Small Caps | Jun 20 2023
This story features CAPRICORN METALS LIMITED, and other companies. For more info SHARE ANALYSIS: CMM
New research on Capricorn Metals anticipates growth potential along with consistent profits and increasing dividends over time.
-Management at Capricorn Metals has a strong record
-Assets have greater than 10-year mine lives, a rarity
-High margins mean less leverage to gold price upside
-Bell Potter considers the company a takeover target
By Mark Woodruff
Jarden expects longer-term outperformance by Capricorn Metals ((CMM)) based on a management team that has a track record of building conservative gold mining companies.
Conservative in this case means consistent profits and a cash-rich balance sheet enabling the payment of increasing fully-franked dividends over time, explain the analysts.
As the safe-haven status of the US dollar will probably cap gold price upside, the broker also seeks gold producers that can capture margin through cost control. Ideally a gold equity exposure would deliver both sustainable margins and a decent mine-life.
Capricorn Metals meets these requirements and has two assets with over ten years of life, a rarity in the small-to-mid cap domestic mining space, points out Jarden, initiating coverage with an Overweight rating and a 12-month target price of $4.80.
The company owns the Karlawinda Gold project in the Pilbara region of Western Australia and in July 2021 acquired the Mount Gibson Gold project 280km northeast of Perth.
Unique geological qualities at Karlawinda have yielded reserve replacement and resource growth over the past four years and Jarden suggests mine inventories may potentially be boosted by up to 1moz from deeper underground operations.
The broker also sees broader green and brownfields potential at modest depth, which has the capacity to add mine life and scale over time at Mt Gibson.
Prior to identifying this potential, Jarden already felt management had secured an asset for -$40m that could provide the basis for a separate small cap company.
The maiden pre-feasibility study (PFS) for Mt Gibson, released in April this year, showed economics similar to Karlawinda, which the broker points out potentially more than doubles group production to 250,000oz per year at a (real) all-in sustaining cost (AISC) of $1,400/oz from the second half of 2025.
Following the release of a maiden ore reserve and the PFS for Mt Gibson, Bell Potter upgraded its rating for Capricorn to Buy from Hold.
This broker suggested Capricorn had emerged as a highly attractive acquisition target given its two low-cost, long-life gold mining operations in the world’s top mining jurisdiction (Australia). Not only was the company’s strong growth outlook mentioned, but also its excellent delivery track record.
Since pouring first gold in June of 2021, management has successfully ramped-up production at Karlawinda and delivered production and costs either in line or ahead of guidance.
Canaccord Genuity also noted the potential indicated by the PFS would see the company rank among the ten largest ASX-listed gold producers, with AISCs firmly in the lowest quartile of the sector.
Jarden extends its life of mine (LOM) for Mt Gibson to 15.5 years compared to the 9.5 years within the PFS as the broker’s gold price forecasts remain substantially ahead of the $2,200/oz applied to the resource pit shells.
The Capricorn management team has been together for 20 years and the broker notes past successes include Samantha Gold, Equigold, and, most recently, Regis Resources ((RRL)). Shareholder value has been created by acquiring assets cheaply, observes the broker, or by positioning to help incumbent management realise asset potential.
In the case of Equigold, Regis Resources and now Capricorn Metals, there has been/is strong alignment of management with shareholders in terms of equity holdings, point out the analysts. Once Mt Gibson commissions, it’s felt the strong history of returns to both parties will continue.
While Capricorn’s high-margin operations offer less leverage to the gold price on the upside, Jarden notes the trade-off is downside protection.
March quarter results and the outlook
Back in late March, Capricorn Metals released third quarter production and AISC metrics in line with Macquarie’s forecasts though sales were 10% higher-than-expected.
Management maintained its FY23 production guidance of 115-125koz.
In April, Canaccord Genuity remained confident ongoing drilling would translate to further ounces added to the mining inventory, potentially providing an enhanced production profile and/or mine-life beyond the PFS and the broker’s forecasts.
Jarden expects Capricorn will be in a position to commence a fully franked dividend stream from FY26. The broker’s base case assumes a 30% free cash flow payout ratio, but the historical payout ratios of management’s previous vehicles (Equigold and Regis Resources) suggest a higher payout ratio is possible.
FNArena’s daily monitoring consists of Bell Potter and Macquarie with ratings of Buy and Neutral, respectively, and an average target price of $4.85, which suggests just under 14% upside to the latest share price.
Overweight-rated Jarden and Canaccord Genuity (Buy) are not monitored daily and have an average target of $5.23.
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