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JV Paves Upside For Gold Road Resources

Small Caps | Mar 14 2017

Western Australian junior Gold Road Resources has secured a well-funded JV on its Gruyere project and several brokers highlight the upside.

-Funding, development and execution risks largely mitigated
-Stock could be substantially under-priced
-Significant prospects in other areas of the Yamarna belt


By Eva Brocklehurst

Junior explorer Gold Road Resources ((GOR)) posted an envious first half report, featuring strong headline net profit and cash in the bank. The financial results reflect the sale of 50% of the company's Gruyere gold mine to Gold Fields, to develop the 6.2m ounces deposit under a joint venture.

The deal has significantly de-risked the project, Canaccord Genuity asserts, enabling Gold Road to return to its core competencies in exploration and project evaluation. The broker observes the share price has drifted around 27% lower since the deal was announced and now presents a value proposition.

Gold Road also joins Overweight-rated gold miners in Morgan Stanley's coverage. The broker believes delivery on Gruyere and further exploration potential are both capable of lifting the equity price. Encouragingly, there is plenty of funding for the Gruyere mine.

Unique Position

Canaccord Genuity believes the company's position in the ASX gold sector is unique as its funding, development and execution risks are largely mitigated, while it has a sizeable production profile, long mine life and prospective tenements. The broker, not one of the eight monitored daily on the FNArena database, reiterates a Speculative Buy call and $0.80 target.

After Gruyere capital expenditure, Gold Road should have more than $150m in net cash. Its share of Gruyere cash flow is around $420m, Morgan Stanley calculates, and just $75m is attributed to the additional resource and exploration potential. This underpins the broker's positive view, as it focuses on the valuation uplift when the project comes into production in 2018.

The emphasis now is on execution, with bulk earthworks and processing plant construction beginning this year. Morgan Stanley will be on the look out for delays and revisions to capital expenditure, but notes these factors have less effect than gold prices and/or production and operating costs.

Gold Road's projected all-in sustainable costs (AISC) of $945/oz, and based on the 13-year life of mine used in the feasibility study, should result in strong cash flow and margins, the broker believes. Morgan Stanley's cash-flow conclusion is based on a gold price forecast of US$1220-1250/oz over the next five years.

The broker finds a good argument that the equity is under-priced by around 35% and, if the cash is incorporated at face value, then the Gruyere project is only being priced at half what the JV partner paid for its stake.

Applying a risk factor, as the project is still to be constructed and commissioned, suggest that the equity is 25% under priced. On further analysis, using spot prices instead of Morgan Stanley's forecast gold prices, the mispricing is still substantial, at 14%. The broker has a $0.70 target.

Yamarna Belt

The company has retained full interest in the majority of its North Yamarna tenements and is undertaking an ambitious exploration program. The Yamarna belt has been under explored relative to other Archean gold belts in Western Australia.

The company offers exposure to a fully funded 250,000-plus ozs per annum gold mine in Gruyere and its valuation implies no value to these other large tenements with multiple targets. Canaccord Genuity believes, given its prospectivity, that Gold Road's return to original exploration program could pay further dividends.

Sizeable shallow discoveries are possible, evident from the discovery of the Gruyere deposit. In November 2016 Gold Road sold the 50% to South African miner Gold Fields for $350m. This price, in the broker's view, more than covers Gold Road's share of capital expenditure, allowing it to remain debt free and fund further exploration.

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