Scotland’s first commercial gold producer Scotgold Resources Limited (AIM:SGZ) is undervalued compared to its peers, according to broker Shore Capital’s latest analysis.
“We believe the market is missing [Scotgold Resources’] significant short-term production and earnings prospects,” analyst Sheldon Modeland said in a note, adding its valuation represents a “significant discount to peers”.
Shore Capital said the AIM-listed company trades on price-to-earnings multiples of 3.3x for 2024, which “compares favourably” with peer group average multiples of 7.8x.
This discount is “unwarranted” given the company’s growth prospects and earnings profile once it achieves full output, according to the broker.
“On relative terms, [the company] is undervalued on both EV/EBITDA and P/E multiples when compared to our selected gold peer group,” Modeland said in the note.
Analysts expect the gold miner to deliver “an impressive” 75% compound annual growth rate in underlying earnings from 2022 to 2026, driven by optimisation plans for its Cononish mine.
The Cononish mine, located in the Loch Lomond and Trossachs National Park, has a run rate of 10,000 oz of gold, which is expected to increase to 24,000oz next year once an ore sorter is installed.
Production at the Cononish mine uses gravity separation and flotation without the need for cyanide, which is a big polluter in illegal mines in South America.
Shore Capital expects Scotgold to generate free cash flow of £13mln a year through the mine’s lifetime of 8.5 years, and sees potential for its life to be extended “with additional drilling and resource definition”.
Scotgold generated £6.3mln of revenue from the production of 551 tonnes of gold concentrate in the first half of 2022, Shore Capital said.
Analysts estimate the net asset value of the company at £93mln or 155p per share in 2023, representing 109% upside on the current share price.