Roxgold: A High-Growth Story In A Low-Growth Sector

Summary

• Roxgold released its Q4 and FY2020 results last week, reporting strong revenue growth and significant margin expansion.
• However, the real story was Seguela, the company's development project which offers investors industry-leading organic growth.
• Based on the discovery of the Koula deposit, Roxgold could increase annual production to more than 140,000 ounces, a massive boost from the ~103,000-ounce production profile in the Q2-20 PEA.
• Given Roxgold's enviable organic growth profile, and the ability to add a second mine without shareholder dilution, I would view any dips below US$1.05 as low-risk buying opportunities.

The Q4 Earnings Season for the Gold Miners Index (GDX) is nearly over, and one of the most recent names to report its results is Roxgold (OTCQX:ROGFF). The company had an exceptional year in FY2020, beating its production guidance and coming in only slightly above cost guidance. This impressive performance coupled with a higher gold price allowed the company to post double-digit revenue growth and enjoy a massive boost in all-in sustaining cost [AISC] margins. However, the real story was Seguela, which continues to exceed my expectations. Given Roxgold's enviable organic growth profile, and the ability to add a second mine without shareholder dilution, I would view any dips below US$1.05 as low-risk buying opportunities.

(Source: Company Presentation)

Roxgold released its Q4 and FY2020 results last week and reporting annual gold production of ~133,900 ounces at AISC of $1,004/oz. This translated to a 7% beat vs. its guidance mid-point of 125,000 ounces, and only a slight decrease from FY2019 levels (~142,200 ounces) despite COVID-19 related headwinds. While this was great news and a welcome surprise for investors, the best news came from Seguela, where the company is getting ready to build a second mine to augment its production profile. Exploration success at Koula suggests that Seguela could be much larger than envisioned in the Q2 2020 Preliminary Economic Assessment [PEA], and continued high-grade results from Koula should allow Seguela to operate at industry-leading costs once in production. Let's take a closer look at the results below:

(Source: Company Filings, Author's Chart)

As shown in the chart above, Roxgold had a solid year at its flagship Yaramoko Mine with quarterly production remaining above 30,000 ounces per quarter, despite challenges brought on by COVID-19. Roxgold's Q4 production came in below last year's levels, but it was still a solid quarter, given that the company was lapping record production on a year-over-year basis. These solid results at Yaramoko were due to impressive throughput figures, with annual throughput coming in at a record of ~512,300 tonnes, up 10% year-over-year. This mostly offset the lower grades processed in FY2020, with Roxgold's average head grade coming in at 8.5 grams per tonne gold (FY2019: 9.5 grams per tonne gold).

(Source: Company Filings, Author's Chart)

In terms of Roxgold's financial results, it was an incredible year, with annual revenue of $239.7~ million, up more than 30% year-over-year. This significant boost in revenue was driven by a much higher gold price of $1,771/oz in FY2020 and $1,874/oz in Q4. The only negative was that Roxgold's AISC increased significantly on a year-over-year basis to $1,004/oz, up from $844/oz in FY2019. It's important to note, though, that COVID-19 costs were estimated to add $35/oz to costs, and adjusting for this headwind, costs came just below the cost guidance mid-point ($969/oz vs. $970/oz). The good news is that the gold price's strength more than offset the higher costs, with Q4 AISC margins hitting a new record of $966/oz and FY2020 AISC margins up 39% to $767/oz.

(Source: Company Filings, Author's Chart)

While the financial results were exceptional and allowed Roxgold to finish the year with over ~$60 million in cash, the real story for the investment thesis continues to be Seguela. Last year, the company released a PEA highlighting the potential for an operation capable of producing ~103,000 ounces per year at all-in sustaining costs of $749/oz. However, the project has transformed since then, with a 97% increase in indicated resources and the bonanza-grade Koula deposit discovery. This larger resource at significantly higher grades (4.8 grams per tonne gold vs. 2.5 grams per tonne gold) suggests Roxgold could have a much larger operation on its hands, especially if Koula continues to deliver.

