Galane Gold stock still trades slightly above 1x on EBITDA (OTCQB:GGGOF)
Posted on the Value Lab 6/28/22
Galane Gold (OTCQB:GGGOF) is a microcap gold mining stock that offers a strong case for value investors and gold speculators. As a gold mining company, it has operating leverage to Commodities, which we believe is in a reasonably good environment that will weather the down cycle better than most commodities despite rate hikes reducing gold’s relative return. Moreover, it is trading at an extremely low price on the expected mining revenues, and even cheaper considering the properties they are developing. With management having an excellent track record of restoring old mines and making them profitable again, we see Galane as an attractive gold-oriented PE type investment vehicle that investors should consider in today’s market. .
Update for Q1
The big event of our last coverage was that they disposed of the Mupane property which was on its last legs. Despite this, some consideration has been paid for its disposition despite the clean-up provisions which allowed moderate gross debt and bond deleveraging of approximately $5 million to $4 million.
Currently, the only cash flow producing asset is the Galaxy Mine, which is being expanded to nearly double its payable gold production in a Phase 2 CAPEXing plan. This is still in progress.
In other news, there is the recently acquired Summit mine which is a restart effort. Currently it is out of service, but Galane management is working on an economic assessment of the mine next June so they can signal next steps. We already have an idea of the possible daily tonnage, which allows us to produce a model later. We don’t know how long it will take to get this asset up and running, but some CAPEX will need to come into it in order to supply it with machinery and equipment to bring it out of disrepair. Summit will produce silver in addition to gold.
October 2021 was when the Galaxy mines first came into action, and more or less when the Mupane mine was no longer a contributor. Current operating results show us the effect of the mine still being operational in its Phase 1.
Foreign exchange losses have decimated results, but we are looking at around $1.2 million in EBIT this quarter and around $2 million in EBITDA, which cancels out at around $8 million in EBITDA per year, which is still lower than our estimates based on assumed mining costs per ounce. in our model. Based on the guided production numbers, it looks like the culprit could be the front line in this case, so we expect Galaxy to mature at a fuller rate this year.
Model and conclusions
Currently, the Galaxy mine is the only one in operation, so let’s build a model using its cash costs.
A good thing to note is the minimum royalties. Using the current gold price, we can build the EBITDA model, jump to when phase 2 is in action.
We can do the same with the Summit mine, instead estimating the EBITDA margin at 30%, where cash costs per ounce cannot yet be determined.
Note that the cost per ounce has dropped massively for the Galaxy mine. Further improvement with the Phase 2 scale has therefore not been factored into our model, where we use current fill rate costs per ounce for Galaxy.
In total, this gives us an EBITDA of $33 million. With the EV of around $37 million, this puts EBITDA slightly above 1x.
There are risks here. First of all, CAPEXing will be necessary to relaunch Summit in particular. Second, Forex is a problem because the Galaxy property is in South Africa, and the strengthening of the rand against the dollar, in which gold is traded, has meant much less revenue in terms of the rand and ultimately dollars Canadians because it is repatriated and presented. in Canada. A strong rand is not good for Galane, and unfortunately a strong rand could persist due to positive exposures to palladium, a resource heavily biased towards Russia in terms of reserves, but also in general for commodities. The rand is likely to weaken as higher rates depress industrial commodity prices, but it is unlikely to fall to previously normalized levels due to the impact from Russia. Finally, there is the risk of operational leverage on gold. Gold could fall as rates rise and the yield on fixed income rises relative to just holding a commodity. Also, speculators are generally abandoning commodities in the market right now, which will hopefully reduce some of the inflation through rate hikes, but also signal that gold could get the same treatment then. that people are starting to assess the economic situation more confidently and reduce the desire for gold as a safe haven.
Nonetheless, trading at a low valuation like this makes it an attractive way to ride out the current market jitters with durable assets in safe commodities. Gold reserves are rapidly dwindling and there are supply forces supporting the raw material. Additionally gold has certain utility streams from being used in jewelry which means there are certain call option elements where downside is limited based on that when the speculative value falls. Overall, a multiple of 1x is attractive and worth considering.