Forum Topics RRL RRL RRL valuation

Pinned valuation:

Added 6 months ago
Justification

13-April-2024: Update: I don't think McPhillamys is going to progress much in the next little while because of significantly increased costs - probably best explained by the MoM lads here:

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Regis disappoints with McPhillamy's numbers [03-April-2024]

McPhillamys-Gold-Project-Definitive-Feasibility-Study-Update.PDF [03-April-2024]

So yeah, nah... Sold my Regis shares out of my SMSF after I digested all of that and I now have zero direct exposure to RRL either here or there (or anywhere).

My current opinion is that there are better gold companies to be invested in at this time than Regis.

My previous thoughts (when I held them) are below:


12-June-2023: My $2.78 price target (PT) is probably a LOW price for this company once they start producing gold from McPhillamys, which has now received the necessary development approvals to go ahead. McPhillamys is still farmland at this stage, so production is a couple of years away, and they are still working through the final FID alongside further issues that they still need to resolve. The recent approval, which I did discuss here at the time, did come with a raft of conditions, as expected, which are designed to protect the nearby Belubula River, and the rest of the surrounding environment.

The headwaters of the Belubula River - which runs into the Lachlan River near Cowra, then the Lachlan River runs into the Murrumbidgee River (near Balranald) which runs into the Murray River (at Boundary Bend, just east of Robinvale) which runs all the way to the sea at Goolwa (south east of Adelaide, S.A.) - are in and around the McPhillamys area.

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WaterInsights - WaterNSW

The Belubula River actually starts about 10km north east of Blayney, but it's just a stagnant creek until it gets down to Blayney.

Below is what the Belubula looks like where the NSW Mid Western Highway (A41) crosses it about 2km northeast of Blayney:

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Note the "Save the River" sign on the right.

The photo above is looking east, away from Blayney. The following photo is from the middle of that bridge looking south, i.e. downriver.

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Not much of a river at this point, but the start of the river.

And McPhillamys is North of this point, above the start of the Belubula River, but considered to be in an area that forms part of the Headwaters (or source water catchment area) for the Belubula River.

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Here's an example of the type of protest group that is against McPhillamys and against mining in the area altogether.

https://www.facebook.com/BelubulaHeadwatersPG/

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So, while RRL HAVE received approval to develop McPhillamys as long as they comply with a heap of conditions and rules, there is still opposition to the mine, as there often is. So it's not a done deal until they get the thing into actual gold production, and that's not going to happen before CY 2025 or 2026 I would imagine.

Meanwhile, Regis have one of the most disastrous hedge books of all of the mid-cap Aussie gold miners, as explained here:

Regis Resources takes $27 million hit on hedging book in December quarter | The West Australian

Regis Resources takes $27 million hit on hedging book in December quarter


Danielle Le Messurier, The West Australian, Wed, 25 January 2023 10:26AM.

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Haul trucks at the Tropicana gold mine. Photo Credit: Marc Esser.


Regis Resources took a loss of $27 million on its hedging book in the three months to December, delivering 25,000 ounces of gold at approximately $1571 an ounce.

That was well below the spot gold price of $2675 at the end of December. The Subiaco-based gold producer and explorer sold 121,3000/oz of gold in the quarter at an average price of $2412, which included the hedge impact.

The company’s quarterly report on Wednesday showed it generated operating cash flow of $93m from the Tropicana project east of Kalgoorlie— which it shares with AngoGold Ashanti — and Duketon project, north of Laverton.

Gold produced over the quarter totalled 117,3000oz all at average all-in-sustaining cost of $1760/oz.

Gold has been rallying since early November on signs the Federal Reserve was turning less hawkish. Spot gold was trading around around $US1937/oz on Wednesday.

The impact of Regis’ hedge book could grow, with Regis set to deliver a further 50,000oz into the hedging program over the remainder of fiscal 2023 — at 25,000oz a quarter and all at $1571/oz, below its current all-in-sustaining costs.

Another 120,000oz will be delivered in equal instalments of 30,000oz per quarter in fiscal 2024.

Guidance for the 2023 financial year remains unchanged with Regis forecasting 350,000-500,000kz at an all-in-sustaining cost of $1525-$1625/oz.

“The significant inflationary environment experienced in the September quarter continued in the December quarter, but we have seen some recent easing of pressure through reduction in the cost of diesel,” Regis Resources managing director Jim Beyer said.

“Despite this background of cost pressures, the planned increased production in the second half means we are anticipating our AISC unit costs to lower albeit to the top end of full year guidance, with efforts to contain costs continuing to be an important focus.”

--- end of excerpt --- [from that January article in the West Australian newspaper]

In short, the management at Regis (RRL), led by their MD Jim Beyer, entered into a fair amount of gold hedging (which is forward selling of future gold production at set prices) when gold prices were substantially lower, to guarantee future profitability, and those hedges were agreed to at prices that were well below the current gold price levels (which have risen substantially). Meanwhile, Regis' costs have increased, and in some cases their costs are now above the prices of some of that hedged production, so they will be selling a portion of their production at prices that are lower than their actual costs of production, so at a loss. Until they close out all of those low-priced hedges, they are only getting limited exposure to the current high gold price.

