Amid a topsy turvy week for gold investors that saw the bullion price fall sharply and one of the ASX’s stalwarts disappear for good, one emerging player dug deep to paint a precious outlook for investors.
Gold Road Resources’ (ASX: GOR) inaugural Annual Investor Strategy call on Tuesday attracted a large crowd of top-shelf analysts and investors as managing director Duncan Gibbs provided a three-year production outlook for the Gruyere mine and opened up about this world-class asset’s future.
With production at Gruyere – a 50-50 joint venture with South Africa’s Gold Fields – inching towards its long-term average of 300,000 ounces (100%) annually, Tuesday’s call provided Gold Road the opportunity to spell out in more detail what the next three years of production looks like.
And the numbers are impressive.
Having delivered 258,173oz (100%) in calendar 2020 at all-in sustaining costs for Gold Road of $1273/oz, this year output should rise to between 260,000 and 300,000oz at Gold Road AISC of $1225-1350/oz before hitting as high as 350,000oz in 2022 and 370,000oz in 2023.
Much of the increased production will be driven by a capital-light investment to boost Gruyere’s processing capacity from 8.2 million tonnes a year to 10mtpa.
Gold Road’s attributable AISC will fall in line with the rise in production, even if some analysts want them to fall faster and further.
It is a strong outlook from a mine that only poured first gold in June 2019 – six years after the world-class ore body’s discovery by Gold Road.
But it was a tough week to update the market. The gold price sank sharply at the same time as the Aussie dollar gained.
Still, from a Gold Road peer group perspective, a gap for investors gap has opened up among mid-tier producers after Saracen Mineral Holdings on Monday was removed from the ASX following the completion of its takeover by Northern Star Resources.
And notwithstanding a challenging external environment, gold bulls chasing an investment in long-term, steady production will have been buoyed by Gold Road’s outlook for Gruyere.
Gruyere still has at least 10 years of mine life ahead of it and Mr Gibbs flagged a longer future with the announcement of a maiden underground mineral resource of 18.5 million tonnes at 1.47 grams per tonne for about 870,000oz. The resource sits underneath the Gruyere pit and relates only to Gold Road’s 50% share.
A 12,000m framework drilling campaign will get underway this year to provide more certainty around what lies beneath the pit shell.
As Gold Road’s investor relations and corporate development manager Duncan Hughes quipped on the investor call, Gruyere’s mine life was likely to outlast his working life.
In a tough week for gold stocks when few made headway, Gold Road’s share price finished at $1.155 for a $1 billion market capitalisation – and well short of analyst forecasts.
JP Morgan analyst Levi Spry retained his “overweight” rating with a $2.10 price target for Gold Road.
“The three-year outlook was marginally below our expectations but begins to show the potential with 35% growth in production,” Mr Spry said in a note to clients.
“But the real value driver remains what happens beyond this.
“In an industry where producers are struggling to maintain production and replace inventories, we continue to be attracted to the opportunities in front of Gold Road. The first step is the reserve update in 2H CY21, which will likely see life extension as more resource is converted to reserve.
“The announcement of a maiden 900koz underground resource is a reminder of the optionality at Gruyere as the resource potentially grows towards 10moz.”
Macquarie Securities analyst Andrew Bowler also applauded a stronger-than-expected three-year production outlook though mentioned the cost pressures.
“Gold Road believes that its growth aspirations can be realised from minimal capital expenditure with utilisation rates at the plant the key driver of the 10Mtpa processing rate target,” Mr Bowler, who has a $1.50 price target and an “outperform” rating, said in a note.
“While the underground resource is interesting, we believe the open pit and process plant optimisations at Gruyere are more likely to drive Gold Road’s outperformance in the near to medium term.”
Canaccord Genuity (Australia) analyst Tim McCormack is probably the most bullish on Gold Road, upgrading his price target to $2.30 following Tuesday’s call and reiterating his “buy” recommendation.
“We note that in achieving the step-up in production, the strategy is wholly underpinned by reserves and with the exception of a modest deep drilling program at Gruyere, no significant growth capital is anticipated within the three-year mine plan,” Mr McCormack told his clients.
“As a reminder, Gold Road’s dividend policy is linked to free cashflow generation (15%-30% payout ratio) and, as such, our forecasted dividends increase in line with the free cashflow metrics mentioned above.
“We currently model the mid-point of the payout ratio, noting that if we assume a payout of 30%, the dividend yield for CY22e increases to 3.5% (from 2.7%) and CY23e increases to 5.0% (from 3.8%).
“Considering the capex-light phase, well-drilled and understood orebody, we see minimal execution risk to hitting targets outlined in the plan.
“As such, we believe Gold Road should establish itself as one of the highest yielding stocks in the gold sector by 2023.”
Gold Road is due to release its full-year results next month and expected to use the occasion to declare a maiden dividend, further proof of this Perth company’s coming of age.
