REGIS RESOURCES LIMITED 
By 
The company already distributes a 4% yield and the latter should increase as expansion plans materialize.
Naturally, a bet on a commodity producer should be approached as a leveraged bet on the price of the underlying commodity. For the record, metals extraction, like oil drilling, has always been a difficult business: capital intensive, barely (if ever) profitable over the long cycle, and subject to the vagaries of volatile economic and political conjunctures.
Readers will recall how, in the wake of the financial crisis, gold — at the time subject to a short-lived but feverish speculative bubble — was seen as a safe heaven, as well as a fitting hedge against the vicissitudes of the "accommodative" — i.e inflationary — monetary policies of central banks.
Yet, despite successive rate cuts and quantitative easings, inflation has remained desperately anemic. As a result, the price of gold languished, while repeated frauds among junior producers, dubious acquisitions and outrageous compensation schemes have — until recently — kept investors at bay.
Things have started to change, however, with solid tailwinds — fiscal indiscipline in the U.S., overheated capital markets, etc. — supporting gold price. As a result, the once climbed to a new 8-years record, hitting $1,600. That trend could last.
In this context, mid-sized producer Regis Resources sports a AUD $2bn market capitalization and distinguishes itself by three distinctive features: a spectacular but self-funded track record of growth; a fortress balance sheet, carrying excess cash of AUD $100mil; and finally, the ability to extract gold for a lower cost than most competitors.
It is odd to find a commodity producer that shuns capital market and funds its own endeavors — but Regis comes across as such kind of rare bird. Profitable over the full cycle in spite of a depressed gold price, the company generated sizable cash earnings which enabled it to expand its reserves without tapping lenders, as well as distributing generous dividends to shareholders as production grew.
With 4 million onces in proven and economic reserves, plus 4 other million onces as probable resources, Regis maintains a tight focus on the Duketon Belt, where bountiful deposits were found a decade ago. The four mines it operates — Rosemont, Moolart Well, Garden Well and Dogbolter — collectively produced 360,000 onces last year.
All-in sustaining cost — extraction cash cost plus maintenance capex to sustain reserves — amounts to AUD $1,230, or USD $800, a top tier performance not many peers are able to match. This is because 90% of Regis' production takes place in open pit mines, where extraction costs remain lower than in underground mines.
With the price of an ounce at USD $1,660, Regis realizes a cash netback before taxes, corporate costs and growth capex of USD $860 per ounce, or AUD $1,320. Since management anticipates production to reach 340,000 to 370,000 ounces in 2020, Regis would — using the lower estimate — earn AUD $450 million this year, i.e a fifth of its current enterprise value.
Should the price of gold decline by 25% to reach USD $1,245 per ounce, Regis' netback would come out at USD $445 per ounce, for consolidated earnings before taxes, corporate costs and growth capex of about AUD 230 million, i.e a ninth of its current enterprise value.
All these hypotheses remain adjustable at will, for everyone to stress-test their own models as they please.
In New South Wales, the company develops the McPhillamys deposit and expects a yearly production comprised between 150,000 and 200,000 ounces. Using the same hypotheses as those laid out above, the latter would amount to consolidated earnings of about AUD $100 million per year.
There's every reason to believe in this call option, for Regis already doubled its reserves following exploration of the site.
In terms of valuation, the company trades for a very affordable multiple of its consolidated profits — provided that gold price climbs or stays at current level — in particular if production begins at McPhillamys. Using net asset value and counting all probable resources for zero, the 4 million ounces in "proven and economic" reserves should be worth at least $ 5.3 billions (ounces x cash netback per ounce), with all liabilities covered by cash and equivalents.
These positive developments have led analysts — whose consensus is surveyed in real time by MarketScreener — to raise their ratings and expectations. It is in order to ride such momentum that we've added the stock to our Asian portfolio.