For context, the spot gold price is currently A$2,900/ounce, and has recently (in the past month) spent time over A$3,000/ounce. All of Regis' remaining hedges - which are scheduled to expire in June NEXT year (2024) are set at A$1,571/ounce. That's a LONG way below the spot price, and below most gold miners' costs these days.

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Source: RRL-Change-To-Hedging-Structure-28May2021.pdf

Further Reading: ASX RRL: Gold miner Regis sinks on operational hiccups, wet weather (afr.com) [17 April 2023]

The original management that built Regis up from nothing, by successfully developing their Duketon assets, have all departed the company, and most of them turned up at either Capricorn Metals (CMM) or Emerald Resources (EMR) who both have better share price charts that Regis do, by a LONG shot.

The Senior Management and Board at Regis are therefore relatively new, and they haven't covered themselves with glory thus far, with the hedging debacle being their worst mistake, but there have been others.

So, a LOT rides on McPhillamys, because without McPhillamys, unless RRL get a decent takeover offer, I can't see the market getting super excited about this company. If they extinguished those hedges early, or if we just wait until the hedges have all been filled - which they will be by 28-June-2024, then they might get a positive re-rating, as long as the Aussie gold price was still nice and high at that time, but McPhillamys is the big one.

I think McPhillamys has the potential to be as positive for Regis as nearby Cadia has been for Newcrest (NCM), but it's a waiting game until they get McPhillamys into production, and many market participants don't have the patience to wait for these catalysts to play out. I expect Regis to get cheaper as we get closer to the end of June. However, I won't be adding to my positions, because I have enough exposure already. There is still risk there. Significant risk. And there are plenty of safer options within the sector, however I can justify maintaining an allocation within my gold sector funds to Regis because IF they get McPhillamys into production in a timely manner, and don't enter into more stupid hedges in the meantime, there is significant upside - in my opinion - that does justify that risk - for me.

But because of the risk, which is real, I wouldn't bet the farm on them.

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12-Dec-2023: Update: Marked as stale. I was going to reduce my price target, but they've just closed out their hedgebook - see here: Closure-of-Hedge-Book.PDF [11-Dec-2023] so that is a real positive. They are now 100% unhedged and fully exposed to the high spot gold price.

The investment thesis still heavily relies on McPhillamys getting up and running, and that's still a few years away, with progress remaining very slow on that, despite the conditional approvals they've received - but I'm thinking that this closing out of their terribly priced hedgebook is a huge step in the right direction in terms of getting some positive market interest again.

Not sure if the market will respond straight away though. It might take a few more positive announcements - particularly concerning McPhillamys - for the market to turn positive on Regis again. However, WITH McPhillamys, Regis should hit $2.78/share at some point, so no change to that share price target today from me.

Disclosure: I no longer hold Regis here on SM or in my largest real money portfolio - they are only a smaller position in my SMSF now. That could however change at any time, without notice.

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13-Apr-2024: As disclosed at top of this lot, I have now sold that small RRL position out of my SMSF, as I no longer think McPhillamys is likely to get built within the next 3 to 5 years, and there are far better places to invest in the Aussie gold sector at this point in time than in RRL. I no longer have any direct exposure to RRL.

thunderhead
a month ago

Good call on RRL looking back from a few months forward @Bear77 !

Out of curiosity, what are the current best ways to get exposed to the gold sector in your view? Happy to be directed to any recent commentary you may have posted. Thank you!

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Bear77
a month ago

Personally @thunderhead I like to get my gold exposure through gold producing companies with good management, however there is also of course the options of holding physical gold, or a physical gold ETF/ETP (such as NUGG, GOLD or the currency-hedged QAU - or PMGOLD which is backed by Perth Mint Gold), and even when you choose to invest in gold through gold producing companies who own a lot of gold almost all of which is still under the ground waiting to be dug up, you have the option of global gold miner ETFs like the VanEck Gold Miners ETF (ASX:GDX) or Betashares currency-hedged Global Gold Miners ETF (ASX:MNRS).

I prefer not to go with gold mining company ETFs like GDX or MNRS because they include too many companies that I do NOT want direct exposure to, and not enough of the ones that I DO want exposure to, so I choose to invest directly in the ones I like best.

First filter is quality management with good track records, and the second filter is complex and has to do with risk management, and includes:

  • How many gold producing assets does the company own, and where are they located geographically? If they have project located in risky places, like West Africa, how long have they been operating in that part of the world, and what is their track record of navigating through headwinds such as political unrest, violence, and the goalposts being moved on them?
  • What are their costs, both AISC and AIC where AIC is disclosed (AIC includes AISC plus additional costs such as exploration, development and resource definition costs that are usually NOT included in AISC) and how do those costs compare to their peers, i.e. where are they on the cost curve?
  • What is their CURRENT management's track record with regard to M&A - are they likely, IMO, to blow up shareholder capital with poor M&A, or do only smart and strategic (and well priced) M&A?
  • What is the mine life profile across their assets? How many years before they need to replace currently producing assets?
  • Does the company have a history of meeting or exceeding guidance, most of the time? If not, is that due to stuff beyond their control or are they just really bad at their job?
  • Do they have future growth that will provide positive share price re-rate potential - i.e. are they growing and likely to be worth substantially more in the future than they are today?
  • Does the company and their outlook fit within my current desired timeframe for investments? (which has narrowed significantly in the last year - i.e. I'm not taking a ten year view any more on most companies, I may well hold them for 10 years or more but I want them to be trading at higher prices in 3 years and 5 years.)

