Teranga Gold: Digging Into The Q4 Results
- Teranga Gold released its Q4 results in late February, with another year of record production, and solid production growth expected in FY-2020.
- The company managed to easily beat both output and cost guidance for FY-2019, with over 289,000 ounces of total gold production as Wahgnion commercial production began ahead of schedule.
- The next significant catalyst for Teranga Gold is the combined pre-feasibility study for Massawa and Sabodala, after the transaction which was completed last year.
- Based on a solid year operationally and further production growth expected in FY-2020, I see Teranga Gold as a Hold.
We're now more than three-quarters of the way through the Q4 earnings season for gold miners (GDX), and it's been a solid quarter for the majority of companies. Of the gold miners that have reported to date, we've seen 27% revenue growth year-over-year, and over 50% of companies beating earnings estimates. Teranga Gold (OTCQX:TGCDF) was one of the more recent names to report earnings and had a strong year operationally across the board. The company managed to beat production and cost guidance by 3% and 12%, respectively and is in the process of completing a significant acquisition to beef up all-in margins at their Sabodala Mine. Based on strong forward guidance and a potential game-changing purchase of the Massawa Gold Project, I see the stock as a Hold. However, I would view any pullbacks to the C$6.00 level as low-risk buying opportunities.
Teranga Gold released its Q4 and FY-2019 results just over a week ago and managed to trounce both production and cost guidance for the year. Annual gold production came in at 289,000 ounces, well above the high end of guidance of 270,000 ounces, helped by the company's Wahgnion Mine beginning commercial production ahead of schedule. Meanwhile, all-in sustaining costs also came in much better than planned, at $917/oz vs. a guidance mid-point of $950/oz. Finally, the big news for the year was the acquisition of the Massawa Gold Project from Barrick Gold (GOLD), which has the potential to transform Teranga Gold from a mid-tier gold producer with industry average costs, to a mid-tier gold producer with slightly better than average costs. While we still do not have a detailed look at what the project's integration will look like, the early look at the project is encouraging. Let's take a closer look at the company's operations below:
(Source: Company News Release)
(Source: Company Presentation)
Beginning with Teranga's Sabodala Mine, the company saw annual gold production of 241,00 ounces at all-in sustaining costs of $807/oz. Overall, gold production was down 2% for the year from 245,000 ounces in the year prior, but all-in sustaining costs were also down 2%, offsetting this slightly. Fortunately, it was a much more profitable year for Sabodala due to the bump in the price of gold (GLD), with the average selling price coming in 7% higher for FY-2019, from $1,271/oz to $1,366/oz. It's also worth noting that the company had 20,000 ounces of unsold gold bullion at year-end, and this would have had a positive impact on all-in sustaining costs. In hindsight, the delay in shipping and selling this bullion will likely benefit the company, due to the higher gold price from December to January.
(Source: Company News Release)
Moving over to the company's new Waghnion Mine, we saw commercial production begin ahead of schedule here on November 1st of last year, with 36,872 ounces produced in Q4. Between pre-production ounces and Q4 production, the Wahgnion Mine contributed a total of 47,492 ounces to Teranga's Gold FY-2019 production. All-in sustaining costs at Waghnion came in at $938/oz and were well above guidance. However, this is less relevant as it was the company's first two months mining at Wahgnion, and a full year of mining is necessary before assessing how the mine is operating relative to expectations. The good news is that Wahgnion will benefit from lower unit mining costs in FY-2020 as the company is transitioning from a contractor mining fleet to an owner-operated mining fleet in the back half of this year.
(Source: Company Presentation)
If we look ahead to FY-2020, the company has guided for 350,000 ounces of annual gold production at all-in sustaining costs of $950 to $1,075/oz. This represents a significant jump year-over-year, mostly due to higher capital spend with Massawa, and would reflect all-in sustaining costs of $1,012/oz at the mid-point. While this would work out to a 10% jump in costs from 2019, it is worth noting that the company has a habit of giving conservative guidance and beating it. This is evidenced by the all-in sustaining cost guidance of $900/oz to $1,000/oz for FY-2019, and all-in sustaining costs coming in at $917/oz. Based on this, I would expect all-in sustaining costs to come in at $965/oz to $985/oz for FY-2020, well below the guidance midpoint of $1,012/oz.
The other thing worth noting about the cost jump for FY-2020 is that it's not expected to last. Teranga Gold's acquisition of Barrick Gold's Massawa Gold Project should do wonders for Sabodala's margins once it's in production, as the project has one of the highest-grade reserves in Africa. As the chart below shows, Massawa's reserve grade of 3.94 grams per tonne gold is nearly 200% higher than Sabodala's reserve grade (1.35 grams per tonne gold), and this should dramatically lower costs once the two projects are integrated. As we can see from the processed ore profile plan, Teranga Gold plans to partially phase out Sabodala ore and feed much higher-grade Massawa project ore to the mill to drive maximum free cash flow and improved margins. Not only will this help the company bolster its balance sheet, but it will also allow Teranga Gold to fund more aggressive exploration and development studies at its Golden Hill Project.
(Source: Company Presentation)(Source: Company Presentation)
In summary, Teranga Gold had a solid year, made better by the acquisition of Massawa, which could be a game-changer for the company. We don't yet have an integrated pre-feasibility study in place to put concrete numbers on what we should expect. Still, I believe it's possible that Teranga Gold could transform into a 350,000 plus ounce producer with all-in sustaining costs below $870/oz consistently by FY-2020. This would be a 4% drop over FY-2019's all-in sustaining costs of $917/oz, and 7% below the industry average of $950/oz. Let's take a look at Teranga Gold's chart and see if it is confirming a potential re-rating down the road:
As we can see from the chart below, Teranga Gold has broken out of a multi-year base near the C$6.00 level, and this has transitioned the stock from neutral to bullish from a bigger picture standpoint. Based on this, I believe there's a strong likelihood that 30% pullbacks will present buying opportunities going forward as dips of this magnitude often find immediate support in bull markets. In addition to this, past levels of significant resistance often end up becoming new support, and this pivotal area for Teranga Gold sits at the C$6.00 level. Therefore, as long as the bulls can defend the C$6.00 level, I would consider corrections to be noise.
Teranga Gold is one of the more attractive African-based gold producers and is undergoing an impressive transformation assuming attractive economics from the Sabodala/Massawa combined pre-feasibility study. This acquisition has the potential to increase all-in cost margins at the combined project materially, and would likely lower Teranga Gold's all-in sustaining costs to below $850/oz going forward. Assuming a smooth transition for Massawa and the receipt of all permits, there's no question this could be a game-changer for the company. Based on this, while I do prefer B2Gold (BTG) as it's my favorite African gold producer, Teranga Gold is a name worth keeping a close eye on in 2020 if we can see a dip towards the C$6.00 level. For now, I see the stock as a Hold.
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Analyst’s Disclosure: I am/we are long GLD. 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.
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