Development capital and exploration expenditures down from $39M to $6M in the respective halves.

Transcription

1 RMS.asx Buy Gold: Producer Ramelius Resources Ltd (RMS) RAMELIUS RESOURCES LTD (RMS) Cash build to accelerate. Ramelius returned Mt Magnet to form in the December 2017 half, reestablishing solid operating performance at all mines. Gold production from Mt Magnet and Vivien was 36.5kozs in the December 2017 quarter; the best return since the September quarter of Ramelius first quarter in charge of Edna May yielded 21.4kozs, which equalled the mine s previous quarter under Evolution s control, and confirmed the expected trend of head grades above 1 g/t. The Company s cash and gold balance at the end of December 2017 was $62M; a quicker recovery in the cash balance after the Edna May acquisition than we anticipated. The second (June 2018) half is set up for cash and bullion on hand to rise further as several factors weigh in; A full half contribution from Edna May Higher budgeted head grades and production at Edna May. Water Tank Hill stopes operating for the entire half. Development capital and exploration expenditures down from $39M to $6M in the respective halves. Delivery into higher price forward gold sale contracts in the June 2018 half. Hartleys forecasts Ramelius cash and bullion balances will exceed $100M (20cps) by the end of June We have allowed for $10M more development and exploration expenditure than indicated by Ramelius, and have assumed no more production above guidance in FY cutback option open FY2019 could be just as productive for Ramelius as FY2018 is shaping. Vivien, Water Tank Hill and the Mt Magnet pits will all be in full swing, while Edna May continues in the low strip ratio phase of the Stage 2 pit design, stockpiling excess ore. A low unit cost mine will probably be developed at Shannon. 24 Jan 2018 Share Price $0.430 Valuation $0.52 Price Target (12 month) $0.55 Brief Business Description: WA based gold producer and explorer. Hartleys Brief Investment Conclusion Sensitive to cash flow returns and Edna May's long term mine plans in coming quarters. Chairman & MD Robert Kennedy (Chairman) Mark Zeptner (MD) Top Shareholders Ruffer LLP 8.3% Van Eck Associates 7.0% Company Address Level 1, 130 Royal St East Perth, WA, 6004 Issued Capital 527m - fully diluted 538m Market Cap - fully diluted Cash + bullion (31 Dec 17) Debt (31 Dec 17) EV EV/Resource oz EV/Reserve oz A$226m A$231m A$62m A$0m A$164m A$43/oz A$49/oz Prelim. (A$m) FY17e FY18e FY19e Prod (koz Au) Op Cash Flw (A$M) Norm NPAT (A$M) CF/Share (cps) EPS (cps) P/E Au Resources (Moz) 3.8 Reserves (Moz) A$ 25. M Feb-17 Ramelius Resources Jun-17 Sep Jan-18 Volume - RHS Source: IRESS RMS Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS The big decision for Ramelius is whether to cut back the Edna May Stage 3 pit a potential $100M investment that will need to start early in FY2019. A go-ahead would forestall net cash flows, but also add up to 500kozs and 7 years to reserves and mine life respectively. Ramelius first drill results from the Edna May Stage 3 extensions are expected to be announced by the end of January At this point we model Stage 3 on an economic knife s edge, while trusting RMS to make the call and execute. Upgrade from Accumulate to Buy Ramelius share price has stood still despite excellent results and a rising market. We think there are more good figures and at least a catch up rally in store for Ramelius shareholders over the next 12 months. John Macdonald Resource analyst Ph: E: john.macdonald@hartleys.com.au This report was prepared solely by Hartleys Limited. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Hartleys Limited, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 9 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 SUMMARY MODEL Ramelius Resources RMS Buy Market Information Directors Company Information Share price $0.43 Robert Kennedy (Chairman) Level 1, 130 Royal St Market Capitalisation $226m Mark Zeptner (MD) East Perth, WA, 6004 Net cash (debt) $62m Michael Bohm (Non-Exec Director) Issued Capital (F.pd) 527m Kevin Lines (Non-Exec Director) Issued Capital (F.diluted) 538m EV $165m Valuation $0.52 Top Shareholders m shares % 12 month price target $0.55 Ruffer LLP Van Eck Associates Profit & Loss Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Production Summary Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Net Revenue A$M Underground ore mined Mt Forward sales A$M UG ore grade g/tau Total Costs A$M Open pit ore mined Mt EBITDA A$M Open pit ore grade g/tau margin 32% 32% 34% 28% 16% Mill Throughput Mt Depreciation/Amort A$M Head grade g/t EBIT A$M Net Interest A$M 1 2 Gold (koz) Pre-Tax Profit A$M AISC A$/oz 1,205 1,107 1,079 1,119 1,243 Tax Expense A$M NPAT A$M Costs Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Abnormal Items A$M Cost per milled tonne $A/t Reported Profit A$M Total cash costs incl. royalty $A/oz depreciation & amortisation $A/oz Balance Sheet Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 All in sustaining costs (AISC) A$/oz Cash A$M Price Assumptions Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Other Current Assets A$M AUDUSD Total Current Assets A$M Gold US$/oz Property, Plant & Equip. A$M Gold A$/oz Investments/expln A$M Deferred tax assets A$M Hedging Unit Jun 17 Jun 18 Jun 19 Jun 20 Tot Non-Curr. Assets A$M Hedged sales kozs Total Assets A$M Hedged price A$/oz Short Term Borrowings A$M Hedge gain(loss) A$/M Other A$M Hedged % 48% 30% 33% 23% Total Curr. Liabilities A$M Long Term Borrowings A$M Sensitivity Analysis Other A$M Valuation FY19 NPAT Total Non-Curr. Liabil. A$M Base Case Total Liabilities A$M Sens -10% +10% Sens -10% +10% Net Assets A$M US Gold price +/-10% 36% % AUDUSD +/- 10% -37% % Cashflow Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Production +/-10% 25% % Operating Costs +/-10% 31% % Operating Cashflow A$M Income Tax Paid A$M Unpaid Capital R&D grant A$M Expiry year No. (M) $M Avg ex. % ord Interest & Other A$M Jun % Operating Activities A$M Jun % 30-Jun % Property, Plant & Equip. A$M Total % Exploration A$M Asset sales/acqn A$M -38 Reserves & Resources Mt g/t Au Koz Mkt cap/oz Investments A$M TOTAL RESOURCE , Investment Activities A$M Mt Magnet/Vivien June ,571 Edna May Dec ,262 Borrowings A$M Equity A$M INCLUDES TOTAL RESERVE Financing Activities A$M Mt Magnet open pit, stockpile. June Mt Magnet, Vivien underground. June Net Cash Change A$M Edna May open pit, stockpile. Dec Edna May underground. Dec Shares Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Ordinary Shares - End M Hartleys model June '17 Mt g/t Au Koz Mkt cap/oz Diluted Shares - Weighted M TOTAL INVENTORY Mt Magnet open pit Ratio Analysis Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Mt Magnet & Vivien underground Edna May open pit GCFPS A Edna May underground CFR X EPS A Share Price Valuation (NAV) Risked Est. A$M. A$/share PER X % Mt Magnet after tax 7% DR DPS % na na na na na 100% Edna May after tax 7% DR Yield % na na na na na Exploration Interest Cover x na na Corporate overheads ROCE % 17% 43% 41% 24% -6% Net cash (debt) ROE % 13% 33% 25% 14% -3% Tax benefit Gearing % Hedging *All values fully diluted unless otherwise stated Option/equity dilution Sources: IRESS, Company reports, Hartleys Research Total Page 2 of 9

