With equity and debt closing last week for the Okvau mine in Cambodia, Emerald is well placed to weather the current storm. Cambodian borders are closed to the US and some EU countries, but remain open to China and regional neighbours; as Chinese manufacturing recovers the company’s supply chain is largely intact. 2H20 carries some risk on EU mills, mitigated by early fabrication, being steel only. These conditions are not new to the team, who successfully built Bonikro despite disruptions from the Ivory Coast civil war. Stepping back, we see the size of the equity raise and investors involved as a testament to (i) the asset and team, with most of the construction team behind Regis, and (ii) jurisdiction, as Emerald controls risk with a fiscal stability agreement. Updating for debt and equity, we estimate 1xNAV5%-1400-1650 is A7.5-10.4c/sh in 1Q21 around the time of first production. This equates to ‘normal’ peer single-asset juniors relatively low 4-5xEV/EBITDA. We estimate 4xEBITDA2022 equates to 7.2-11c/sh at US$1400-1650/oz Au, driving an undemanding 15% FCF yield. In normal markets, with multi-asset emerging-market producers trading at 7-11x EV/EBITDA, we see M&A as accretive beyond A15c/sh for potential buyers. We maintain our BUY rating and 6c price target, based on 1Q21 0.8xNAV5%-1400 net of all financial and group G&A costs.
Funding closed, well placed to weather the storm: 1xNAV15-5% 7.6-10.4c/sh at spot goldEmerald Resources has completed an A$75m equity raise at 4c/sh, with the second tranche having closed today with overwhelming shareholder support, including for a 1:10 consolidation. This follows closing of the US$60m debt facility last week, taking total sources of funding to US$118m (US$60m debt, ~US$51m equity and ~US$7m cash as at December 2019) against a US$98m capital estimate.
Virus impact diminutive, for nowEarly works require a low staff headcount creating little immediate impact. Most of the supply chain is SE Asian based, so with China manufacturing back up to 95% as working-age populace carry on, Emerald is well placed to deliver first gold in 2Q21. Some mill equipment is sourced from the EU, albeit early fabrication is a matter of steel rolling only – this of course exposes the company to some delays should virus impacts continue past summer, and similarly if travel restrictions occur later in the year as the construction team builds. However, while Cambodia has closed borders to the US, HK and some parts of EU, they remain open to key trading partner China, reducing supply chain risk compared to EU and US peers. Volatile currencies will have an impact on the valuation – so far, the strengthening dollar materially improves the Emerald valuation, albeit the impact on funding USD denominated supply-chain needs to be watched closely.
Our viewWe consider the size of this equity placement, predominantly from mining equity investors, as a threefold testament to management’s track record, the asset, and most importantly, the ability to execute in Cambodia. Similarly, detailed due diligence by debt providers should provide additional assurance on the asset and fiscal aspects. With surety of financing, orders for key long-lead items should be executed with delivery times of 40-52 weeks. These include the SAG mill and power transformers. With steel and foundations in place by the time of delivery, this should facilitate a 1H21 first pour. Pre-production capex is US$98m, excluding finance costs and G&A during build. Pre-raise cash of US$7m, US$60m of debt planned, and US$50m of equity thus leaves ~US$10m for finance costs and G&A during build, and another ~US$10m contingency. While tight, delivering on time and on-budget is core to our investment thesis, and the very reason for our conviction in the management team.
Valuation: maintain BUY rating and A6c/sh PTWe dilute for the recent equity raise, and value Okvau on a DCF basis using DFS inputs, with a group valuation net of finance costs and central G&A. This drives our NAV of US$248m, which equates to a FD 1xNAV5%-1400 of 7.3c/share or 10.4c/sh at spot US$1,650/oz discounted to 1Q21. We expect the teams’ background to support a premium to NAV, but offset by the new jurisdiction and a one-asset junior, so apply at 0.8xNAV multiple to our March 2021 (around first pour) NAV of US$248m as an ‘exit value’, and thus maintain our BUY rating and 6c/sh price target. We discuss upside in more detail below, which comes from spot gold price, and earnings-based multiple once in production, and near-mine plus in-country exploration. Of course current market conditions will drive the price in the short term.
Upside and opportunitiesThe first upside is gold price – at spot US$1,650/oz, 1xNAV at first pour sits at 10.4c/sh, around 4x the current share price, with high ROI given the fast projected build. The gold price is of course extremely volatile currently.
On a cash flow multiple, the 8-11c range for 4xEV/EBITDA equates to ~15% FCF yield, well above stable single-asset producers at around 10% FCF yield. Looking toward M&A – focussing on the multiples of potential acquirers, emerging market peers (BTO, SMF, EDV, TGZ, RSG, PRU, ASR) consistently average just 5-10% FCF yield (Figure 2, lifting to 7-12% in current markets), indicating Emerald could be accretive even up to 15c a share. Should Emerald’s centre of gravity return to Australia, the valuation discrepancy to larger Australian producers is even more pronounced with the likes of SAR/NST at <5% FCF yields, with the group as a whole still under 8% (Figure 1) even in current market conditions.
Exploration: The most immediate potential gain comes from near-pit drilling earlier this year, with highlights of 8m @ 20g/t Au. We estimate this could add 50-100koz to reserves; +100koz would lift our project NPV5%-1400 by US$29m. Further, the company owns or is earning into 1,442km2 of exploration tenements in Cambodia over five discrete projects. With the MIA now granted, we maintain a nominal US$10m for the broader exploration portfolio, but add another US$10m to near-mine upside , a relatively conservative ~0.3xNAV or US$100/oz on 100koz, broadly in line with current EMR EV/reserve.
Why we like Emerald 1. First mine into production is vanilla open pit CIL 2. Management have built six mines on time and on budget at Equigold and Regis 3. Management aligned with shareholders given A$19m equity invested at TopCo 4. Acquisition debt facility, and ‘low capex’ IP of management, should enable growth via M&A.
Catalysts • 1Q20: Construction start • 1H21: First pour
EMR Price at posting:
2.7¢ Sentiment: Hold Disclosure: Held
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