Regis Resources - Rebuilding The Balance Sheet In Anticipation Of An Expansion?

| About: Regis Resources (RGRNF)
This article is now exclusive for PRO subscribers.

Summary

Regis Resources has sold in excess of 150,000 ounces of gold in the first half of its financial year 2016.

The company was profitable and free cash flow positive.

Based on the current gold price and USD/AUD exchange rate, I think Regis will generate in excess of $80M in free cash flow.

The generous 4% dividend yield is most definitely covered by the free cash flow, and as Regis has a net cash position, it makes sense to reward its shareholders.

Introduction

I couldn't believe it has been more than 8 months since I last discussed Regis Resources (OTCPK:RGRNF), one of my favorite Australia-based gold producers. The company has performed really well, thanks to its very consistent production results and the cheaper Australian Dollar obviously also helped as well! In just nine months' time, Regis' share price more than doubled (in Australian Dollar), so now it's up to me to determine if this positive momentum is either sustainable or a blatant hype.

RGRNF Chart

RGRNF data by YCharts

Regis is an Australian gold producer and as its operations are also located in Australia, the company opted to have just one primary listing, on the ASX. The ticker symbol down there is RRL, and the average daily volume is almost 6 million shares (!). The current market capitalization of Regis is approximately $900M.

H1 FY 2016: uneventful is really good

In the first half of the financial year 2016 (which ends on June 30 this year), Regis Resources sold approximately 156,600 ounces of gold at an average price of A$1550/oz. That's great, considering the company's all-in cost per ounce was less than A$1000/oz at A$946 per produced ounce of gold. As this is just US$730/oz, I think you really understand how important this low all-in cost really is, as Regis Resources is printing cash right now due to the excellent situation whereby the weak Australian Dollar is reducing the operating expenses at the Australian mines.

Source: company presentation

The total revenue in the first half of the year was almost US$183M which is approximately 1.5% higher compared to H1 FY 2015 as the 10% higher gold price compensated for the total amount of gold sales, which fell by approximately 8% YoY. The gross profit at the operations was approximately A$71M ($53M) whilst the pre-tax profit fell by approximately US$3M to US$48M on the back of some higher corporate expenses. The net income remained relatively stable as the net profit from continuing operations decreased by just 3%. Regis Resources should burn a nice candle for the Australian Dollar, as that's the only reason why the company was able to report an excellent financial performance in the first semester of the financial year 2016.

Source: press release

The cash flows are also looking pretty robust. The net operating cash flow after paying the interest expenses and the income tax was approximately US$72M, a 50% increase compared to the same period last year. As the total level of capital expenditures remained roughly the same at US$30M, Regis Resources reported a total free cash flow of approximately US$42M for the first half of the year. This means the company is definitely remaining on the right track to generate $75-85M in free cash flow in the current financial year.

Source: press release

The final result will obviously depend on a) the gold price and b) the value of the Australian Dollar, but considering Regis sold its gold in H1 FY 2016 at A$1550/oz and the gold price is currently trading at in excess of A$1600/oz (despite the stronger Australian Dollar), it's now very likely the full-year free cash flow result will meet the higher end of my personal expectations, resulting in a free cash flow yield of approximately 9%.

The balance sheet situation has been rectified in the past two years

After having spent approximately half of the H1 FY 2016 free cash flow on paying a dividend, the company was able to add almost $20M to the treasury, further strengthening the balance sheet.

Indeed, compared to just six months ago, Regis' balance sheet is now looking much cleaner. The cash position has increased by 50% to $55M whilst the net cash position has now reached US$33M compared to just $22M as of at the end of the previous financial year. As the working capital position is also increasing to $56M (despite paying a $22M dividend), Regis seems to be ready for the future!

Source: press release

The company also continues to spend quite a bit of cash on its exploration efforts as Regis reported a net exploration expense in excess of $6M in H1 FY 2016. This continuous focus on exploration is really paying off, as Regis has released a maiden ore reserve at the Baneygo and Gloster zones at the Duketon Gold region. This maiden reserve estimate came in at 361,000 ounces of gold which will immediately be used for mining purpose from the third quarter of this calendar year on, as 70% of the reserve estimate at Gloster is located within 80 meters from the surface.

Investment thesis

Regis Resources is still generating a very decent amount of free cash flow and despite the recent strength in the Australian Dollar, the company should be able to generate in excess of $80M in free cash flow this year, as the higher gold price compensates the stronger Australian Dollar. The balance sheet is looking much better now as well and Regis is currently trading at a free cash flow yield of 9% which is pretty good for an Australia-based producer.

Regis' dividend yield is now in excess of 4%, which makes this company a very generous dividend payer. But as it's paying just half of the free cash flow as a dividend, it still has plenty of cash available to continue to work on the existing properties to create more shareholder value.

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.