Get things right, and investors will start placing a premium on the stock over that paid for stocks where for all sorts of reasons, FCF can be non-existent, even at record prices.
Much of the gold sector actually falls into that later space. Examples where premium pricing is being paid by investors for impressive FCF outcomes are Capricorn Metals (ASX:CMM) and Gold Road (ASX:GOR).
Investors like free cash. Look across the Aussie gold sector and there is a massive bifurcation between the low FCF multiples applied by investors to high-cost, low-growth names and the higher multiples applied to those like Capricorn and Gold Road and African producers Perseus (ASX
RU) and West African Resources (ASX:WAF), minus their Africa location discounts.
It helps it seems to be a new producer. Bellevue is certainly in that category and comes from the crawl before walking, and walking before running school in that it has yet to post production/cost guidance.
All it says is that based on the 1Mtpa processing of 6g/t dirt, Bellevue will be good for initial annual production of 200,000 ounces at sub-$1,000 an ounce.
But it does point out that an over-sized crushing circuit in the 1Mtpa plant means a virtual no-cost expansion to a processing rate of 1.25Mtpa could be possible ahead of an upgrade to 1.5Mtpa.
Stralow said now that the platform for growth had been established, the intention was to grow the mine to one that would not be out of place in a major mining company. So that 1.5Mtpa ambition is certainly there.
But again, the company wants to crawl first. On that score, Stralow said the commissioning/ramp up was going well. Apart from the establishment of 40 development headings, stoping of the mine’s high-grade shoots is “rapidly stepping up”.
“And what we drill, what we fire, what we expected, is what we are getting,” he said.
The focus is now on optimising underground mining rates (already at the required rate), milling rates, and growing the reserves and resources (more than three million ounces).
He said that with the start to production, Bellevue was expected to be cash flow neutral through the December quarter. He stopped short of tipping a cash-flow take-off in following quarters.
But there are clear indications of that happening, meaning Stralow’s desired re-rating of the stock on a FCF multiples basis is not that far off, assuming the commissioning/ramp up to full production next financial year continues to progress well.
The stock traded higher on Thursday at $1.57 a share for a market cap of $1.77 billion. That compares with the average 12-month price target of analysts of $1.73 share.
So there is a recognition out there, in part at least, that Bellevue’s re-rate is around the corner. But should it capture Capricorn and Gold Road-type premium valuations, it won’t be stopping at $1.73.
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