After nailing the call on Detour Gold to begin the year (top 2019 pick), we’ve sharpened our pencils to find other potential candidates for the gold consolidation wave.
We’re focusing on the intermediate gold miners with annual production in the range of 350-900k oz. We believe these companies have the production, reserves, and resources that would be attractive to growth-starved senior gold producers.
Based on our initial review, we’ve identified 5 intermediate producers that we believe would be attractive on a standalone basis for investors or an acquisition target for a senior gold company.
While we believe any of these company’s merit investment consideration, our top pick is New Gold (TSX: NGD). We believe they are positioned for a turnaround year in 2020, and higher gold prices make them one of the best leverage plays.
Moving forward we will be diving deeper on each of the intermediate names and will also screen the junior gold mining universe for potential M&A targets.
Intermediate Gold Miners
Among intermediates we’ve identified the following 5 miners that we believe deserve closer analysis:
- New Gold
- SSR Mining
- Endeavour Mining
Each of these companies had unique attributes that we felt would be attractive to senior gold companies. We compared each of these companies by the following criteria:
- Share price performance
- Price to Net Asset Value
- Reserves and Resources
- Price to Cash Flow
- Enterprise Value to EBITDA
- All-in Sustaining Cost of Mining per oz
- Debt to Capital
We’ve summarized the analysis in terms of attractiveness in the following scorecard:
The following series of charts illustrate how the key metrics of these companies stack up against their peers. We’ve also included Detour Gold (DGC) to provide context on how the most recent takeout target compares. This is followed by a high-level overview of each company.
To set the stage we reviewed the implied upside from the current stock price based on consensus analyst target prices — this provides context around the potential upside relative to the intermediate gold peer group average.
Implied Upside to Consensus Target Price
Second, we looked at the relative performance of companies by quarter and year to date. Identifying companies that have lagged their peer group provides us with a reasonable bottom fishing screen for M&A attractiveness. At a minimum, you want to be wary of companies whose stock has already run.
QTD and YTD Stock Price Performance
Next, we looked at the price to net asset value to determine how a company is trading relative to its total reserves and resources.
As we saw with the Kirkland Lake and Detour Gold acquisition bid, the main motivation was for Kirkland Lake to increase its gold reserves. With that in mind, a company with cheap assets suggests it would be looked at favourably as an acquisition target (greater likelihood of NAV accretion for the acquirer).
Price to Net-Asset-Value
Along these same lines, the total reserves and resources are also important to look at. The long-term organic growth potential of different land packages can make a company more interesting.
Reserve and Resources
Looking at the more traditional metrics of price to cash flow (P/CF) and EV/EBITDA, these values provide an illustration of the companies’ current operations.
As with any sector, cash is king, so buying cash flow at a discount is always preferred. Similarly, EV/EBITDA provides a solid lens from which to assess the profitability of a company’s operations relative to price — no one wants to pay a premium for unprofitable operations.
2019 Price to Cash Flow Estimates
2019 EV/EBITDA Estimates
Finally, we reviewed key operational and balance sheet metrics to assess companies’ operational leverage and health of their balance sheet. The lower the AISC, the more free cash flow a company can generate per ounce of gold. The ratio of debt to capital gives investors a clear picture of a company’s financial leverage.
2019 AISC Estimates
Debt to Capital
The company’s largest producing mine, Rainy River, is the main culprit for the high AISC, however, these are expected to fall as new mine construction is complete moving into 2020. Given it’s an open-pit mine with high production capacity in excess of 250 Koz per year, small mine improvements can have an outsized effect on financial performance.
The company is also starting new developments at their previously operating New Afton underground mine as well as furthering plans for a potential third mine that is still early stage. Overall, the reserves and resources are substantial and would be looked on favourably by a senior producer looking to extend reserve life.
It’s likely their debt was used to pay for the developments across all three mines, with current long-term debt in excess of $700 million.
