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Today's Market View - Highland Gold Note - (HGM LN) - Laying foundation for growth

Published: 14:45 21 Dec 2017 GMT

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Highland Gold (LON:HGM) 161p, Mkt Cap £524m – Laying foundation for growth

Hold – Target price 163

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  • Highland Gold is an established unhedged gold producer with assets base spread across three main hubs in the Khabarovsk, Zabaikalsky and Chukotka regions in Russia, as well as Kyrgyzstan in Central Asia;

  • Three operating mines – Mnogovershinnoye (MNV), Novo and Belaya Gora (BG), - to produce around 265/265koz in 2017/18e at $493/482/oz in TCC ($597/585/oz when processing, transportation costs and metal payabilities for the Novo concentrate are included) rating HGM as the fourth largest public Russian gold miner and placing it comfortably below the median for production costs among other operations in the region;

  • Given highly competitive production costs, we estimate Highland to generate $156/153m in EBITDA, equivalent to 51/51% margins, and $67/29m in FCF in 2017/18e (a reduction in FCF in 2018/20 is attributed to Kekura, Blagodatnoye and Novo development capex); FCF is expected to pick up significantly in 2021 on a ramp up of Kekura in Chukotka, the major growth project in the Group portfolio;

  • On dividends, Highland has been continuously returning funds to shareholders since 2011 while carefully managing balance sheet risk (Net Debt/EBITDA is conservative at 1.3x as of H1/17); the Board has just agreed a 20% of Net CFO dividend payout policy which if applied to H2/17 earnings amounts to 3.2p or 8.2p for the year (5.1% yield); we attribute a conservative dividend policy to the capital intensive period of 2018-20 while NCFO is expected to increase and capex spend to fall away once Kekura is commissioned raising chances for increased dividends;

  • We highlight management proactive approach in identifying key challenges and laying out development plans at each hub including sustainability at already producing assets as well as working on delivering future growth;

  • Near to medium term development projects pipeline features a capacity upgrade to flagship polymetallic Novo operation, a bolt on of the greenfield Blagodatnoye deposit onto the BG unit in an effort to turnaround situation at a struggling operation and a commissioning of the high grade Kekura potentially adding 200kozpa in production. Additionally, the MNV exploration budget is being expanded to further extend the life of the oldest operation in the portfolio;

  • Gold prices assumed to average $1,225/1,250/oz in 2018/19, slightly below market estimates ($1,265/1,295/oz medium Bloomberg estimates), USDRUB fixed at 60/USD and no inflation in costs assumed;

  • Next catalysts are the release of resource/reserve estimates and PFS for BG/Blagodatnoye (we used HGM inhouse Blagodatnoye reserves estimates) and Kekura DFS (we incorporated PFS production profile) both to be released shortly;

Given our subdued gold price outlook we value HGM shares at 163p and assign Hold recommendation with key risks to our valuation including different to our assumptions’ gold prices, USDRUB exchange rate as well projects’ operating/capital costs and commissioning timing.

 

(Dec year end)

 

FY2015

FY2016

FY2017e

FY2018e

FY2019e

Gold price (spot)

US$/oz

1,160

1,249

1,255

1,225

1,250

Gold sales

Koz

258

267

262

265

279

AISC

US$/oz

640

652

644

617

668

Revenue

US$m

276

306

304

300

321

EBITDA

US$m

133

162

156

153

158

PAT

US$m

-10

48

65

67

69

FCF

US$m

38.6

57.9

66.6

28.8

-54.2

EV/EBITDA

x

3.5

4.3

5.8

5.9

5.7

PER

x

-

9.9

10.9

10.6

10.3

PER and EV/EBITDA multiples calculated using 161p share price as of 21/12/17; Source: SP Angel, Company

 

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