So, with all of that in mind, what works for me are the 5 gold producers that I hold:

  1. Northern Star Resources, NST, the best gold producer Australia has EVER produced, who have provided TSRs that are superior to almost EVERY other decent-sized company listed on the ASX over the past 10 years. You'll find many that have better returns over shorter periods, but over a decade, there's not too many that have provided better than NST. They are also Australia's largest listed gold miner (HQ'd in Australia with most of their mines in Australia), and they are a top-10 global producer in both market cap terms and gold production p.a. terms. They are going to move up that top 10 list over the next few years, possibly into the top 5, once their Fimiston mill expansion at the Kalgoorlie Super Pit is complete (currently underway, will take a couple of years to complete) which is going to more than double its capacity. See here: https://strawman.com/reports/NST/Bear77 Note that the man who built up NST from nothing to be Australia's second largest gold producer (behind Newcrest, before Newmont bought Newcrest last year), Bill Beament, is now running a different company, Develop Global (DVP), however the MD at NST, Stuart Tonkin, was the CEO at NST when Bill Beament was NST's Executive Chairman, and Stuey is running NST in a similar way to how Bill ran it - I like Stuey's management style - low profile but gets the job done - good capital allocator.
  2. Genesis Minerals (GMD), run by Raleigh Finlayson who built up Saracen Minerals (was SAR.asx) to become Australia's fourth largest gold producer (back when Newcrest was our largest and NST was #2 and EVN was #3) and then Saracen and NST merged to make NST even bigger, and Ral left and began building Genesis around assets in the Leonora area of the WA goldfields (north of Kalgoorlie) where he grew up and worked in his younger years, and where Saracen's main mines were also situated back in the day. Genesis doesn't look cheap, because they have a superior management premium included in the share price, but that premium is well-deserved and the company has plenty of growth ahead of it, even without further M&A (and there WILL be further M&A). See here: https://strawman.com/reports/GMD/Bear77
  3. Ramelius Resources (RMS), see here: https://strawman.com/reports/RMS/Bear77 (scroll down past the "Val" to the straw). RMS have a great balance sheet with a heap of cash (almost half a billion) and no debt, plus they are finding more high grade gold themselves, and they own just under 18% of Spartan (SPR) - check out SPR's one year SP graph. RMS also have some of the lowest costs across all of the goldies, without relying on excessive byproduct credits from copper production like Evolution Mining (EVN) does where two of their gold mines are actually copper mines that also produce gold. RMS is a gold miner, not a copper/gold miner.
  4. Emerald Resources (EMR), have done what others either failed to do or didn't even think was possible, established a profitable gold mining operation in Cambodia, and with the acquisition of Bullseye Mining - which finally completed a few months ago (it took 2.5 years) - EMR are going to be developing mines in WA now as well. I have discussed this elsewhere but the management team that built Equigold (acquired by Lihir, which was acquired by Newcest, which was acquired by Newmont, the world's largest gold producer) went on to build out Duketon at Regis (RRL) before leaving and turning up mostly at either Capricorn Metals (CMM) or Emerald (EMR). CMM is also worth a look, and a very well run gold producer, but of those two I currently prefer (and hold) EMR. See here: https://strawman.com/reports/EMR/Bear77
  5. Perseus Mining (PRU), higher risk, but trading at lower multiples because of where they operate - in West Africa. Specifically they operate two gold mines in Côte d'Ivoire and one in Ghana, and they have a project in Sudan that is on hold due to the situation there. PRU have also recently acquired OreCorp whose key project is the Nyanzaga Gold Project in northwest Tanzania which hosts a Mineral Resource Estimate of 23.7Mt @ 4.0g/t gold for 3.07Moz. So Perseus not only have highly profitable gold mines already operating, they have growth projects as well that they are developing. The downside is where they operate - West Africa - so there's certainly higher risk with PRU.

I have to go do something away from the office for an hour or two now.

Have a read through some of this thread for more: Gold as an Investment (Strawman.com)

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NewbieHK
a month ago

Great summary @Bear77 of why and how you invest in Gold. I think it’s a reminder that you can invest in the same area but, there are different ways to get exposure, which might influence your returns.

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thunderhead
a month ago

Thank you for your thoughtful and considered response. I will mull over it and get back if I have any points for further discussion!

The only time I have had exposure to gold is via a stake in MNRS a few years ago. I sold out of that at a small profit, and haven't returned to gold since even though I have considered adding back exposure many times - it looks like my dithering has cost me participation in the most recent bull run!

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