Short/medium term outlook, page-3

I think meeting guidance will be a good start, but it is not all that I think is necessary. The driver for my initial investment was the amount of cash they were generating per share, and their production growth. That payed off very well in 2015 2016, but then increased other costs cut in such as exploration drilling to keep churning over the resources, and other capital development.

For example 4Q16 and 1Q17 they increased their cash by an equivalent of 30% and 40% per annum. You can not help for a rerating on that cash generation, they were spectacularly undervalued. However the last 3 quarters free cash flow is down to 14% per annum which is about average indicating average value. Their production is stable around 130koz with no organic growth profile for the next few years to put them ahead of the pack. Their AISC is average and higher than the top runners like EVN, SBM, NST etc. Also RMS has gone for significant gold price hedging which for the last 3 quarters has put their gold sale price down $50 on the likes mentioned above. Now they have 50% hedging for fy18 at AUD1715, good for the current quarter and maybe not reflected in their share price. However this will significantly cap their response if gold keeps heading up, or the australian dollar drops. Again this is ok playing it safe but limits their potential to get back to the large cash cow status of FY16.


Looking at the charts it should be obvious that RMS has not responded to the current mini bull market in AUD gold price at all. Even my little loss making miners RED and BLK have turned an uptrend since end of July, but RMS is yet to (quite) break its current downtrend. The market has spoken using the cash generation arguments I gave above, metric I mentioned above, and is boosting lower cost producers like SBM EVN NST (and previously RSG but not now, also some others that I am not invested in).

An alternative from the charts is that RMS has a way to catch up the gains of the other goldies, and I would expect it to perk up a bit, you could maybe justify a short-medium term buy on that. Do you buy the lagger hoping it will catch up or do you follow the market trend? If you were asking yourself this at the start of August when Gold broke its short term downtrend, and decided on RMS you would have made nothing. If you instead followed the market, and looked for fundamental cash generation, taking EVN, NST, SBM, RSG, or even BLK or RED, you would be up 20% minimum. Go back to the start of the year can double the profits on the bigger miners, RMS started the year on fire, but then since the half yearly I think the big drop in free cash flow has really pulled it down.

RMS is still making a healthy profit, but as I see it is fair value with it's peers and more limited in upside in the medium term. I like it enough to keep holding but looking for a sell point when it catches up to its peers. I posted warnings a lot in Feb and April about the big drop in cashflow, their increasing AISC, loss from hedging. This was mostly discounted as one off capital costs, but take a look at the FY18 forecast for capital costs and exploration ... They are just as high as last year so not much change in cash flow this year.

Please DYOR if you don't like what I say. I know I only chip in with warnings and gloom maybe but the positive stuff is well covered by other so why should I preach to the converted. Look at my previous posts.