- I’m bullish Aussie gold producers, and Regis stands out at the moment.
- The upside potential is huge if gold trends to $2,500.
- If you are looking for mid-tier gold producers with significant upside potential, then the risk-reward of Regis is compelling.
Introduction
We have been in a 23-month correction for this gold bull market. Some would argue that this PM (precious metals) bull market is over. But in my mind, as long as $1,680 holds for gold, the PM bull market is only correcting.
At some point, I expect this correction to end and for gold to break out to a new ATH. When that happens, many gold producers will see their share prices jump higher. What many investors do not realize is that gold miners have huge leverage to the gold price. The reason why is that their profit jumps immediately. For each $100 jump in the gold price, their share price will jump a certain percentage based on a variety of factors.
Those producers in good locations will benefit more because they have lower risk. Gold producers in Australia and Canada will be favored by investors because they have lower location risk. For each $100 rise in gold, the risk of owning a gold miner in Australia or Canada decreases. Why? Because their balance sheet is improving as their FCF (free cash flow increases). Of course, this rise in the gold price has to stick and make its way onto their balance sheet.
I like large, long-life mines that can generate significant FCF (free cash flow). A producing gold miner can be valued by its FCF (comparing its market cap to its FCF). It can have a low FCF multiple of perhaps a 5 if it isn’t that exciting and has several red flags. It can have a high FCF multiple of perhaps 25 or 30, if it is a rare company that investors love. The sweet spot is somewhere between 15 and 20 for a quality large mid-tier producer. I’m always after the sweet spot, and Regis (RGRNF) fits this criteria of being a quality large mid-tier producer.
Of course, gold mining is extremely risky. With large potential returns come high risk. A myriad of things can go wrong. This is the reason Regis is currently cheap versus its potential. Investors are not going to assume it will obtain high FCF. Thus, Regis has to prove it, and the price of gold has to rise.
Regis Resources
Stock Name | Symbol (US) | Type | Category | Share Price (US) | FD Shares | FD Mkt Cap (7/23/2022) |
Regis Resources | RGRNF | Gold | Mid-Tier Producer | $1.08 | 756M | $822M |
Note: Regis home exchange is in Australia with the symbol RRL. This symbol has better liquidity than its US OTC symbol.
Note: All dollar amounts mentioned in this article are USD.
Regis Resources is an Australian mid-tier gold producer. They will produce about 500,000 oz in 2022, with free cash flow of around $140 million at $1,750 gold. It has an FD market cap of $822 million, making them a large mid-tier producer. Cash costs are around $900 per oz, with a breakeven cost around $1,400 per oz. Its balance sheet is not great, with about $110 million in cash and $240 million in debt.
They recently acquired 30% of the Tropicana project in Australia. This gave them an additional 125,000 oz of production at a long-life mine. This was a smart move and added more FCF.
They are developing a large open pit project, which has 2.3 million oz. and will add another 100,000 to 150,000 oz. around 2025. This will take them over 500,000 oz. of production. This project is not priced into their share price, which gives them a lot of upside leverage. In fact, I am only valuing them as a 500,000 oz producer, which is very conservative.
Regis could be a cash flow and dividend machine at higher gold prices. Until this recent PM selloff, Regis upside was somewhat limited versus a lot of other mid-tier producers. I waited until it got cheap and recently bought it.
Not only are they positioned to grow into a 500,000+ oz producer, but they do have 500,000 acres to explore on about 35 exploration and development properties.
Regis is currently on sale. It is down about 50% in the past year. Part of that is from the cost of the acquisition of Tropicana, but I thought it was accretive. What are investors thinking? It’s currently trading at a FCF multiple of around 5, which is cheap on a future basis if gold prices trend higher. I think a stock of this caliber could get a 20x multiple at higher gold prices. If they do get a 20x multiple, that would give them 5+ bagger potential at $2,500 gold. I don't think that is a stretch.
Company Info
- Cash: $110 million
- Debt: $240 million
- Current Gold Resources: 10 million oz.
- Estimated Future Gold Resources: 10 million oz.
- Estimated Future Gold Production: 500,000 oz.
- Estimated Future Gold All-in Costs (breakeven): $1,400 per oz.
Scorecard (1 to 10)
- Properties/Projects: 8
- Costs/Grade/Economics: 7
- People/Management: 7.5
- Cash/Debt: 7
- Location Risk: 8
- Risk-Reward: 8
- Upside Potential: 7.5
- Production Growth Potential/Exploration: 7.5
- Overall Rating: 7.5
Strengths/Positives
- Significant upside potential
- Good management
- Good location
- Large resources
Risks/Red Flags
- High debt
- Costs are somewhat high
- Takeover target
Valuation ($ 2,500 gold prices)
- Production estimate for the long term: 500,000 oz.
- All-In Costs (break-even): $1,400 per oz.
- 500,000 oz. x ($2,500- $1,400) = $550 million annual FCF (free cash flow).
- $550 million x 10 (multiplier) = $5.5 billion
- Current FD market cap: $800 million
- Upside potential: 600%
Note: I used a $2,500 gold price to identify their future value because I am a long-term investor who plans to wait for higher gold prices. As an investor/analyst, I prefer to use $2,500 because I think it is a likely outcome after gold reaches a new ATH.
Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).
Note: I used a future FCF multiplier of 10 to be conservative. It’s likely that the quality gold miners in Australia will have higher multiples at $2,500 gold.
Risk/Reward
The main risk is the gold price. Unless it rises, it is never easy making money in gold miners. In fact, a volatile gold price will likely put you under water at some point, and perhaps significantly down. Another risk factor is taxes and royalties, which can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.
To take on that risk, the reward has to be high. A 100% return, in my opinion, is simply not enough for accepting high risk. We want outsized returns. For Regis, I think those outsized returns are likely if the price of gold trends higher. Anything above $2,300 and Regis should take off like a rocket ship.
Investment Thesis
I want to be overweight producers and own as many high-quality mid-producers as I can find. I prefer to use a low cost-basis investment strategy to lower my risk. I do not like to invest more than 1% of my cost-basis into individual stocks, and most of my investments are well below 1%. With this strategy, I tend to own a lot of stocks, but I also want to own a lot of quality names. Regis is a good fit with my strategy. The key was making sure I got a good entry price. I’m not interested in 1-baggers or 2-baggers, so I had to wait until Regis became cheap enough to buy.
Similar Aussie Gold Producers
- Capricorn Metals (CRNLF)
- Gold Road Resources (ELKMF)
- Red 5 Ltd (REDLF)
- Karora Resources (KRRGF) (Canadian company that mines in Australia)
- Westgold Resources (WTGRF)
- Evolution Mining (CAHPF)
- Northern Star Resources (NESRF)
- Genesis Minerals (GSISF) (acquiring Dacian Gold)
- Ramelius Resources (RMLRF)
For further details see:
Regis Resources: An Aussie Mid-Tier Gold Producer