(Source: Company Filings, Author's Chart)

For those unfamiliar, the Ancien deposit was previously the sweetener for the Seguela deposit, with a resource of 224,000 ounces at 6.6 grams per tonne gold, dwarfing the Q1 2020 resource grade of 2.8 grams per tonne gold. However, the emergence of Koula is a complete game-changer, with the company recently announcing an inferred resource of 281,000 ounces at 8.1 grams per tonne gold. In addition, Ancien has been upgraded to 261,000 ounces at ~5.5 grams per tonne gold, with more than 95% of this resource in the higher confidence indicated category. These positive developments should propel Seguela to ~140,000-ounce per annum status, a 35% increase from the previous ~103,000 production profile over the mine life.

(Source: Company News Release)

(Source: Company News Release)

However, if we continue to see the results like we've got thus far in FY2021 from Koula, I would not rule out a 150,000-ounce per annum production profile. Just recently, Roxgold released new drill results from Koula that dwarf the current resource grade of 8.1 grams per tonne gold, with these results as follows:

• 12 meters of 38.3 grams per tonne gold
• 16 meters of 28.3 grams per tonne gold
• 15 meters of 24.0 grams per tonne gold
• 9 meters of 30.5 grams per tonne gold
• 13 meters at 15.1 grams per tonne gold

While these highlight holes will not dictate the average grade of the resource, they are some of the best intercepts drilled to date at Koula, with the January intercept of 14 meters at 42.9 grams per tonne gold coming in just after the resource was reported. This suggests that we might see a lift in resource grades at Koula for the Feasibility Study that's due before summer, offering Roxgold two high-grade ore sources to choose from to sweeten overall feed grades from the larger low-grade deposits at Seguela (Antenna, Agouti, and Boulder).

(Source: Company Filings, Author's Chart)

To put these recent Koula intercepts in perspective, we can look at a chart of the best drill intercepts of 2020, ranked by grams per tonne gold x interval thickness in meters. As we can see, the range of the top intercepts drilled in 2020 by all companies was 700 gram-meters to ~27,300 gram-meters, and Roxgold's most recent intercepts came in at 601, 508, 460, and 453 gram-meters, respectively. While these are in the lower end of the range for the top-35 intercepts drilled last year, it's important to note that Koula is a near-surface open-pit deposit, and most of these hits are underground. So, adjusting for the fact that these are open-pittable ounces sitting within 200 meters of surface, these are world-class results.

(Source: Company Presentation)

Assuming Roxgold's Feasibility Study can prove up a 10-year mine life with over average gold production above ~140,000 ounces, this would translate to a more than 100% increase from Roxgold's current production profile of ~130,000 ounces per annum. This should lead to a significant re-rating once Seguela pours its first gold, with the potential for a further re-rating if we see another high-grade discovery on the property or if Koula and Ancien continue to grow. In a sector where one struggles to find miners growing production by more than 20% in the next three years, Seguela's 105% potential boost in overall gold production places it in a world of its own.

(Source: Company Presentation)

In summary, while Roxgold might look fairly valued as a ~130,000-ounce producer at costs only slightly below the industry average in a Tier-3 jurisdiction like Africa, it's important to note that there is considerable value at Seguela. Given that Seguela is still awaiting a Feasibility Study [FS] and is two years out from production, the market is not yet giving value for its potential. However, assuming the FS delivers, Roxgold could double its production without any share dilution and do so while decreasing its overall cost profile. So, for investors looking for growth in this sector, Roxgold is one of the few names that stands out. With the stock trading at an enterprise value below ~$400 million with the potential to double production within 2 years, I would view any further weakness below US$1.05 as a low-risk buying opportunity.

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.

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.

Comments

[fazsha]

“With today’s announcement awarding Lycopodium as our preferred EPC contractor, we now have direct visibility on a fixed-cost basis of over half of the overall project capital requirement. This has provided more certainty that the capital estimate in the Feasibility Study will be consistent with the estimate of $142 million in the PEA Study.

“Meanwhile, our early works activities have allowed us to begin our engagement with the local communities, initiating a Roxgold training program and hiring over 100 local workers in support of the project, with additional sub-contracting employment opportunities to carry out minor works."

