Galiano Gold: Limited Margin Of Safety At Current Levels

seekingalpha05-14

Galiano Gold reported its Q1 results last month, reporting quarterly production of ~30,400 ounces at $1,793/oz at its Asanko Gold Mine (100% basis).The bigger news was that the company has bought Gold...

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Unfortunately, it was one of the few producers that saw its all-in sustaining cost margins (12.8% vs. 31.5%) halved year-over-year despite the higher gold price, but this was largely due to a heavy waste stripping campaign at Abore which will set up a much stronger second half to the year. In this update, we'll dig into the Q1 results, recent developments, and where the stock's updated low-risk buy zone lies.   Gold Pour - Company WebsiteGaliano Gold Q1 Production & Sales Galiano Gold released its Q1 results last week, reporting quarterly production of ~30,400 ounces of gold from its Asanko Gold Mine in Ghana. This translated to a 7% decline in gold production from the year-ago period (Q1 2023: ~32,700 ounces), but Galiano’s attributable production increased year-over-year despite the softer results given that it now holds a 90% interest in the Asanko Gold Mine, up from 45% previously. In fact, the company recently completed a transformative acquisition that helped it graduate to 200,000+ ounce producer status on a life-of-mine average basis, with it taking the other half of the Asanko Mine off Gold Fields (GFI) hands in a transaction that closed on March 4.   Galiano Gold Quarterly Production - Company Filings, Author's Chart  Asanko Mine Quarterly Production Metrics - Company Filings, Author's ChartDigging into the production Q1 results a little closer, the Asanko Mine processed ~1.47 million tonnes in the period at an average grade of 0.80 grams per tonne of gold, down from ~1.57 million tonnes at 0.90 grams per tonne of gold in the year-ago period. Fortunately, recoveries were better at 83% vs. 73% in Q1 2023, and grades are expected to improve in H2 following the stripping campaign at its Abore deposit, with Galiano noting that high-grade ore will start being fed to the mill by the end of Q2.   Asanko Gold Production Annual Production & AISC & Forward Estimates - Company Filings, Author's ChartBased on the company’s impressive track record of over-delivering on promises the past year (evidenced by Galiano beating its initial guidance midpoint of 22% in 2023) under President & CEO Matt Badylak, I certainly wouldn’t rule out a 150,000+ ounce year with Galiano likely to continue its track record of over-delivering. Hence, while Q1 production is sitting at just ~20.3% of its guidance midpoint of 150,000 ounces, this is largely to be expected given the processing of stockpiles in Q1 while Abore was being prepared for mining (waste stripping in H1 2024 to set up a much stronger second half of the year). Given the higher gold price, the Asanko Mine generated revenue of $65.6 million despite the lower production quarter (Q1 2023: $65.2 million), with fewer ounces sold (~31,800 vs. ~35,200) more than offset by an average realized sales price of $2,056/oz. Meanwhile, free cash flow was positive at $5.8 million despite elevated stripping costs. It's worth noting that with the gold price currently averaging ~$2,330/oz quarter-to-date, Asanko should see another robust sales quarter in Q2 2024 and benefit from full ownership (90% interest, 10% Ghana) of this mine just in time for record realized selling prices. And even assuming just ~33,000 ounces are sold in Q2 at an average realized price of $2,300/oz, Galiano will see its revenue soar to ~$76 million. Costs & Margins Moving over to costs and margins, Galiano reported Q1 all-in sustaining costs [AISC] of $1,793/oz, a significant increase from $1,293/oz reported in the year-ago period. This resulted in AISC margins of $263/oz (12.8%) vs. $582/oz (31.5%) in Q1 2023 despite the benefit of a higher average realized gold price. However, while these results may appear disappointing, it's important to note that this is a transition year and was expected to be a weaker H1 because of waste stripping at the Abore deposit, with fewer ounces sold, higher sustaining capital ($14.9 million vs. $4.9 million), and continued inflationary pressures felt sector-wide. On a positive note, Q2 will benefit from a higher average realized gold price to partially offset the elevated costs, and I would expect to see a significant decline in AISC in H2 2024 and 2025 with consistent access to better grade material.   Galiano AISC & AISC Margins - Company Filings, Author's ChartDespite the weaker operational results in Q1, Galiano still finished the quarter with over $130 million in cash and no debt, and this was net of its $65.0 million payment to Gold Fields as part of the acquisition. This continues to leave Galiano with one of the strongest financial positions among its junior producer peer group and sets the company up to aggressively drill this property over the coming years to work on optimizing its mine plan and ultimately boosting its net asset value by uncovering new regional ounces. And with several smaller producers being in weaker positions financially, it's nice to see Galiano controlling its own destiny and not having to worry about selling streams or royalties to expand and/or optimize its operations. Recent Developments As for recent developments, the most significant one is the acquisition of the other half of the Asanko Gold Mine announced in Q4. This deal is transformational for Galiano as it gives it a 90% interest (previously 45%) in a ~240,000-ounce per annum gold operation, catapulting ahead of most of its junior producer peers from an attributable production standpoint. And while many producers have a habit of over-paying for assets when it comes to M&A in this sector, Galiano did an excellent job negotiating the price for this asset, with Gold Fields' consideration being as follows:  $65.0 million in cash, which is equivalent to Gold Fields' effective interest in the AGM joint-venture 28.5 million shares issued to Gold Fields $55.0 million in deferred consideration, with $25 million in cash due by year-end 2025 and another $30 million due by year-end 2026, with the potential to satisfy up to 20% of each payment with common shares (*) $30.0 million in cash contingent upon production of 100,000 ounces of gold from the Nkran deposit a 1.0% NSR on the Nkran deposit capped at 447,000 ounces of gold once the deposit has produced over 100,000 ounces of gold.  (*) The ability to satisfy up to 20% of these deferred payments with common shares is subject to Gold Fields not owning over 19.9% of the company (*) Given that Galiano was acquiring an additional 45% interest in a mine that it was already operating which is a very low-risk transaction, even a total consideration of $200 million would have been justifiable based on the mine's estimated NPV (6%) of ~$580 million at a $2,000/oz gold price and a 0.80x multiple. However, Galiano paid substantially less and did not impair its balance sheet to complete the transaction, with the benefit of much of the consideration being deferred. So, while we saw minor share dilution (~12%), this was still a very accretive deal for the company, with it effectively doubling production and becoming a much more relevant producer overnight. As for other recent developments, the move in the gold price since announcing the acquisition is certainly positive, with gold averaging over $2,250/oz year-to-date and $2,330/oz quarter-to-date. This has resulted in a significant increase in the Asanko Gold Mine's NPV assuming these prices are here to stay, and given the size of the breakout we've seen in gold, it certainly looks like there's further upside on deck for the gold price over the coming years. As shown below, the last similar breakout to all-time highs (base-on-base pattern) for gold was in 2009, and the metal went on to gain 90% in less than three years. History doesn't have to repeat, but it often rhymes, and Galiano certainly timed this deal well with the mine set to benefit from record free cash flow generation in the coming years if the gold price continues to cooperate.   Gold Price Breakout - StockCharts.comSo, how does Galiano's valuation look after its recent outperformance?  Valuation Based on ~269 million fully diluted shares and a share price of US$1.80, Galiano trades at a market cap of ~$484 million and an enterprise value of ~$355 million. This compares favorably to an estimated NPV (6%) of $570 million at the Asanko Gold Mine at a $2,000/oz gold price on a 100% basis, leaving Galiano trading at ~0.85x P/NAV. So, while this might suggest Galiano remains undervalued, it's rare to see single-asset West African producers trade anywhere near 0.80x P/NAV, let alone 0.90x P/NAV. Plus, this estimated NAV figure is on a 100% basis, with Galiano Gold having a 90% interest in the mine, which reduces its attributable NPV (6%) to ~$515 million.   Galiano Updated Share Count - Company FilingsSo, what's a fair value for the stock? Using what I believe to be a generous multiple of 0.85x P/NAV to better align with where single-asset West African producers often trade and after subtracting out estimated corporate G&A from its net cash and adding in additional value for exploration/mine plan optimization, I see a fair value for Galiano of ~$550 million or US$2.05 per share. This fair value estimate points to an 11% upside from current levels, but I am looking for a minimum 40% discount to fair value when it comes to single-asset producers to ensure a margin of safety. Hence, while GAU may trade higher if it were to rally towards its fair value estimate, I don't see any margin of safety here at US$1.80 and the stock's updated low-risk buy zone comes in at US$1.24 or lower. In fact, GAU arguably has the least upside to fair value among its junior producer peers. The above point does not mean that GAU can't continue to trade higher and a rising gold price will certainly lift all boats, including a single-asset producer like Galiano which will see a significant increase in AISC margins next year (higher gold price, higher production, and lower operating costs). Still, I prefer to buy at a deep discount to fair value or pass entirely, and with more diversified producers like B2Gold (BTG) still trading at depressed multiples of 0.80x P/NAV using the same gold price assumption with multiple operations (three mines and two development projects) and a ~6.0% dividend yield, I continue to see better value elsewhere. In summary, while GAU would become interesting below US$1.24 per share, I don't see any way to justify chasing the stock at current levels with it now getting a little overbought short-term above US$1.80. Summary Galiano Gold had a slow start to the year but should see a much better quarter in Q2 with slightly higher processed grades and the benefit of a full quarter of ownership of the AGM as well as a much higher gold price. Looking out to H2-2024, we should see AISC drop materially with the benefit of improved grades from Abore, and Galiano's costs drop more in line with the industry average, implied by its cost guidance of $1,675/oz at the midpoint. Plus, as highlighted previously, I would not be shocked to see Galiano beat its guidance midpoint on production with its strong performance to date under new President & CEO Matt Badylak.  That said, Galiano's outperformance since its acquisition of the other half of Asanko has pushed its P/NAV multiple above that of many junior producers and most of its West African peers, and it's now even trading at a higher P/NAV multiple than B2Gold and in line with Endeavour Mining (OTCQX:EDVMF). This suggests that the stock may need a higher gold price to move higher from current levels, and it's more vulnerable to a correction in the gold price than its more undervalued peers that have yet to re-rate. Hence, while I think the recent deal for GAU is transformational, I don't see any way to justify paying above US$1.80 for the stock.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2435583409"}