We’re nearly through the Q1 earnings season for the Gold Miners Index (GDX), and it’s been a mixed start to the year for the group given that we’ve seen differing restrictions by governments from each country when it comes to mining during the COVID-19 pandemic. The stand-out names that were least affected were the Australian gold producers, like Silver Lake Resources (OTCPK:SVLKF), and the miners hit the hardest that are just starting to come back online are in Mexico. Robex Resources (OTCPK:RSRBF) is the most recent name to report Q1 earnings, and the company had an exceptional quarter, with industry-leading costs and near-record operating cash flow thanks to the higher gold (GLD) price. While the company is in a less attractive jurisdiction in Mali and is going to need to boost its gold reserves, the stock remains very reasonably priced for a 50,000-ounce per year producer on track to generate operating cash flow of over $65 million in FY-2020. Based on this, I believe the stock is worth keeping an eye on for investors that are willing to invest in Tier-3 jurisdictions.
Robex Resources released its Q1 results last week, and the company reported quarterly gold production of 14,900 ounces, up 32% year over year thanks to another quarter of strong gold recoveries and improved head grades. From a cost standpoint, it was an incredible quarter, with all-in sustaining costs coming in at $707/oz, nearly 30% below the industry average, and down 8% year over year. Overall, it was an incredible quarter for the company. These solid results helped Robex end Q1 with over C$25 million in cash, and allowed the company to pay a one-time C$11.9 million dividend earlier this year to reward shareholders. Let’s take a closer look at operations at the company’s Nampala Mine in Mali below:
As we can see in the chart above, Robex has continued to grow gold production over the past two years with quarterly gold production of 14,900 ounces in Q1, a slight dip from the new high in quarterly gold production set in Q4 above 17,000 ounces. The company’s new primary crusher has improved and stabilized availability at the Nampala Mine, with the company’s objective being to achieve 5,600 tonnes per day of production for the remainder of 2020. During Q1, the strong operating results came from a 380 basis point improvement in gold recoveries year over year to 88.8%, in addition to higher grades, with head grades coming in at 1.10 grams per tonne gold vs. 0.95 grams per tonne gold last year. However, the real stand-out for the quarter was from a cost standpoint, with Robex continuing to remain one of the leanest producers in the sector from a margin standpoint.
As noted above, all-in sustaining costs for the quarter came in at $707/oz, down 8% year over year, and this was attributable to the reduction of operating services costs and maintenance of the plant. Fortunately, following these improvements, Robex now can incorporate its own preventative maintenance programs, rather than have to undergo unplanned shutdowns at Nampala. It’s worth noting that these extremely low costs were achieved despite much higher stripping costs in the quarter of C$3.2 million vs. C$1.6 million in Q1 2019. In fact, this was one of the lowest-cost quarters in three years for the company with cash costs of $408/oz (C$560/oz), and the 20% jump in the gold price coupled with the nearly 10% reduction in costs was a significant tailwind to operating cash flow. We can take a closer look at this below:
As we can see in the chart above, we saw a surge in operating cash flow in Q1, following a record quarter of operating cash flow in Q4 2019. Robex’s operating cash flow in Q1 came in at C$18.7 million, up 143% year over year from the $7.7 million reported in Q1 2019, on the back of significant revenue growth of 63% (C$30.9 million vs. C$18.9 million), and a higher average realized gold selling price of C$2,107/oz. These operating cash flow figures are outstanding for a company with an enterprise value of just C$175 million, as the company is currently trading at just over 3x FY-2019 cash flow. Based on the gold price strength we’ve seen, Robex is on track to generate over C$65 million in operating cash flow for FY-2020, meaning the company is trading at just 2.7x FY-2020 cash flow. I believe my estimate of C$65 million for FY-2020 operating cash flow is conservative for FY-2020. Still, I am using a 10% discount given the unprecedented times we’re living through and the risk of mining restrictions if the COVID-19 situation worsens.
As we can see in the chart above comparing all-in sustaining costs across the industry, Robex was ranked 8th out of 58 gold producers last year from a cost standpoint, with all-in sustaining costs coming in at $699/oz. For FY-2020, the company’s guidance is calling for 51,000 ounces of gold production at all-in sustaining costs below C$1,000/oz (US$730), and the company is on track to meet its outlook after a solid Q1 report. Given the shuffling we will see among the top 10-ranked producers with some on track to see higher costs in 2020, Robex will likely hold its spot in the top 10 ranks for gold producers worldwide from a cost standpoint. This is an exceptional feat for a company that is relatively under the radar with a small production profile below 100,000 ounces per year. Therefore, for investors looking for high-margin gold producers, Robex is certainly a name to keep on one’s radar.
So, what are the negatives?
The one negative that I’d be remiss not to mention is that the company has a meager reserve base currently, with only 180,000 ounces of gold in reserves at an average of 0.73 grams per tonne gold. This is not ideal as it’s only about four years of my life at the current production run-rate, and it could be one of the reasons the market is not giving the company much value for its recent operating cash flow growth. However, there are two positives here. The first is that the company does have a resource of over 450,000 ounces of gold at 0.81 grams per tonne gold, and Robex could move some of these ounces into the reserve category with further drilling. The other good news is that the company has outlined an extremely aggressive C$13 million drill program for FY-2020, and unless the company can’t hit anything after drilling several thousand meters, this should also provide new leads for resource expansion. Thus far, early results are encouraging, with 10 meters of 2.34 grams per tonne gold and 7 meters of 2.25 grams per tonne gold drilled in Q1. However, assuming an absolute worst-case and the company can’t find any more gold in follow-up, this is undoubtedly a risk to Robex remaining a producer after 2024.
While Robex Resources is relatively under the radar with minimal coverage, I believe the company is worth keeping an eye on for investors comfortable investing in Tier-3 jurisdictions. The company remains one of the leanest gold producers in the sector from a cost standpoint, has consistently kept a tight ship to maintain strong margins, and is finally seeing the fruits of this labor with the gold price strength. Given that the company is trading at just over 3x FY-2019 operating cash flow, I believe any 30% plus corrections in Robex Resources would be low-risk buying opportunities for starter positions in the stock.
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.
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.