Hannam & Partners has raised its target price for Steppe Gold Inc to C$3.25, up from C$3.15 previously, and repeated a 'Buy' rating on the stock following recent news the company has resumed full gold production from its oxide heap leach operations at the ATO project in Mongolia.
Operations at the ATO project had been halted since November 2020 with the company having encountered COVID-related issues in securing reagent imports and after almost a year of significantly reduced production due to issues in securing cyanide supply.
In a note to clients, Hannam's analysts said: "We view the restart of production as a major catalyst for the stock, reducing the residual uncertainty over the funding of ATO’s Phase 2 sulphide expansion which will continue to progress over the coming months."
READ: Steppe Gold back in production at ATO gold mine in Mongolia after receiving key reagents
They noted: "Based on current spot gold (~US$1,940/oz) we estimate oxide EBITDA in FY’22 and ‘23E of US$40m and US$37.7m, implying deeply discounted EV/EBITDAs of 2.8x and 3.8x, respectively, despite a 21% rally in the shares post this announcement."
The analysts said they have rolled their DCF based target to December 2022, giving a small uplift to the target price, but implying strong upside to the current share price of C$1.81.
They added: "We apply a target P/NPV of 0.8x to balance the low-risk existing Phase 1 oxide operation with Phase 2 execution risks, although funding risk has reduced post the recent debt package. Combined with an assumed C$12.5m for the Uudam Khundii (“UK”) asset, and after adjusting for net debt, G&A etc, our risked SOTP for Steppe is C$3.25/sh, offering 108% upside."
The analysts concluded: "We believe STGO shares offer cheap exposure to a proven producer, with near-term FCF potential to fund further growth."
Contact the author at jon.hopkins@proactiveinvestors.com