It Looks Like I Was Right About Acacia Mining - The Turnaround Has Now Been Confirmed

| About: Acacia Mining (ABGLF)

Summary

Acacia Mining has continued on its momentum established in Q4 last year, as the company produced more gold at a lower cost.

The company now expects to reach the higher end of its production guidance and lower end of its all-in cost guidance.

The balance sheet now shows a net cash position of almost $200M.

The H2 production will be lower than the H1 production rate, but that's not unexpected as the Bulyanhulu mine will process lower grade ore and will see a maintenance shutdown.

Introduction

Back in February, I wrote an article about Acacia Mining (OTC:ABGLF) wherein I said 2016 could be 'the year' for Acacia, as all stars were aligning and the company was getting its ducks in a row. The gold production rate should remain relatively consistent at in excess of 700,000 ounces, whilst the all-in sustaining costs to produce one ounce of gold should drop to a triple-digit dollar amount versus the ultra-high all-in cost we experienced several years ago. Acacia Mining was previously known as African Barrick Gold, a SpinCo from Barrick Gold (NYSE:ABX), which still owns a substantial stake in Acacia Mining.

Click to enlarge

The company's share price (in USD) has now almost doubled, and I wanted to follow up after the company published the results of the first half of the year. Acacia does have an OTC listing, but its London listing is much more liquid with approximately 1 million shares changing hands on a daily basis. The ticker symbol is ACA, and the current market cap is approximately 3 billion US Dollar.

Excellent production and cost results in Q2 and H1 pave the way…

In the original article, I explained why I was expecting Acacia Mining to perform quite strong in 2016, as the company's H2 2015 results were overshadowed by a bad performance in the third quarter of last year. As Acacia was able to improve its performance in the final quarter of the year, I argued the market might have missed that tiny detail.

Click to enlarge

Source: company presentation

And in hindsight, it does look like I was right, as the company's operating performance in the first half of the current financial year was really strong. Acacia produced no less than 412,000 ounces of gold (of which approximately 222,000 ounces were produced in the second quarter of the year). What's even more remarkable is the cash cost and the all-in cost. Whereas the all-in sustaining cost in the first semester of the previous year was approximately $1,133/oz, Acacia was able to reduce this to just $941/oz in H1 2016, again on the back of the strong performance in the second quarter of the year, which pushed the AISC in Q2 to just $926/oz.

Click to enlarge

Source: press release

On top of that, the realized gold price also slightly increased, allowing Acacia Mining to expand its operating margin from $67/oz in H1 2015 to a stunning $268/oz in the first half of this year. And if you'd just look at the second quarter of the year which took the higher gold price into account, Acacia's operating margin on an all-in basis increased from $35/oz in Q2 FY 2015 to a stunning $332/oz in the current financial year. That's right, the company's net operating margin almost ten-folded.

The total revenue increased to $505M in H1 2016, which is a 12% increase compared to the first half of last year, and as Acacia was able to reduce its 'cost of sales' even further, the gross profit almost doubled to $150M. The G&A expenses were slashed by 50%, and despite the higher exploration expenses, Acacia more than tripled its EBIT. Whereas the company generated an income before finance expenses and taxes of $30.8M in H1 FY 2015, a triple-digit result in excess of $105M was achieved in the current financial year. Due to a deferred tax expense, Acacia's bottom line was still negative, but this doesn't mean the company was unable to generate a positive cash flow in the first semester.

… for an even stronger cash flow result and balance sheet

As the majority of the taxes due in H1 2016 were deferred (the tax assets decreased and the tax liabilities on the balance sheet decreased), the cash flows were actually exceptionally strong in the first half of the current financial year.

Click to enlarge

Source: press release

Acacia Mining generated an operating cash flow of $157M, which took a $10M tax payment into account, rather than the full $100M in taxes that were deferred. As the total capital expenditures were less than $83M, Acacia's free cash flow technically was approximately $75M. On a normalized basis (with a normalized tax rate), this would have been approximately $45M, assuming a total tax rate of 40% on the pre-tax income.

Click to enlarge

Source: company presentation

At the end of last year, the company's official guidance was to produce approximately 765,000 ounces of gold and to spend less than $180M on capital expenditures (of which just 1/3 were considered to be sustaining capex). As the total production rate in the first half of this year was already 412,000 ounces, Acacia seems to be on track to reach the higher end of its production guidance as it already produced 54% of the mid-point of its guidance in just the first six months of the year.

Click to enlarge

Source: press release

This also means the adjusted sustaining cash flow will be more impressive than the cash flow statement indicates, as just 1/3rd of the total capex will be sustaining capex. If I would apply this ratio on the H1 capital expenditures, Acacia would have spent just $28M on sustaining capex (in fact, it was just $22M according to the fine print on page 21 on the company's H1 report, see the previous image), further boosting its adjusted free cash flow results.

Investment thesis

Acacia has now officially increased its production guidance to the upper end of its guidance of 750,000-780,000 ounces of gold, and now expects its all-in cost per ounce of gold to drop towards the lower end of its cost guidance, which would mean the AISC per produced ounce of gold will be just $950, indicating the net margin will probably be higher than $350/oz in the second half of the year.

The production rate will, however, be a little bit disappointing in H2, as the mine plan expects the average grade at the Bulyanhulu mine in Tanzania to drop, and on top of that, Acacia has planned a two-week shutdown of the hoisting shaft. As the company now has a net cash position of almost $200M (and very likely $200M+ by the end of this quarter), Acacia Mining is in a great shape to take advantage of potential opportunities to acquire new Africa-focused assets. As the company's share price has doubled since my previous article, I think Acacia Mining now is a 'hold' rather than a 'buy'.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.