We’ve finally begun the Q3 Earnings Season for the Gold Miners Index (GDX), and one of the first companies to report its results is Gold Road Resources (OTCPK:ELKMF). While the mid-tier Australian gold producer started off the year strong and was tracking in line with guidance, Q3 was a tough quarter for the company, with gold production sliding 22% sequentially. This unexpected softness forced Gold Road to revise its FY2020 guidance at the Gruyere Mine, with the updated outlook down 3% from the prior outlook. Fortunately, the weaker operations in Q3 were offset by a higher gold (GLD) price, allowing the company to finish the quarter with above A$100 million in cash. I see this recent pullback as a low-risk buying opportunity, but I believe there are more attractive names among the Australian gold producers. All figures are in Australian Dollars unless otherwise noted, and all mine production statistics are on a 100% basis for Gruyere.
Gold Road Resources released its Q3 results last week and reported quarterly gold production of 55,900~ ounces from its 50% owned Gruyere Mine in Australia. This was a significant drop-off from the 71,900~ ounces produced in Q2 and was the weakest quarter for gold production since the mine began commercial production in Q4 2019. Fortunately, this was mostly due to a short-term issue that occurred on the restart of the processing facility after planned maintenance, and it’s not expected to have any lasting effects on operations. Let’s take a closer look at the quarter below:
As shown in the chart above, it was a tough quarter for Gruyere in Q3, as the company reported the failure of a ball mill motor bearing in late September. This resulted in a 7-day impact on the company’s operations, which weighed on production numbers, but the ball mill is now fully operational, so this has set up Gold Road for a strong finish to the year. Unfortunately, as noted earlier, it led to a 3% cut in guidance at the mid-point (260,000 ounces at mid-point vs. 268,000 ounces previously).
Taking a closer look at operations, we can see that the Gruyere plant processed 1.89 million tonnes during Q3 at an average grade of 1.03 grams per tonne gold. This was a significant drop from the record 2.19 million tonnes processed in Q2 at 1.06 grams per tonne gold, which was the main culprit for lower gold production sequentially. The lower throughput was due to lower plant availability with a planned shutdown exacerbated by unplanned maintenance, while the 3% drop in gold grades didn’t help matters. In addition, gold recovery rates slid by 160 basis points from 93.1% in Q2 to 91.5% in Q3. This resulted from a transition to more fresh rock ore, though this was to be expected.
Given the much weaker quarter at Gruyere, it’s no surprise that all-in sustaining costs rose materially, up from $1,233/oz [US$87/oz] to $1,488/oz [US$1,056/oz] sequentially. While this is certainly not ideal, it’s important to note that Gold Road will continue to maintain its industry-leading costs on an annual basis, with FY2020 cost guidance sitting at $1,300 [US$923/oz]. Therefore, while this hiccup has led to a spike in costs short-term, the company still has a very respectable production profile as a 130,000-ounce producer (50% basis) at costs below the industry average of $980~/oz.
(Source: Author’s Chart)Moving over to the financial results, Gold Road generated $22.2 million in free-cash-flow for the quarter. This was just below the $23.8 million reported last quarter, but Gold Road had a headwind in the quarter with a nearly 50% increase in sustaining capital and exploration costs. On a trailing-twelve-month basis, Gold Road has generated $77.4 million in free-cash-flow, meaning that the stock is currently trading at just over 15x free-cash-flow, a little higher relative to some peers. This is a reasonable valuation, though there is better value out there in names like Kirkland Lake Gold (KL) currently, in my opinion, trading at similar levels with much higher margins.
In the quarter, the good news for Gold Road was that the company’s cash position continues to build, increasing to $103 million at quarter-end with no debt. I was previously excited by this significant cash build as I thought the company might explore M&A. However, Gold Road announced that it expects to pay an inaugural dividend for the six months ended December 2020, and they are targeting 15% to 30% of free-cash-flow. While some investors might like this decision, I’m not crazy about it, as I would much rather see the company focusing on growth vs. paying out dividends here.
The gold producers with the best returns consistently like Silver Lake (OTCPK:SVLKF) and Ramelius (OTCPK:RMLRF) have made growth a priority ahead of dividends, allowing them to diversify their operations and rapidly grow production. With Gold Road being a single-asset producer, I don’t see a reason to go the dividend route. Instead, I would much rather see as much cash as possible accumulating on the balance sheet and the company in a position to acquire an advanced stage explorer or save money to double their drill programs on their regional targets if they hit something exciting. In my view, dividends are for more mature companies that don’t have any meaningful growth prospects short-term, and a 130,000-ounce single asset producer is hardly what I would consider mature.
If we look at the technical picture, Gold Road is sitting at a precarious position, right on a key support level going back several years. The key for the bulls will be defending this long-term moving average (green shaded area), as a weekly close below A$1.30 would be a negative development. Therefore, while I see the stock as beginning to get oversold here and this pullback being a low-risk buying opportunity, this is contingent on support holding. So far, pullbacks to this area have had a good track record, with three of the past four finding immediate buying support.
Gold Road Resources had a rough Q3 but still managed to add another $17 million to its balance sheet, and the short-term issues are now behind us, hopefully. However, I am not elated with the decision to pay out dividends already, as I would much rather see the company building its balance sheet even quicker to open up M&A potential next year. Therefore, while I see the stock as a solid name in the sector given its Tier-1 jurisdiction and industry-leading costs, I think there are better names out there like Ramelius, Silver Lake, and Kirkland Lake Gold.
Disclosure: I am/we are long GLD, KL. 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.
Additional disclosure: 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.
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.