GFI - Galiano Gold: Production Increase And Excellent Growth Potential

2023-10-02 14:52:22 ET

Summary

• Gold revenue was $64.066 million, generated from 32,912 gold ounces sold at an average realized price of $1,944/oz for the quarter.
• Full-year gold production guidance has been revised upward from 100K Au Oz to 120K Au Oz to 120K Au Oz to 130K Au Oz.
• I recommend buying GAU between $0.587 and $0.58 with possible lower support at $0.55.

Introduction

Galiano Gold ( GAU ) operates and manages the Asanko gold mine, or AGM, located in Ghana, West Africa, jointly owned with Gold Fields ( GFI ). Also, Galiano Gold owns the Asumura project indicated below (see map below).

Note: Galiano is the joint venture operator and receives an annual service fee from the JV. Gold Fields Limited owns a 45% equity interest in the AGM JV, with the Government of Ghana owning a 10% free?carried interest.

On August 2, 2023, Galiano Gold reported its 2Q23 results.

Note: I have followed GAU quarterly since 2021. This new article is a quarterly update of my article published on July 7, 2023.

Note: Asanko Gold Mine is called AGM in its abbreviated version. The AGM is a multi-deposit complex with four main open-pit mining areas : Abore, Miradani North, Nkran, and Esaase, and multiple satellite deposits on the Asankrangwa Gold Belt.

1 - 2Q23 Results Snapshot

Gold production was 33,673 Au ounces during 2Q23, down 32.7% from last year. Full-year gold production guidance has been revised upward from 100K Au Oz to 120K Au Oz to 120K Au Oz to 130K Au Oz.

Gold revenue was $64.066 million , generated from 32,912 gold ounces sold at an average realized price of $1,944/oz for the quarter. The net income for the company was $11.96 million or $0.05 per share during the quarter, including the Company's share of the JV's net earnings for the quarter.

Note: 2023 Guidance for gold is between 120K and 130K Au ounces . GAU revised AISC to between $1,650/oz and $1,750/oz due to strong operational cost performance in 2Q23.

2 - Stock Performance

Galiano Gold has significantly outperformed the VanEck Gold Miners ETF ( GDX ) and is now up 21% on a one-year basis. The recent weakness experienced with the gold price has been an important factor in the sudden drop in the stock price.

3 - Investment Thesis

The investment thesis for GAU is the same as the previous quarter, even if the miner had some technical issues in the past. The AGM gold mine has been Galiano's flagship asset since 2016 and is waiting for the open-pit's restart at Abore, which will significantly increase gold production.

The Asanko Gold Mine is expected to produce between 120,000 to 130,000 ounces from stockpiled material in 2023, at all-in sustaining cost guidance of between $1,650/oz to $1,750/oz. All-in sustaining cost is anticipated to be elevated in 2023, primarily due to waste stripping necessary to restart mining at Abore , which will benefit future years production, as well as higher expenditures on the tailings storage facility.

However, I do not think GAU is a good fit for the long term due to its extreme specificity, but it is an excellent tool for short-term and medium trading using the LIFO strategy. Those penny stocks can jump significantly overnight and carry more volatility than solid companies with more complex business profiles.

The major problem is that the stock is based on one single JV in West Africa (double whammy), considered high-risk from a long-term investor's perspective. However, on the other hand, Gold Fields' potential to acquire Galiano Gold is a good incentive to keep a position on the side.

The company presents a solid balance sheet and excellent growth potential, significantly reducing the chances of short-term collapse. Galiano has about $115 million in liquidity with Cash and cash equivalents of $55.50 million as of June 30, 2023, while remaining debt free.

On March 28, 2023, the Company published an updated National Instrument 43?101 ("NI 43?101") Technical Report for the AGM, which included the reinstatement of Mineral Reserves . It revealed an improved long?term outlook for the mine.

The mining at AGM is expected to restart during 4Q23 as scheduled in the 2023 Technical Report. The company is expected to double production to ~250K Oz per year by 2025.

Thus, I recommend trading LIFO for about 60% of your overall position but keeping a medium long-term position for a potential future acquisition offer in an all-share deal later in 2024.

Galiano Gold: 2Q23 Balance Sheet History - The Raw Numbers

Note: The Joint Venture is split 50/50 for the 90% economic interest, with the Ghana Government holding 10%. Therefore, Galiano Gold and Gold Field own 45% each of the Joint Venture.

Source: Company M&A . Fun Trading files.

Analysis: Revenues, Free Cash Flow, Debt, And Gold Production

1 - Quarterly revenues were $64.066 million in 2Q23 (100% basis)

2 - Free Cash Flow was negative $1.38 million In 2Q23

Note: Free cash flow is cash flow from operations minus CapEx.

Trailing 12-month ttm free cash flow was $0.43 million , with a negative $1.38 million in 2Q23. For the JV, the company indicated in the press release:

The AGM generated $18.0 million of cash flow from operating activities and free cash flow of $10.1 million during Q2 2023. This compares to $34.3 million of cash flow from operating activities and free cash flow of $25.3 million during Q2 2022. Despite higher AISC margins, the decrease in free cash flow was primarily due to fewer gold ounces sold in Q2 2023.

3 - No Debt in 2Q23 and Total Cash of $55.50 Million

4 - Quarterly Gold Production Analysis

Galiano Gold reported that gold production at the Asanko gold mine in Ghana was 33,673 ounces during 2Q23 and sold 32,912 ounces.

During the quarter, AGM processed ore from existing stockpiles and Esaase (729 Tons), and there was no mining activity. The AGM did incur $2.65 million of ore rehandling and mining overhead costs during the quarter.

As said in my preceding article, on March 28, 2023, the Company posted an updated NI 43?101 Technical Report for the Asanko Gold Mine, which included the reinstatement of Mineral Reserves with 2,068K Oz.

The processing plant achieved a milling throughput of 1.457 Mt of ore at a grade of 0.8 g/t and metallurgical recovery averaging 85% in 2Q23.

AISC in 2Q23 is now $1,374 per ounce. Gold Price Realized reached a record at $1,944 per ounce.

5 - Galiano Gold New Life Mine Plan until 2031

The LOM is now 7.2.

We can see that production is expected to increase significantly from 120K-130K Oz in 2023 to 167K Oz in 2024 and then reach about 255K Oz for the next five years.

Technical Analysis And Commentary

GAU forms an ascending channel pattern with resistance at $0.67 and support at $0.58 . RSI is now 39 and beginning to be oversold, indicating we are not far from support.

Ascending channel patterns or rising channels are short-term bullish in that a stock moves higher within an ascending channel, but these patterns often form within longer-term downtrends as continuation patterns. The ascending channel pattern is often followed by lower prices, but only after a downside penetration of the lower trend line.

I recommend trading LIFO for about 70% of your total position and keeping a tiny core long position for a test of $1 or more.

The trading strategy is to sell partially between $0.665 and $0.69 with possible upper resistance at $0.70 and buy/accumulate between $0.587 and $0.58 with possible lower support at $0.55 .

Watch the gold price like a hawk.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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