Feasibility Study - Q2.

Séguéla construction decision - mid 2021.

[Brian Cellars]

Thanks Taylor. I'm long again with my full allocation at $1.43 CAD ave. It has held up pretty well and would like to see a breakout higher from here.

[Taylor Dart]

Hi Brian,

Happy it was of value - agree, someone seems to be supporting it.

[Brian Cellars]

@Taylor Dart Got the breakout and now I'm uncertain of what to do and perhaps you can help. I'm perplexed by the recent action of various miners, and in particular, ROXG, SBB and JAG, all of which you have written about recently. I started taking gains on ROXG last week over $1.70 CAD, with the sector falling back after Wednesday's blast up. It's now approaching its September high from which it fell, but JAG kept blasting higher in February, which I managed to hang on for, and now it has fallen over 40% and is falling further, with another -10% to get back to its November bottom. SBB did a hard run up to close 2020 and then fell 50% and may have hit bottom. It seems that fundamentals are not driving these moves, and going forward in the short term, ROXG could be the winner, blasting to new highs before losing momentum and falling way back. That said, it seems reasonable to sell ROXG, locking in gains and buying SBB and waiting for JAG. Longer term (months), I'm pretty sure SBB and JAG will outperform ROXG from current prices, but the short term has me wondering. Thanks.

[Taylor Dart]

Hi Brian,

JAG is somewhat tightly held so it trades erratically, but I rarely trust breakouts in miners, they have about a 30% success rate even in bull markets, let alone in choppy markets. That's why I was recommending selling into the JAG breakout if it got above US$7.35.

SBB did a financing at an unfavorable price and has significant upside to my target price, but it's out of favor, I'm waiting for a clear sign of turnaround before starting position. I have no issue buying companies at low FCF multiple with no debt and high margins into weakness, but I rarely buy juniors on weakness since there's no valuation metric to put a floor under them except onuces in the ground which most fund managers aren't trading off of.

My favorite among the 3 is ROXG,but I liked it below US$1.10, it's a hold now.

SBB - Medium-risk, high-reward (takeover potential, cheap, but digesting recent financing which led to slight dilution)

ROXG - Medium-risk, high-reward (massive organic growth but Tier-3, but defensive to gold price, very low cost)

JAG - HIgh-risk, high-reward (minimal production upside short-term, expensive on reserve valuation basis, Tier-2, high costs so not defensive to gold price)

[coloradan]

Taylor:
I read the article over the weekend, liked what I saw, spent some time on the company website reviewing their data and took a moderate position yesterday. Got lucky with the gold price jump today.
I'm generally in sync with what you like as we both look for nice deposits that get better over time (as they explore more) and, as they go through the different feasibility stages the CapEx and AISC are lower quartile, resulting in expected high NPVs and IRRs.
You haven't taken a look recently at Great Bear Resources. It's 25% off its highs, but continues to have great drill resources. They're playing a long game, not attempting to define resources yet, as the drilling keeps hitting good finds. My sense it's a 10-20m oz deposit.

[Taylor Dart]

Hi CD,

Think you'll do well here if managed to get in near US$1.00.

I cover some juniors on SA, but most North American juniors I only cover in my private newsletter at www.tfsignals.com. Names include Wallbridge, Great Bear, and several others.

[fazsha]

Mar 9 - Roxgold continues to release monster drill results from Koula...

www.juniorminingnetwork.com/...

[Diottica]

From linked article:

"While we had initially viewed Koula as an attractive satellite opportunity it is now clear that it has the potential to be the most important deposit defined at Séguéla so far. In addition, our drills have resumed extension testing at Ancien, the other ultra-high grade deposit discovered to date."

Long and holding.

[Reading61]

Hi Taylor:

Thanks! Any thoughts on the news below?

Sibanye Stillwater (SBSW -2.7%) CEO Neal Froneman says South African-based miners AngloGold Ashanti (AU +1.9%) and Gold Fields (GFI -0.4%) would fit with the company's acquisition strategy.

[Taylor Dart]

Hi Reading, no prob!

