- Galiano Gold is down more than 47% from its 2020 highs, which can mostly be tied to the weakness in the price of gold.
- Just recently, the company released its FY2020 preliminary results, and the company had a solid Q4, helping Galiano beat its FY2020 guidance.
- Looking ahead to FY2021, the company is expected a higher-cost year, which could be a minor headwind to margins.
- At current levels, the valuation is starting to look compelling, and I believe the stock is a Speculative Buy at $1.00.
We're more than two-thirds of the way through the Q4 Earnings Season for the Gold Juniors Index (GDXJ), and Galiano Gold (NYSE:GAU) is getting set to report its Q4 and FY2020 results. The company recently released its preliminary results for the year and posted a beat on guidance for the second year in a row, despite minor COVID-19-related headwinds at its 45%-owned Asanko Gold Mine [AGM]. This is a rarity in the sector given that more than 70% of companies missed guidance, and it should translate to strong growth in annual earnings per share [EPS]. With Galiano more than 45% off its highs, the valuation is getting compelling, but I would not rule out a re-test of the recent lows. Therefore, while I am not long currently, I would view the stock as a Speculative Buy at $1.00 if this correction continues.
Galiano Gold owns a 45% interest in the Asanko Gold Mine Joint Venture (JV), but all production figures are reported on a 100% basis unless otherwise noted.
Galiano Gold released its Q4 and FY2020 preliminary results last month and reported annual gold production of 249,900 ounces, a massive beat vs. its guidance mid-point of 235,000 ounces. This strong performance was helped by an impressive finish to the year in Q4, with production coming in at 65,600~ ounces, more than 4% above the trailing-twelve-month quarterly production rate (62,600~ ounces). However, cost guidance came in a little high at $1,115/oz. This miss on costs was not entirely the company's fault because it was partially affected by the higher royalties related to the gold (GLD) price. Let's take a closer look at the results below:
As shown in the chart above, production bounced back strongly in Q4 after a very weak Q3. This weak Q3 performance was because Galiano was busy with development work to prepare the Esaase and Akwasiso pits in Q4, which led to much lower feed grades with some reliance on lower-grade stockpiles. Fortunately, Q4 production soared 34% sequentially, more than making up for the weak Q4 performance. The strong performance was driven by higher feed grade, stable throughput, and exceptional gold recovery rates, with gold recovery up 100 basis points year over year to 95%.
If we look at the chart above, we can see that Galiano's ore mined hit a new multi-year at 1.96~ million tonnes, with the strip ratio dropping to a much more favorable 6.0 to 1 vs. 11.8 to 1 in Q3. Meanwhile, feed grades jumped to 1.5 grams per tonne gold from 1.1 grams per tonne gold in Q3 and were flat year over year. Given that throughput (grey bars) came in well below Q2 and Q3 levels, this should have been a sub-65,000-ounce quarter, but gold recovery rates surprised to the upside. This is very encouraging and was the main culprit for higher production outside of much stronger grades on a sequential basis.
While production was down 1% year over year (249,900~ ounces vs. 251,000 ounces), this was still a solid year for the mine, given that Q3 was mostly focused on development work, and operating the mine was more challenging due to social distancing. If we look ahead to FY2021, it's expected to be a softer year, though, with output guidance of 235,000 ounces at the mid-point at all-in sustaining costs of $1,200/oz. However, it's important to note that the company has consistently beat the upper end of its guidance, so FY2021 will likely be a 245,000-ounce year at costs of roughly $1,200/oz if we a similar pattern of under-promising and over-delivering.
Assuming the gold price averages below $1,800/oz in FY2021, this could be a minor drag on Galiano's margins, given that the company's average realized gold price in FY2020 was $1,711/oz. Assuming that all-in sustaining costs come in at $1,200/oz for the year and the gold price comes in at $1,800/oz, all-in sustaining cost margins will roughly flat for the year at $600/oz. If cost guidance misses like it did this year, we could see all-in sustaining cost margins dip closer to $550/oz for FY2021. This isn't a huge deal because the company is still enjoying much higher margins than it has in the past, but it could make achieving earnings growth a little more difficult next year. Let's take a look at the earnings trend and most recent estimates below:
As shown in the chart above, Galiano Gold has been unable to generate meaningful annual EPS since FY2016, but FY2020 is expected to be a drastic change to this prior trend. This is because annual EPS estimates are sitting at $0.21 currently, translating to 2,000% growth in annual EPS ($0.21 vs. $0.01). While it's relatively easy to achieve a quadruple-digit growth rate when prior year comps are a penny, this is still a massive and welcome step in the right direction. However, as noted earlier, FY2021 earnings growth is less clear, given that production should be down slightly and costs are expected to climb, offsetting what will likely be a higher average realized gold price.
So, what's the good news?
Galiano recently provided an update on its Phase 3 Drill Program at Miradani North, a target that lies 10 kilometers south of the company's operations. Results from this follow-up drill program look quite solid, with highlights as follows:
- TTDD20-052: 134 meters at 1.62 grams per tonne gold
- TTDD20-050: 10.1 meters at 6.20 grams per tonne gold
- TTDD20-030: 44.33 meters at 2.04 grams per tonne gold
Given that the current reserve estimate at the AGM comes in at a grade below 1.40~ grams per tonne gold, these are all very encouraging intercepts. This is especially true because the target lies in very close proximity to the plant, so trucking the ore will incur minimal additional costs. As it stands, the company hopes to announce a maiden resource estimate for Miradani in Q3 with its updated reserve estimates for the AGM. Assuming the company can prove up a 300,000-ounce plus resource above 1.50 grams per tonne gold, this would be a very positive development, given that most of the current reserve pits come in below 1.40 grams per tonne gold.
So, is the stock a Buy at current levels?
Given that Galiano is a high-cost single-asset miner in a Tier-3 jurisdiction, I believe a conservative earnings multiple for the stock is 7 to account for these risks. Based on FY2021 annual earnings per share estimates of $0.21, this translates to a conservative fair value of $1.47. However, I prefer to buy when there is a minimum of 40% upside to fair value for names with sub $1 billion market caps. This would translate to a share price of $1.05 or lower. Given that we've seen strong buying support at $1.04 going back to last year, any dips below this area would be a low-risk area to start a position. So, while the stock is certainly getting cheaper at below 7x earnings estimates, I am waiting for a pullback closer to $1.00 to bake in a further margin of safety.
Galiano Gold had a solid year and set to report a massive boost in annual EPS, which explains why the company performed so strongly in the first half of 2020. However, with the potential for flat earnings on a year-over-year basis, unless the gold price starts to strengthen, it's possible that the stock could retest its lows before finding a bottom. If we were to see an undercut of this previous strong support level, I would view this as a low-risk buying opportunity. Therefore, while I do not own the stock currently, I would strongly consider starting a position at $1.02 where Galiano would trade at roughly 5x FY2021 annual EPS estimates. It's important to note that Galiano Gold is a high-risk, high-reward name in the sector given its lower margins and less favorable jurisdiction, so I would rate the stock a Speculative Buy if it dips to this level.
This article was written by
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.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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