3 Ramelius produced 58kozs in the December 2017 quarter. MT MAGNET AND EDNA MAY Gold production from Mt Magnet and Vivien was 36.5kozs in the December 2017 quarter; the best return since the September quarter of 2016 (Figure 2). The start of stoping at Water Tank Hill underground mine was a major factor. Ramelius first quarter in charge of Edna May yielded 21.4kozs, which equalled the mine s previous quarter under Evolution control, and confirmed the expected trend of head grades above 1 g/t. The Company s cash and gold balance at the end of December 2017 was $62M, implying operating cash flows of $20-25M per quarter in the December 2017 half. About $35M in development capital+exploration spending and the $40M payment for Edna May, meant cash went down in the half, but the current June 2018 half should tell a different story. With all mines in production phase, development capital spending is done for the time being (Figure 4), with the possible exception of Shannon s development should Ramelius decide to bring it on early or cut back the Shannon pit to enable access. The Company s Edna May mine plan has production rising to 26kozs in the June 2018 quarter (Figure 3). Also, Ramelius will deliver into higher priced gold hedges in this half, adding about $6M to revenue (Figure 5). Hartleys projections show cash and bullion exceeding $100M (20cps) by June A stellar FY2018 for Ramelius should also be borne out by net profit results for the period. On current projections Hartleys forecasts FY2018 EBIT of $68M. FY2019 could be just as productive for Ramelius (Figure 1). Vivien, Water Tank Hill and the Mt Magnet pits will all be in full swing, while Edna May continues in the low strip ratio phase of the Stage 2 pit design, stockpiling excess ore. A low unit cost mine will probably be developed at Shannon. The big decision for Ramelius is whether to cut back the Edna May Stage 3 pit a potential $100M investment that will need to start early in FY2019. A go-ahead would forestall net cash flows, but also add up to 500kozs and 7 years to reserves and mine life respectively. Ramelius first drill results from the Edna May Stage 3 extensions are expected to be announced by the end of January Page 3 of 9