The company clearly has work to do to pay that down with portions due in 2021, 2022 and 2025. They also recently completed a bought deal financing to pay off some of their debt. In the end, they will need to see mine efficiencies improve to generate the cash flow to pay off that debt and generate earnings for shareholders.
According to analysts, there is still substantial upside in the stock from here. While the company has significantly underperformed compared to their peers, this is likely due in part to the bought deal financing and the fact they are in a period of investment and mine development.
Further clarity on the timeliness of the efficiency improvements at their Rainy River mine and the ramp-up at New Afton mine is needed before investing. If the timing isn’t right, then it could be a long wait before any real returns are realized.
The company is severely underperforming peers YTD and QTD and has moderate upside according to analyst estimates. With low multiples for P/NAV, P/CF, EV/EBITDA and debt to capital compared to their peer groups, it leads investors to wonder what’s happening. Unfortunately, the answer is trouble at the old mill — or more specifically trouble at the Didipio mine in the Philippines.
The company has halted mining operations due to what is being called unlawful restrictions on operations by a provincial government. Currently, OGC is pursuing solutions to this matter with the Philippines government, who they say is the proper authority.
The reasoning behind this development is unclear given the mine has won awards for safe and environmentally friendly operations in the past. It’s also unclear for how long their financial performance will be affected.
Before any investment consideration is made, a clear resolution to this issue needs to be seen. Further, the total reserves and resources in their current form do not scream M&A. However, with solid performance coming from New Zealand and exploration work continuing, the OceanaGold story is intriguing at these depressed stock prices.
At first glance, B2Gold
Their flagship mine, Fekola (Mali), has performed exceptionally well, with low costs and estimated life of mine extending into 2030. This is the main driver behind their low net AISC and why they are on this list.
With strong free cash flow expected from Fekola as it continues ramping, their moderately high debt to capital is of minimal concern.
Further, their P/CF and P/Nav suggest B2Gold is either fairly valued or comes at a premium compared to peers. This likely stems from the fact that investors know they are purchasing high-quality assets as well as the expectation for drilling results that build on the success seen at Fekola.
Their reserves and resources are low at this time. However, investors may be pricing in possible future Fekola-like discoveries.
With inferred returns of +30% according to analyst estimates, in-line with peer average, there is still upside to be had with BTO. Their share price has also performed in-line with peers YTD.
Overall, B2Gold seems like a safe investment based on an initial high-level review, but not something that screams takeover target. However, their solid flagship asset, free cash flow, and development potential certainly justify taking a closer look.
The best part of the EDV story is their strategic focus on investing in low-cost, long-life mines that will provide the company with a stable source of free cash flow. While their reserves and resources are not overly impressive, they are expected to ramp production considerably.
They are projecting production of almost 700 Koz of gold in 2019, with that number increasing to above 800 Koz across 2020 and 2021. Costs are also expected to decrease throughout this period.
These improvements to overall operational efficiency over the coming quarters should help pay off company debt, which is sitting very high compared to its peers.
Overall, the other fundamentals of P/CF and P/NAV suggest investors can buy EDV at a discount. Analysts also project a solid upside of 30% from the current stock price, which has lagged its peers YTD.
If the company continues seeing strong growth in low-cost, long-life assets and can lower debt levels, it could become an attractive target given its trading at a discounted P/NAV.
The company is on track to ramp production substantially (40%) through 2021. They also have a solid track record of performance, supported by an ability to grow gold reserves organically through exploration. While their reserves are below average, their resources are substantial.
Although their debt levels appear high, they have a healthy amount of cash on the balance sheet that should fund significant exploration. Additionally, their higher AISC in times of high gold prices leads to outsized relative increases in free cash flow — a plus for any company.
SSRM still has a meaningful upside according to analyst projections and has underperformed peers YTD. However, high P/NAV, P/CF, and EV/EBITDA suggest investors are willing to pay a premium for a solid historical track record and healthy balance sheet. The question remains whether this premium is too steep for a possible takeover.
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.