Kopy Goldfields — Maintaining full year guidance, growth on track

Kopy Goldfields reported H1 production of 20.7koz (H120: 24.1koz). Q2 saw a much-improved quarter after the COVID-19 challenges of Q1, with a 69% q-o-q rise in production to 13.0koz (Q220: 14.0koz).

Following an outbreak of COVID-19 at the Yubileyniy mine site in December 2020, Kopy Goldfields strengthened and extended quarantine measures to prevent any recurrence, and operations at Yubileyniy were restored to capacity during the first quarter. Nevertheless shortages of some key personnel and other effects caused by the COVID-19 pandemic continued to have an impact on Yubileyniy production and procurement processes into Q221. Q221 production was also affected by seasonal factors. Transport of concentrate from Perevalnoe to the Yubileyniy processing plant primarily takes place during winter using the winter road, but unstable weather conditions in the spring meant that some Perevalnoe concentrate produced in H1 remains on site and has not been processed. Some transport of concentrate takes place during the summer by helicopter, but otherwise concentrate is accumulated at Perevalnoe until the winter.

Kopy Goldfields saw H121 EBITDA fall by 21% y-o-y in line with the reduction in gold sales (down 22% y-o-y). The company benefited from a 7% increase in the realised gold price to US$1,775/oz. Despite lower production, the company has done well to keep unit cash costs contained at just US$859/oz, slightly below H120’s US$861/oz despite the lower levels of production. H121 EBITDA was US$14.0m (H120: US$17.8m) and PBT was US$7.8m (H120: US$12,3m). Given the challenges of the first half year, we view these as a solid set of results, with an EBITDA margin of 38% (H120: 40%)

In H121 Kopy generated US$1.3m in cash from operations after interest payments and spent US$15.9m on capital projects. Cash flows in the first half were affected by the need to build inventories on site while the winter roads are in place, hence the US$12.8m inventory build.

The company ended H121 with net debt of US$59.6m, up from US$41.9m at the end of 2020. That puts the company’s last 12-month average net debt to EBITDA ratio at 1.4x. At 30 June 2021 the company had US$0.9m in cash, US$13.9m in available undrawn facilities and 5.25koz of gold in stock ready for sale.

Kopy Goldfields has maintained 2021 production guidance of 56–59koz, and while the lower H121 production means that H221 production will need to be significantly higher year-on-year to achieve the guidance, there are three reasons why we believe H221 will show such growth:

Offsetting those benefits somewhat, COVID-19 related personnel availability remains a challenge that the company is working to mitigate. We expect some input cost pressures may result, but will be offset by the economies of scale of higher production.

We now forecast 2021 gold equivalent production of 56koz, at the lower end of the guidance range (previously we forecast 59koz) and gold equivalent sales of 57koz (previous forecast 61koz).

Kopy Goldfields currently has three major capital investment projects underway to increase production to 100koz per annum by FY25:

During H1, activities progressed steadily at Yubileyniy and Perevalnoe, and these projects remain on track. Capital spend at Malyutka will be H2 weighted with the bulk of equipment transferred to site in late 2021 for construction in 2022.

Exploration is also progressing at the Krasny project (not included in Kopy Goldfields’ 100koz per annum organic growth target) with a US$6.8m budget agreed with JV partner GV Gold.

We have updated out FY21 forecasts to reflect the impact of:

Following these adjustments, we now see FY21 EBITDA of US$42.2m (previously US$44.3m) and PBT of US$26.2m (previously US$30.5m), resulting in EPS of 2.3c (previously 2.7c). We continue to expect FY21 capital investment of US$56m. The increase in both FY21 and FY22 all in sustaining cost (AISC) forecasts reflects largely a greater proportion of planned capex being treated as sustaining capex than previously forecast (a reporting rather than cash impact).

We now expect Kopy Goldfields to end FY21 with cash of US$5.0m, US$7.2m in undrawn facilities and net debt of US$63.7m (previously US$61.8m), putting it on a December 2021 net debt/EBITDA ratio of 1.51x.

Our longer-term forecasts are little changed other than the knock-on impact of closing FY21 balances on depreciation and interest.

Kopy Goldfields operates two hard rock mines and a number of smaller placer mines in Russia. In addition to the technical and operating risks of the mines, the company is thus also exposed to Russian political risk factors. Kopy Goldfields is approximately 86% owned by its major shareholders (who sold down approximately 1.5% of the company during this half year to improve the free float), which creates some further risk for minority investors. The latter risk may be partly mitigated by the proposed move to the Nasdaq Stockholm main board for which preparatory work has begun.

In addition to these more general risks, we think the two key risks for the company are any further impacts of COVID-19 on operations, and the balance sheet risk created during this period of higher capex.

An outbreak of COVID-19 at Yubileyniy during the last two weeks of December 2020 affected the pace of mining and processing in Q121 and into Q221. Although operations have now been restored to planned scale, the pandemic continues to pose challenges including to the availability and free movement of personnel and supplies. While Kopy is making every effort to mitigate these risks, this nevertheless remains a key sensitivity in terms of both 2021 production and also execution of the capex programme.

2021 represents the peak year in Kopy Goldfields’ significant growth capital programme (totalling US$130m between FY20 and FY25) with the company expecting to spend US$56m on capex and exploration this year. That also means that net debt should peak this year: we forecast closing 2021 net debt of US$63.7m, or 1.5x EBITDA. Our forecasts assume that the company draws down a further US$20m in debt this year from the available PJSC VTB facility, leaving US$7.2m in undrawn facilities and US$5.0m in forecast cash at year end 2021, or US$12.2m in total funding headroom. Even running a sensitivity analysis at a gold price of US$1500/oz, available funding headroom would remain over US$4m. To manage potential gold price risk as part of debt financing arrangements the company has hedged 40% of production from 2021 to 2025 by way of low-cost collars with floor prices of US$1,400/oz and ceiling prices exceeding US$2,500/oz.

We value Kopy Goldfields using a DCFE, which calculates the net present value of the maximum potential dividend (or total free cash flow to equity per share) each year, discounted at a 10% discount rate and using the Edison gold price deck shown in Exhibit 3 below (unchanged from previous reports except for an update of 2021 to reflect current spot pricing).

Dividend flow for the purposes of valuation (ie free cash flow to equity per share) is calculated as:

Our updated base case DCFE valuation of Kopy is little changed at US$283m (previously US$286m). Translating into Swedish krona at SEK8.65/US$ (unchanged) gives us an updated DCFE valuation of SEK2.75 (from SEK2.78/share).

The table below shows the sensitivity of the discount dividend valuation to gold price and discount rate assumptions. At a flat real long-term gold price of US$1,500/share and a 10% discount rate, the discounted dividend valuation of Kopy would be SEK2.19 per share, but this would rise to SEK3.00 per share at a US$1,700/oz flat real gold price (ie a US$1,700/oz nominal gold price rising by inflation).