We’ve finally begun the Q2 Earnings Season for the Gold Miners Index (GDX), which means that we’re finishing up FY2020 for the majority of the Australian gold producers that are two quarters ahead. St Barbara Limited (OTCPK:STBMY) is one of the most recent names to report its earnings, and the company had a disappointing year, with production guidance missing the midpoint by nearly 10%. This lower production contributed to a substantial increase in costs from A$1,036/oz to A$1,369/oz, with St Barbara falling from a rank among the lowest-cost gold producers to the highest-cost gold producers based on FY2020 figures. While this doesn’t put a lasting dent in the investment thesis, I now see the stock as a Hold here, as there are better opportunities elsewhere in the sector.
St Barbara Limited released its fiscal Q4 and FY2020 results last week and reported annual gold production of 381,900 ounces vs. initial guidance of 420,000 ounces at the mid-point. While the company’s Simberi and Atlantic Gold operations performed relatively close to plans, the company’s flagship Gwalia had a tough year, missing guidance by more than 16% with just 171,000 ounces produced last year. Unfortunately, FY2021 guidance points to another tough year with lower gold production vs. 2018 peak production at rising costs. This is based on the FY2021 outlook sitting at 390,000 ounces at A$1,435/oz.
As we can see from the chart below, St Barbara has had a relatively uninspiring production profile over the past several years, but the hope was that the Atlantic Gold (OTCPK:SPVEF) acquisition last year would change this and push annual gold production above 425,000 ounces. While this should have been the case as St Barbara was producing 400,000 ounces with Simberi and Gwalia alone in FY2018, we instead saw a year of lower gold production relative to FY2018, despite the addition of another mine. Meanwhile, even though the company picked up arguably one of the lowest-cost operations globally, all-in sustaining costs came in higher than FY2018 levels (A$891/oz) at A$1,369/oz. As noted earlier, this is the result of a disappointing year at Gwalia, and a soft year at Simberi, with Atlantic unable to pick up the slack given that it’s the smallest mine in St Barbara’s portfolio on an annual output basis. Let’s take a closer look at the company’s operations below:
Beginning with the company’s Gwalia Mine in Australia, we saw a massive drop-off in production, with 171,200 ounces produced vs. 220,200 ounces in FY2019. While St Barbara was anticipating a decline in production year-over-year based on its guidance mid-point of 205,000 ounces, the slide wasn’t expected to be nearly this bad. The culprit for the weak performance was the Gwalia Extension Project being delayed due to poor ground conditions, which has forced the company to continue mining lower grade stopes. This was evident in FY2020 as the average milled grade came in at 7.1 grams per tonne gold vs. 10.8 grams per tonne gold the year prior. Unfortunately, the higher throughput that hit a multi-year high in Q4 was unable to offset the decrease in grades and recoveries, leading to poor performance overall. Based on the FY2021 outlook, we aren’t expected to see a significant improvement next year, but the company is confident we’ll see production back up to closer to 200,000 ounces per year in FY2022 and FY2023.
Moving over to the company’s Simberi Mine in Papua New Guinea, it wasn’t a great year here either, though certainly not nearly as bad as Gwalia. The mine reported annual gold production of 104,000 ounces, down 26% year-over-year, with all-in sustaining costs suffering due to the weaker performance. All-in sustaining costs for the quarter came in at A$1,467/oz vs. A$1,162/oz in FY2019, with the culprit for the weak performance being grades here as well. Like Gwalia, St Barbara expected a softer year at Simberi in FY2020 based on its guidance of 117,000 ounces at the mid-point, but a 10% miss and 26% drop-off in production year-over-year wasn’t planned for.
As we can see from the table above, the weaker results were due to significantly lower grades and a 400 basis point hit to gold recovery rates. Milled grades during FY2020 came in at 1.17 grams per tonne gold, a nearly 30% drop from the 1.64 grams per tonne feed grade in FY2019. Meanwhile, gold recovery rates dropped to 83%. Unfortunately, while mill throughput was actually up year-over-year to nearly 3.3 million tonnes, it was not enough to offset the sharp decrease in grades. If we look ahead to FY2021, things aren’t expected to bounce back quickly here either, with FY2021 guidance of 100,000 ounces at A$1,750/oz.
Finally, we did get good news from the Atlantic Gold operations in Canada, with gold production of 106,700 ounces in FY2020, above guidance of 100,000 ounces, and up by more than 10% year-over-year. While all-in sustaining costs increased from last year, they came in at industry-leading levels of A$928/oz, equivalent to below US$650/oz, which allowed for significant margins at the mine given the average realized gold (GLD) selling price of A$2,350/oz. This impressive performance from Atlantic was a saving grace for St Barbara; otherwise, this would have been a much uglier year.
During Q4, we saw record quarterly gold production of 29,200 ounces, a more than 10% improvement sequentially from the fiscal Q3 results. This exceptional quarter was driven by higher grades and recoveries despite similar throughput levels, with milled grades coming in at 1.41 grams per tonne gold vs. 1.24 grams per tonne gold in fiscal Q3. While we didn’t see all-in sustaining costs drop in fiscal Q4 despite record production as they came in at A$988/oz, it’s important to note that this was only due to significantly higher capital expenditures. If we remove the A$140/oz headwind in the quarter on a sequential basis due to higher sustaining expenditures, all-in sustaining costs would have come in closer to A$825/oz at some of the lowest costs for any mines worldwide.
Unfortunately, as noted earlier, the solid performance at the Atlantic Gold Operations was not enough to offset the much higher-cost year at Gwalia and Simberi. As a result of this, Atlantic Gold has dropped from a rank of 3rd out of 8 names in this peer group from a cost standpoint to 6th out of 8 names. This is not a huge dent to the investment thesis as St Barbara’s costs are still more than 2% below the industry average for all producers, but it’s certainly ideal. However, the one piece of good news is that this high-cost year was offset by the gold price, as St Barbara managed to improve to a net cash position of A$89 million from net debt of A$36 million at the end of fiscal Q1. However, while this is great, it still doesn’t change the massive relative underperformance vs. peers in FY2020 or the lukewarm year ahead.
While things can’t get much worse than FY2020 for St Barbara with the company’s two largest mines posting massive misses relative to guidance, they aren’t expected to bounce back immediately either. Meanwhile, FY2021 is expected to be a much higher cost year with sustaining capital projected at A$106 million vs. A$73 million last year. This suggests that the higher cost profile is here to stay at least short term. Therefore, while the St Barbara thesis remains intact long term, I see more attractive opportunities elsewhere among the Australian gold producers. Two of the names I prefer are Ramelius Resources (OTCPK:RMLRF) and Saracen Minerals (OTCPK:SCEXF), which offer growth and industry-leading margins, and more consistent operational performance.
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.