Analysts discuss why they’ve taken a shine to shares of Sandstorm Gold Ltd. (TSX:SSL) and K92 Mining Inc. (TSXV:KNT)
Capital Ideas Media | December 13, 2019 | SmallCapPower: Our last gold cover story was in late June after gold broke out to a six-year high. We gave you six research-based ideas at the time with Velocity Minerals (TSXV:VLC) performing the best of the bunch, up 41% into early August before settling back to a 23% return since late June.
(Originally published on Capital Ideas Media on November 5, 2019)
The price of gold pushed toward $1,550 an ounce in early September and is up about 6% since June and has been trading in a range around $1,500. Conditions still seem ripe for further gains in gold and gold stocks with global central banks in easing mode and economic and trade concerns still occupying investors.
We’ve got two names this week worth considering in Sandstorm Gold Royalties (TSX:SSL) (NYSE:SAND), which has been upgraded by CIBC to “outperformer” with the price target boosted to $11.25 from $10, which gives the stock a projected gain of about 15%.
And GMP FirstEnergy has started coverage of K92 Mining (TSXV:KNT) with a “buy” and a target of $4, which suggests a return of about 77%.
K92 has had a stellar 2019, up 167% already but GMP figures it’s just getting started as it builds out its Kora North resource in Papua, New Guinea.
We’ll start with some highlights from CIBC’s report on Sandstorm Gold Royalties:
Sandstorm Gold Royalties had previously reported Q3/2019 production of 17,000 ounces (koz), better than our estimate at that time of 16.3koz.
This was a record quarterly production number for the Company and puts SSL well on track to meet its production guidance of 63koz-70koz for 2019.
Looking ahead, we expect production to grow to >70koz in 2020 and 2021, before taking a significant leap to 140koz in 2023, representing one of the best growth profiles in the royalty/streaming space.
Note: GEO stands for gold plus silver with silver converted to a gold equivalent ounce at average market prices.
SANDSTORM’S FORECASTED GEO SALES GROWTH
At spot gold, SSL shares currently trade at a significant discount to the peer group at 1.1x price to net asset value (P/NAV) and 15x price to 2020 estimated cash flow (P20E/CF), compared to the royalty/streaming peer group at 2x P/NAV and 22x P/CF.
With the continued de-risking of the Hod Maden project, and other more near-term growth prospects within the portfolio, we expect SSL shares to re-rate.
ROYALTY GROUP VALUATIONS AT SPOT PRICES
Year-to-date in 2019, SSL has already benefited from ramp-ups at Eldorado’s Triangle Zone, Yamana’s Cerro Moro, and Equinox Gold’s Aurizona, while looking ahead, further key catalysts include the start-up of Lundin Gold’s FDN in Q4/2019, and Americas Silver’s Relief Canyon in Q2/2020.
Implications
Since the acquisition of Mariana Resources in mid-2017, the Hod Maden development project in Turkey continues to be de-risked, including the release of a Pre-Feasibility Study in June 2018 pointing to a 11-year mine life with annual production to average 266koz.
Work towards a Feasibility Study commenced in Q2/2019, along with ongoing permitting and land acquisitions, with a target of beginning construction in late 2020 and production in late 2022.
Hod Maden represents ~35% of Sandstorm Gold’s NAV.
Financially, the strong Q3 sales drove solid financial results, with EPS of $0.03 and cash flow per share (CFPS) of $0.10, beating our $0.02 and $0.09 estimates, respectively.
CFPS LEVERAGE TO A 10% INCREASE IN SPOT COMMODITY PRICES
$180 million of liquidity is available on the Company’s $225 million revolving credit facility.
“Looking ahead, we expect Sandstorm’s production to grow to ~70koz in 2020 and 2021, before taking a significant leap to 140koz in 2023, representing one of the best growth profiles in the royalty/streaming space.”– CIBC Capital Markets
SANDSTORM GOLD LTD (TSX:SSL) | 10YR CHART
And now GMP FirstEnergy on why its initiating coverage of K92 Mining (TSXV:KNT) with a “buy” rating and a price target of $4, which implies a gain of 77%.
Here are the highlights from the report:
Initiating coverage: Grade, scale and discovery combine to make K92 a NAV growth story.
K92 Mining is a junior gold producer focused on its 100%-owned Kainantu operation in Papua New Guinea.
Thanks to the recent discovery of the Kora North vein system underground, K92 has been one of the best-performing gold equities.
We think K92 remains a compelling growth story as the momentum at the drill bit is showing no signs of slowing down.
KORA NORTH DISCOVERY HOLE KMD0009
Rapidly-growing resource
In just 1.5 years since it was discovered in May 2017, the Kora North resource has grown from <100 koz to ~1.1 million oz (Moz) gold equivalent ounces (AuEq) based on the October 2018 resource.
Since then, the K1 and K2 veins have been significantly extended and there has been more than 120% increase in drilling, which paves the way towards K92’s year-end target resource of ~4–5.5 Moz AuEq across all deposits.
Mine and mill expansion well underway to double throughput.
K92 is progressing through a low-capital expansion of the mine and mill from 550 tonnes per day (tpd) to 1,100 tpd for only ~$15 million.
The mill expansion is largely complete and the mine will continue its ramp-up with a recently topped up mobile equipment fleet and infrastructure upgrades.
The expansion is expected to increase production, lower costs, and enhance mining predictability/sequencing. K92 is currently targeting the full ramp-up to be completed by Q3/2020.
K92 has an attractive production profile and robust margins.
We model a 15.5-year mine life, producing an average of 115 koz of gold per year at total by-product cash costs of $350/oz and all-in sustaining costs (AISC) of $533/oz.
QUARTERLY OPERATING DATA SINCE COMMERCIAL PRODUCTION
EVOLUTION OF KORA NORTH RESOURCE ESTIMATES
Based on spot prices, we see EBITDA growing from $54 million in 2019 to $156 million by 2021 after the Phase 2 expansion is completed.
KNT-CA PERFORMANCE
Upcoming catalysts to watch:
- Continued strong cash flow with upcoming Q3 earnings results.
- Production rate increasing with ongoing expansion project (target completion Q3/2020).
- Ongoing exploration updates and new Kora North resource Q1/2020.
- Preliminary economic assessment commencing early next year on Phase 3 expansion project.
Capital structure.
K92 currently has a market cap of $369 million, net debt of ($6) million, and an enterprise value of $363 million.
The balance sheet currently has $20 million in cash, ~$18 million in working capital, and total debt of $15 million.
There are currently 213 million basic shares outstanding, and 229 million when fully diluted.
Disclosure: GMP/FirstEnergy has, within the previous 12 months, provided paid investment banking services or acted as underwriter to the issuer.
GMP/FirstEnergy owns 1% or more of this issuer’s securities.
K92 MINING INC (TSXV:KNT) | 1YR CHART
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