No real thoughts, just a comment from a CEO. I don't really speculate much on comments made.

[Easy Al]

@Reading61 SBSW's currency is pretty strong while ROGFF is kind of weak. I suppose ROGFF is not too big for SBSW to swallow.

[fazsha]

May 1, 2014 - Appian invested $12.5 million in the West African gold developer, Roxgold Inc. and now owns 12% of the company. Appian CEO Michael Scherb is very complimentary of Roxgold’s management team and board, whom Mr. Scherb describes as “great stewards of capital.”

“We like the term ‘accommodative capital’ because we like to be partners with our portfolio companies,” Mr. Scherb explains. “We have the internal management expertise, both in terms of operations and capital markets, to add value as a cornerstone investor if the management team requests it.”

As of 2021 Appian now owns 13.3% of Roxgold.

[Diottica]

Thanks for the analysis Taylor.

I agree with the positive outlook which is why ROXG (on Toronto exchange) is one of my top 5 holdings and which I'll add to around C$1.34.

[Taylor Dart]

Hi Diottica,

Happy it was of value, thanks for reading!

[alcshrink]

Thanks for continued insight into some of these junior gems. Do you have an opinion of why there AISC are relatively high for averaging ~8 g/t., other than Covid(with 6x the grams/ton of average miner).

[Taylor Dart]

Hi Al,

So many factors from deposit to deposit, so it's not really an apples to apples comparison on the assumption that higher grades always translate to lower costs. High-grade open pit vs. low-grade open pit generally translates to lower costs, but you can get some very low-cost open-pit operations even at low-grades under right conditions. Size also factors into it a lot, because unit costs divided by gold sales at end of day, and mines benefit from economies of scale. For example, an average 200,000-ounce operation could have much better costs than a higher-grade 70,000-ounce operation.

In general, it's hard to get costs below $875/oz on underground mines, unless they are bonanza-grade. Whereas an open-pit mine with 6-8 grams per tonne gold could easily have costs below $625/oz.

[Hughie Thomasson]

Nice article once again. Just wondering about this one sentence:

“Assuming Roxgold's Feasibility Study can prove up a 10-year mine life with over average gold production above ~140,000 ounces, this would translate to a more than 100% increase from Roxgold's current production profile of ~130,000 ounces per annum.”

How is going from 130k oz. to 140k oz. per year a 100% increase in production? Is there a typo or am I missing something?

[Taylor Dart]

Hi HT,

130k at Yaramoko + 140k at Seguela = 270k.

[Easy Al]

@Taylor Dart Thanks for an very informative article. What do you think the chance that ROGFF is acquired by a bigger miner ?

Near the beginning of the second paragraph, you have a sentence: "....This translated to a 7% beat vs. its guidance mid-point of 125,000 ounces, and only a slight decrease from FY2020 levels (~142,200 ounces) despite COVID-19 related headwinds.". Instead of decrease from FY2020, you probably meant by decrease from FY2019.

[Taylor Dart]

Thanks for catching that. I don't think it's very likely because it's too small for most of the African producers (AU, GFI, HMY), and it would fit well for Endeavour but I think they're done shopping, and BTG doesn't seem to be interested in M&A here, because I would have expected them to do M&A in Q3 if they were going to do it with their strong share price. They could do a deal in debt or cash for Roxgold, but that's the only real potential suitor I see.

[simsjr17]

Within 2 years- If gold is at $2000, and Seguela keeps firing and gets built, Roxgold will probably be close to $1billion USD market cap.. roughly $3 CAD (current share price is $1.42 CAD). They will get re-rated due to better sentiment, higher gold price, multi-asset producer, etc. That's a pretty good bet.

[Effen]

Taylor, Thanks for the article. Roxgold had me at Ancien. It was clear that there was a potential in this large land package for more exploration success. I agree that Koula is a complete game-changer.

[Taylor Dart]

Hi Effen,

Thanks for reading. Agreed 100% there. The Seguela story was outstanding even without Koula, and it's nice to see that they could have some long-term upside from Boussara too, though I've valued it at zero for now.