Date : 17/09/2020

Saracen Minerals

ASX :

SAR

Market Cap : $5.76 Billion

Buy

52 Week Range : $2.81 - $6.75

Share Price : $5.20

On the back of a good performance in FY2020, SAR comes with favourable macro economic conditions to completement its board's growth strategy. This is a "Buy" from us.

Company Analysis

 

Saracen Mineral Holdings (SAR) is a Perth based gold mining and exploration company that operates with 3 mines in the Kalgoorlie region, WA. The 3 mines SAR operates are:

  • The Carosue Dam Operation (CDO) – 100% interest
  • The Thunderbox Operation (TBO) – 100% interest
  • Super Pit Operation via Kalgoorlie Consolidated Gold Miners Joint Venture (KCGM) – 50% interest

KCMG, a tier 1 asset was acquired in 2019, and the performance during the seven months of operations resulted in 132,595 ounces. CDO’s production increased to 203,281 ounces – a 1.77% increase from 2019. TBO saw a higher growth in production volumes with an 18% growth, ending with 184,538 ounces. The production numbers from the existing 2 mines in FY2020 were high. The addition of KCGM further boosted the FY2020 performance of SAR.

The leadership team of SAR comes with bags of experience and their strategy is focussed on growth. They have delivered on their guidance for the past 8 years. With the acquisition of Super Pit, SAR is not one among the top 20 producers of gold in the world.

Current production levels are at 500,000 ounces from all three mines. SAR’s guidance tells us it is expected to increase to 600,000 ounces in FY2021 and be on its way towards the goal of 800,000 ounces. There was a 12% increase in Reserves to 370,000 ounces, with guidance suggesting SAR is targeting 380,000 – 400,000 ounces for FY2021.

The year-to-date chart shows the stock price of SAR has been volatile. The stock was trading at record highs during July when gold prices skyrocketed to record highs as well. However, since then, the stock has lost some of the gains and is currently trading close to the middle of its 52-week low-high range.

Industry Analysis

Gold prices are soaring, and hence, companies that rely on gold are doing well. The longer Covid19 affects the world, the higher the demand for Gold. While gold prices are high, gold mining companies reduce their hedging positions, this has occurred at SAR as well.

The above chart tracks the spot price of gold in USD. The demand for Gold is expected to sustain early into the next year as more developed economies around the world are affected by the pandemic and enter periods of economic recessions.

Investment Thesis

SAR has sold more gold and at a higher price in FY2020. There was a 56% growth in the units of gold sold and a 24% growth in average gold price for those sales – A$2138/ounce. The increase in Gold prices is sure to have had a positive impact for the firm.

Total revenues increased by 93% and earnings before interest, tax, depreciation & amortisation by 104%. This indicates the strong performance of its assets where it is able to deliver more for less. This has resulted in the net income SAR doubling in a fiscal year, and earnings per share sitting at $0.19, a 69% increase from FY2019’s $0.11.

The below chart outlines the growth in total revenue, earnings, and net income over a period of 6 years. SAR’s constant growth can be seen until 2019. Since the firm now owns 100% interest in CDO and TBO, and the acquisition of Super Pit, the performance has accelerated. The strong correlation among all three metrics complement the increase in production and suggest a relatively lower growth in costs. The assets are of tier 1 grade and are able to produce a lot more gold with controlled costs.

With the acquisition and strong income, SAR has managed to more than double its cash position to A$362 million which can cover any short-term debt obligation the firm may encounter with an uncertain economic climate. The total assets exceed total liabilities by 2.6x – a strong metric in an industry that is defined by capital intensive operations. The balance sheet is therefore in a position of strength indicating strong financial health.

The firm has 78.2% equity and 21.8% in its capital structure – another sign of good health as it is not carrying too much debt to fund its operations.

Saracen is in a good position to further invest and drive growth, and their management looks like they are doing just that. The surge in gold prices has helped and it will sustain since the world is still affected by the pandemic and investors will hold on to the safe haven with economic uncertainty looming large globally.

Recommendation

Saracen comes with good financial health and on the back of a stellar performance in FY2020. A capable management and favourable macroeconomic conditions indicate lots of potential and should exceed its guidance values for FY2021. With the stock trading closer to the middle of its 52-week range, we give SAR a “Buy” recommendation for the medium to long term.

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