on-year increase of about 21% during Q3 FY21.
• Strong Fundamentals: The top-line revenue had demonstrated solid growth, while the net cash position witnessed a tremendous improvement during H1 FY21.
• Positive Technical Stance: From a technical standpoint, the 14-day RSI (~33.84) is around the oversold territory, while the stock price is trading close to the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples: On a forward 12-month basis, valuation metrics – EV/Sales, EV/EBITDA, Price/Cash Flow, and Price/Book are quite undervalued against the median of the Basic Materials industry.

Key Risks

• Gold Price Volatility: The sluggishness in gold prices due to US dollar strengthening and rising US Treasury Yield can impact the Company’s financial condition.
• Surge in UK Inflation: The UK inflation reached a 10-years high as it surged by around 4.2% for the 12 months ended October 2021. It may cause a sooner-than-expected interest hike.

Recent News

• Acquisition: On 30 November 2021, HOC agreed to acquire the outstanding stake in Amarillo at a price of C$0.40 per share in cash, which shall enhance the Company’s portfolio.
  

Q3 FY21 Production Highlights (for the three months ended 30 September 2021, as on 26 October 2021)

 (Source: Company Results)

• Strongest Quarter: The Company had managed to deliver the strongest quarterly performance during Q3 FY21.
• Robust Guidance: Moreover, HOC remained-on track to meet annual FY21 production ranging from 360,000 to 372,000 gold equivalent ounces, equivalent to 31-32 million silver equivalent ounces.
• Decent Net Cash: The Company had net cash of around USD 64 million as of 30 September 2021.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion 

HOC displayed a favorable turnaround in profitability during H1 FY21. Moreover, the Company has substantial cash reserves to pursue value-accretive acquisition opportunities. Furthermore, HOC has a considerable brownfield programme scheduled for FY21 and attractive optionality in Greenfield to generate substantial shareholder return. The stock made a 52-week High and Low of GBX 274.20 and GBX 68.25, respectively. 

Considering the resilient financial performance, operational recovery, healthy balance sheet, reiterated guidance, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Hochschild Mining PLC at the closing market price of GBX 118.80 (10 January 2022), with lower double-digit upside potential based on 10.92x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Chaarat Gold Holdings Ltd

Chaarat Gold Holdings Ltd (LON: CGH) is a FTSE AIM All-Share listed Gold Mining Company with operating assets in Armenia and other development stage assets in the Kyrgyz Republic.

Investment Rationale – SPECULATIVE BUY at GBX 19.02

• Gold Price Dynamics: Gold bounced back over US$1,800 mark as the rising omicron coronavirus cases, surging global inflation, and weak economic data continued to be a savior for gold prices.
• Financial Flexibility: On 21 October 2021, CHG secured the extension regarding maturity of the convertible loan notes 2021 until 31 October 2022, which shall provide continued support to pursue organic growth plans.
• Guidance Remained Intact: Despite operational uncertainties, Chaarat remained on track to deliver 57 kilo-ounce of production in FY21.
• Technical Indicator: From a technical standpoint, 14-day RSI (~41.47) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bolling Bands.

Risk Assessments

• Regulatory Risk: The pending discussion with government on their new metals export regulation impacted the EBITDA in Q3 FY21.
• Gold Price Volatility: The sluggishness in gold prices due to US dollar strengthening and uncertain demand outlook can impact the Company’s financial condition.

Recent News

• Encouraging Update: On 16 November 2021, CGH announced that the Tulkubash 2021 drilling programme was completed on time and in budget with 4,835 metres of drilling in 33 drill holes.

Q3 2021 Operational Update (for the quarter ended 30 September 2021, as on 29 October 2021)

(Source: Company Website)

• Resilient Performance: Following the strong performance in H1 FY21, results were impacted in July 2021 due to lower grades and fleet availability. However, the performance revived back in August 2021, and it returned to run-rate performance in September 2021.
• EBITDA Contribution: During Q3 FY21, the preliminary unaudited standalone EBITDA contribution stood at US$2.6 million vs US$6.4 million in Q3 2020, reflecting a 60% reduction due to new metals export regulation.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Conclusion

Gold prices remained vulnerable to rising US Dollar and Treasury Yield, and it is moving in the tight range. The investors are now waiting for the upcoming inflation data and subsequent comments from the Federal Officials.

Adjacently, Chaarat remained on track to meet FY21 production guidance of 57 kilo-ounce (koz), while the continuous strong commodity price environment is expected to support revenues and benefit the financial performance. The stock made a 52-week high and low of GBX 31.48 and GBX 18.25, respectively.

Based on the reiterated production guidance, positive EBITDA, favourable commodity prices, and supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Chaarat Gold Holdings Ltd at the closing market price of GBX 19.02 (as on 10 January 2022) with lower double-digit upside potential based on 30.03x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.

Kalkine Media Limited, an affiliate of Kalkine Limited, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.