4 Fig. 1: Hartleys forecast Ramelius production. Production Summary Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Mt Magnet Underground ore mined Mt UG ore grade g/tau Open pit ore mined Mt Open pit ore grade g/tau Mill Throughput Mt Head grade g/t Combined Recovery & Payability % Gold (koz) AISC (A$/oz) Edna May Underground ore mined Mt UG ore grade g/tau Open pit ore mined Mt Open pit ore grade g/tau Mill Throughput Mt Head grade g/t Combined Recovery & Payability % Gold (koz) AISC (A$/oz) Total Underground ore mined Mt UG ore grade g/tau Open pit ore mined Mt Open pit ore grade g/tau Mill Throughput Mt Head grade g/t Gold (koz) AISC (A$/oz) Source: Hartleys Research Page 4 of 9

5 Fig. 2: Mt Magnet quarterly milled tonnes and head grade. Actual head grade for December 2017 quarter overlain. Source: Ramelius, Hartleys Research Fig. 3: Ramelius quarterly production and cost guidance (October 2017). Actual December 2017 production overlain. Source: Ramelius, Hartleys Research Page 5 of 9

6 Fig. 4: 2017). Ramelius quarterly capital expenditure guidance (October Source: Ramelius, Hartleys Research Fig. 5: Ramelius hedging scheduled deliveries (October 2017). Source: Ramelius, Hartleys Research PEER COMPARISON Ramelius share price (43cps) reflects A$43/resource oz, one of the lowest among developed Australia gold miners (Figure 6). Edna May and Mt Magnet reserves also carry less market value than their peers. Apportioned market values are 0.46 and 0.40 times reserve ounces x estimated margin above AISC, for Mt Magnet and Edna May respectively. The sector average is 0.90x (Figure 7). Page 6 of 9

7 Fig. 6: Australian gold sector EV/resource ozs. January Source: IRESS, Hartleys Research Fig. 7: Australian gold projects market value/(reserv es*margin). January Source: IRESS, Hartleys Research VALUATION The accompanying Ramelius model takes into account publicly available information including Ramelius projected group production profile and production guidance given periodically. Costs are estimated according to information supplied by Ramelius and reconciliation against past accounts. At Vivien, Hartleys modelled inventory is 40,000 ounces higher than Ramelius June 2017 reserve of 103,000 ounces, on the presumption that progressive mine Page 7 of 9

8 RISKS Fig. 8: Assumption development and drilling will add incremental reserves as access allows. Additional exploration, development and mining costs are taken into account. The pit inventory at Mt Magnet is modelled here at 7.6Mt at 1.4 g/t (340kozs) compared to 5.4Mt at 1.7g/t (290kozs) in reserve at the end of June 2017, accounting for additional low grade ore mined in planned pits, in line with recent practice. Waste:ore is modelled at a constant 8:1 over the forward mine plan. The modelled Mt Magnet underground inventory of 60kozs is 26kozs more than Water Tank Hill s June 2017 reserves of 167kt at 6.5 g/t (34kozs) at Water Tank Hill, again accounting for progressive reserve definition. The underground mining potential at Shannon is included as exploration potential only. Edna May is modelled assuming completion of the Stage 2 pit as per Evolution s December 2016 reserves schedule, and an additional 470kozs extracted from a stage 3 pit, assuming $A95M cutback costs and 2.3:1 waste:ore after the cutback. Royalty payments of A$100/oz on all production between 200kozs and 700kozs are included in costs. PRICE TARGET The price target is based on a discounted cash flow valuation of the Mt Magnet and Vivien operations, an informal estimate of exploration assets value and nominal assessment of Ramelius other assets and liabilities. Hedging arrangements are valued separately from the mining assets. A real, after tax discount rate of 7% is used in net present value estimations. Hartleys base case commodity and currency forecasts, set out in the summary table, are used to estimate the base case NAV. For Ramelius the 12 month share price target is based on the base case NAV. Key assumptions and risks for valuation Risk of not realising assumption Risk to valuation if assumption is incorrect Comment Gold price, currency High Industry ave. - high Ramelius forward looking AISC production cost of about A$1100/oz is close to the Australian industry average, and hedging (30% of 3 yrs) is modest. Exploration, re-investment Medium High Ramelius may invest most of its cash and future free cash flows in exploration and/or other mineral asset acquisitions. Valuation assumes that future exploration and investments achieve acceptable returns. Edna May Stage 3 pit returns are positive Medium Low Edna May Stage 3 is a substantial potential investment for RMS. Our model assumes marginal returns pending further Company reserve and cost estimates. Exploration asset value Medium Medium Subjective value is attributed to exploration assets at Mt Magnet and Edna May. Costs Medium High Publicly available information has been used in forecasting operating and capital costs. Some cost assumptions are based on incomplete information or informal estimates. Conclusion Source: Hartleys Research Ramelius faces industry average risks with respect to gold price and currency. Major recommendation risks relate to future re-investment and exploration returns. Page 8 of 9

9 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Oliver Stevens Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Associate Director Stephen Kite Associate Director Scott Weir Associate Director Scott Stephens Associate Director Rhys Simpson Manager Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Page 9 of 9 Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom (CEO) Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. This report was prepared solely by Hartleys Limited. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Hartleys Limited, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law.