Berenberg Equity Research has retained its buy recommendation for Resolute and expects the company’s shares to rerate as it continues to increase and optimise production at Syama, with the balance sheet de-gearing.
The following is an extract from Berenberg’s research update:
Q2 operational update: beat at Mako and Syama oxide
- Operational beat at Mako and Syama oxide: Resolute has announced Q2 gold production of 107.2koz at an AISC of USS1,033/oz. This was a beat versus our expectation of 100.5koz. Mako produced 43.478koz, versus our expectation of 39.8koz, with the driver being higher grade. The Syama sulphide circuit produced 35.2koz with overall recoveries of 80%. While production was an incremental miss versus our expectation of 37.2koz due to grade and throughput, recoveries were higher than the 77% we forecast and are guided to remain above 80% for the rest of the year, which we view as a positive. The oxide circuit produced 28.5koz, a beat versus our expectation of 23.5koz, with the driver being grade. Management has maintained guidance of 430koz for the year at an AISC of USD980/oz with no material impact from COVID-19. We expect production of 424koz at an AISC of USD954/oz.
- Tabakoroni sulphides PFS and power upgrade project on track: The completion of the Tabakoroni sulphide pre-feasibility study (PFS) remains on track for completion in Q3 and the development of the hybrid power plant is also progressing on track with the completion of earthworks and commencement of civils. Mechanical and electrical installation should commence over the next quarter and ultimately the project should deliver a 40% reduction in power costs to below USD0.15/kWh.
- Net debt up qoq on working capital and capex: Cash and bullion at the period end was USD88m, with listed investments of USD35m and promissory notes (relating to Ravenswood) of USD35m. Period-end cash beat our USD51m, driven by lower-thanmodelled debt repayments offsetting higher working capital movements and capex; net debt of USD220m was up slightly qoq (from USD212m) and was above our USD195m, and we would expect this to decrease in H2 as i) out-of-the-money hedges roll away and ii) working capital builds are released. The company retains a USD45m undrawn revolving credit facility. Gold in circuit inventories reduced by 3.6koz qoq, but still stands at 2.5koz (USD146m market value). The VAT dispute with the Malian government is ongoing, but Resolute has submitted its objections to the VAT demand and expects a formal response by the end of August. Also, the company has added a further 60koz of hedges at USD1,744/oz, taking the hedge book to 213koz at USD1,624/oz with deliveries out to December 2021. Finally, the strategic review of Bibiani continues, with the company continuing to engage with third parties despite COVID-19 travel restrictions.
- Valuation/price target: We value Resolute based on an unchanged blend of 1x NAV and 6.5x EV/EBITDA; this generates a price target of 90p. We retain a Buy recommendation and expect the shares to rerate as the company continues to increase and optimise production at Syama, with the balance sheet de-gearing. It will also increase the proportion of the gold it sells into the spot market as the hedge book is delivered into. These are a good set of results from an operational perspective and we expect a positive response from the shares. The marginal increase in net debt should unwind in H2.