- 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.
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:
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).
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.
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.
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.
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).
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.
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.
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.
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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.
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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