Great Panther Mining: Industry-Lagging Margins Expected In FY2021
Summary
- Great Panther Mining released its Q4 and FY2020 results on Thursday, reporting annual production of ~150,100 gold-equivalent ounces.
- This increase in annual production combined with higher metals prices translated to significant growth in free cash flow and a return to positive annual earnings per share.
- However, while it was a solid year overall, we've seen a much softer outlook for FY21, with costs expected to rise to some of the highest levels in the industry.
- Therefore, I believe there are much better bets out there in the sector, especially when factoring in that we still don't have clarity on whether GMC will be in production in H2 2021.
We're more than two-thirds of the way through the Q4 Earnings Season for the Gold Miners Index (GDX), and the most recent name to report its results is Great Panther Mining (GPL). Due to a strong performance from its Tucano Mine, Great Panther managed to increase metals production year-over-year, despite shutdowns in Mexico, which impacted operations. This allowed Great Panther to return to positive annual earnings per share [EPS], and the company posted its second quarter in a row of positive free cash flow. However, the FY2021 outlook is quite soft due to higher stripping at Tucano, and risks remain at Guanajuato, with no permits yet for tailings storage. Therefore, I believe there are much better bets elsewhere in the sector.
(Source: Company Presentation)
Great Panther Mining released its Q4 and FY2020 results last week and reported quarterly production of ~37,000 gold-equivalent ounces [GEOs] and annual production of ~150,100 GEOs. The quarterly figure was quite soft due to much lower grades at Tucano and a five-week suspension at its Topia Mine in Mexico. Fortunately, the Tucano Mine's strong performance in Brazil more than offset the weakness at the Mexican operations, allowing the company to post a 2% increase in output on a year-over-year basis. This translated to significantly lower costs for Great Panther, though all-in sustaining costs [AISC] of $1,328/oz were still well above the industry average of ~$1,010/oz. Let's take a closer look at the results below:
(Source: Company Filings, Author's Chart)
As shown in the chart above, Great Panther had an opposite trend from many miners in the sector, with relatively high Q2 production and Q4 production being one of the weakest quarters of the year. As noted earlier, this was due to a five-week shutdown at Topia to curb the spread of COVID-19 and lower grades from Tucano. If we look at the chart below, while throughput did come in at record levels for Tucano, grades were down roughly 9% year-over-year, with the company processing lower-grade stockpiles. Fortunately, all-in sustaining costs dipped considerably in Q4 on a year-over-year basis despite the lower gold sales, given the lower mine-site G&A and lower capital expenditures. For the full year, Tucano produced ~125,400 ounces at all-in sustaining costs of $1,200/oz.
(Source: Company Filings, Author's Chart)
At both Topia and Guanajuato, production was down considerably, with Topia hit the hardest. On a combined basis, Guanajuato and Topia produced just ~2.22 million silver-equivalent ounces, down from ~3.30 million silver-equivalent ounces in the year-ago period. This translated to a massive increase in costs at the two mines of 66% for Guanajuato and 29% for Topia, with costs coming in at $21.88/oz and $19.75/oz, respectively. These higher costs at the impacted Mexican mines dragged up consolidated all-in sustaining costs for Great Panther, which otherwise would have been much lower, given that Tucano's costs came in at $1,200/oz. For FY2020, AISC came in at $1,328/oz, translating to AISC margins of $457/oz.
(Source: Company Filings, Author's Chart)
While some investors might applaud the significant drop in costs year over year, it's important to note that it's not expected to last through 2021. This is because it's a much higher cost year for Great Panther ahead with increased stripping at Tucano, with cost guidance set at $1,400/oz for FY2021. It's important to note that the guidance of $1,350/oz to $1,450/oz does not include general & administrative [G&A] expenses, which should push costs even higher.
Based on the $90/oz differential between pre-G&A AISC and post-G&A AISC in FY2020, we can assume that the actual AISC will be at least $80/oz higher. This means that even if Great Panther meets the guidance mid-point of $1,480/oz, costs are expected to come in at $1,480/oz for the year. This does not leave much wiggle room relative to the current spot gold price. Let's take a look at Great Panther's financial results:
(Source: Company News Release)
If we look at the chart below, we can see that revenue increased significantly year-over-year, with Q4 revenue of $68.7 million and FY2020 revenue of ~$260.8 million. This translated to a 31% increase in FY 2020 despite the shutdowns as a result of much higher gold sales and higher metals prices. It's worth noting that Great Panther's average silver (SLV) price was $21.28/oz in FY2020, so there's further upside this year if silver can stay above $25.00/oz. Given the increased revenue and much higher margins, free cash flow soared to ~$26.9 million, a significant improvement from the (-) $12.1 million in FY2019.
(Source: YCharts.com, Author's Chart)
Moving over to annual earnings per share [EPS], the Tucano acquisition is paying dividends, given that annual EPS has finally crept back into positive territory. Great Panther reported $0.07 in annual EPS in FY2020 and is projected to report $0.12 in annual EPS in FY2021 based on similar output at higher metals prices. If we assume that Great Panther meets these estimates, it's trading at just 7.5x FY2021 earnings estimates. Some investors might argue that the stock is cheap at barely 1.5x sales and less than 8x forward earnings, but Great Panther doesn't come without risks.
For starters, Great Panther is relying on resources for its production at its Mexican mines, not reserves, and this is generally much riskier. This doesn't mean that Great Panther won't succeed in meeting guidance, but an investor can be much more confident in guidance when it's based on higher-confidence reserves rather than resources. Also, Great Panther is awaiting permits from the Comisión Nacional del Agua [CONAGUA] related to its tailings storage facility. However, if the approval for expansion of the tailings storage facility is not received before June 30th, the company may need to stop milling at the site.
(Source: Management Discussion & Analysis)
Finally, Great Panther is a much higher-cost producer, with costs expected to come in above $1,450/oz for FY2021. Therefore, it's a much less defensive play on the gold price and should trade at a discount given its much slimmer margins. Obviously, the company should still be quite profitable at metals prices of $1,750/oz gold and $25.00/oz silver, but if we see further weakness in metal prices, this could severely impact Great Panther's margins. Given that gold is its dominant commodity, the industrial bull case for silver is less of a deal to the Great Panther investment case than it used to be.
(Source: Company Website)
Great Panther had a solid year in FY2020 despite shutdowns related to COVID-19, with Tucano being acquired at the right time to pick up the slack at the Mexican operations. While many investors might be drawn to the stock given its very low earnings multiple, I believe the stock is fairly valued, given that it has some of the lowest margins in the sector, is mining from resources at two of its operations, and has risk related to increasing its tailings capacity at one operation. When factoring in the lower margins, a much weaker FY2021 outlook, and these risks, I don't see any reason to pay more than $1.00 for the stock. Therefore, while rising metals price will lift all boats, I continue to see Great Panther as an inferior way to play the sector.
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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Comments (14)
This is one of my spec plays
Not doing great though