2021 has been a year to forget for precious metals investors, with the Gold Juniors Index (GDXJ) down 20%, underperforming major market averages. While some names like Karora Resources (OTCQX:KRRGF) have held up well against a commitment to an aggressive growth plan, others like Galiano Gold (GAU) have not been so lucky. In fact, Galiano is now down more than 65% from its highs after a lifeless performance in 2021, and its fourth quarter results certainly did little to help the stock, given the indications. missed. Given Galiano’s distinction as a producer of unique high-cost assets in a Tier 3 jurisdiction, I think there are far more attractive ways for investors to play in the sector.

Unless otherwise stated, all figures are on a 100% basis for the Asanko Gold Mine Joint Venture. The joint venture is split 50/50 for the 90% economic interest, with Ghana holding 10%. Therefore, all figures are 45% attributable to Galiano.

Galiano Gold released preliminary results for the fourth quarter and full year 2021 last month, reporting quarterly gold production of approximately 50,300 ounces, down 23% from the reporting period. ‘last year. This disappointing performance was attributed to much lower head grades and recoveries, with grades down 20% to 1.2 grams of gold per tonne and recoveries sliding 400 bps at 91%. Given the weaker fourth quarter performance, the company missed its already revised production guidance for fiscal 2021 by almost 5%, producing approximately 210,200 ounces of gold against a midpoint of 217,500 ounces. Let’s take a closer look at the quarter below:

As shown in the chart above, Galiano experienced a significant drop in production from fiscal 2020 levels, with grades sliding from 1.4 grams per tonne gold in fiscal 2020 to an average of 1.2 grams per tonne of gold in fiscal year 2021. This was partly related to increased stripping year-over-year as the company advanced Cut 3 to Akwasiso and a greater reliance on low grade stocks. However, even in the fourth quarter and with stripping nearing completion, grades at Esaase and Akwasiso were below expectations, with delivery of ore from Akwasiso slower than expected. This resulted in another quarter of lower grades, with an average grade of 1.2 grams of gold per tonne well below the average reserve grade of 1.43 at Akwasiso and around 1.3 grams of gold. gold per ton to Esaase.

Given the headwinds related to COVID-19, we have seen a number of industry-wide production misfires, but Galiano not only missed its initial guidance, but it also missed its revised guidance, which is quite disappointing. This is based on annual production of approximately 210,200 ounces, more than 10% below the original midpoint of 235,000 ounces and 4% below the updated midpoint of 217,500 ounces. Given the lack of guidance, I wouldn’t be surprised to see the all-inclusive sustaining costs [AISC] are at the upper end of the forecast at over $1,415/oz, which would put Galiano’s AISC FY2021 over 30% above the industry average (~$1,080/oz).

Looking ahead to fiscal 2022, the fact that grades are below plan is not ideal, but we should see a slightly better year from a grade perspective with an increased contribution from the Akwasiso deposit to more high content. However, while this should result in higher production, it’s unclear if we’ll see much cost improvement. Indeed, as I will discuss in more detail below, we have seen a significant increase in costs across the sector, and small producers without purchasing power and large supplier networks are struggling to absorb these costs than diversified peers like Newmont (NEM) and Barrick (OR).

So what’s the good news?

Although this has been a very disappointing year operationally for Galiano, the company has reported encouraging drill results on several targets in its properties. Highlights include 5.1 meters at 10.5 grams of gold per tonne, 40.1 meters at 2.4 grams of gold per tonne and 33.2 meters at 2.6 grams of gold per tonne at Dynamite Hill (former pit in operation to the northeast of the plant). Meanwhile, Midras South also reported a few strong intersections including 6 meters at 8.6 grams gold per tonne, 8 meters at 5.3 grams gold per tonne and 6 meters at 2.8 grams gold per ton. Galiano expects to report a resource/reserve estimate at Dynamite Hill and an early resource at Miradani (another key target south of the plant). This should give a better idea of ​​the lifespan extensions we can expect at Asanko Gold Mine.

While these new targets are certainly encouraging, it is too early to tell if we will see a significant increase in reserve grade from Asanko’s average reserve grade of approximately 1.40 grams per tonne of gold. Clearly, an increase in the resource/reserve base is good news for investors, as it will extend the life of the mine and boost the net asset value of this asset. Ghanaian shared with Gold Fields (GFI).

However, the key to making Galiano stand out from its peers, given that single-asset producers are less attractive, is higher qualities and higher margins. I see no reason to believe that these new targets are a game-changer (like Nkran Cut 3 might be), even though they should add resources at over 1.4 grams per tonne of gold to the mineral inventory of the society. So while the exploration success certainly helps the story, it’s not impressive enough, at least in my opinion, to justify favoring the stock over other industry-wide producers with multiple operations in safer jurisdictions.

Earnings trend

Looking at the chart below, we can see that Galiano Gold experienced strong annual earnings per share growth in fiscal 2020, benefiting from a much higher grade year at the Asanko Gold Mine joint venture and a record average realized gold price. This led to more than 2,000% annual EPS growth, with annual EPS rising from $0.01 to $0.26. However, with the gold price under pressure last year, an emphasis on scrap stripping and lower than expected grades, annual EPS is expected to fall by more than 50%, based on current estimates of $0.12. That’s the downside of owning high-cost producers like Galiano, whose margins and profits are very sensitive to fluctuations in the price of gold.

With the expectation of slightly better year-over-year ratings and the possibility of pushing Nkran Cut 3 forward sooner than expected, we should see a significant increase in production in 2023 over 2021 levels. Unfortunately, this was partially offset by increased costs for fuel, labor, consumables and materials across the industry. For most producers, this resulted in cost inflation of 7-10%. However, for some producers mining low-grade deposits and hauling significantly more tonnes than their peers, cost inflation is 10% or more from pre-COVID-19 levels.

Galiano falls into this category of high-volume, low-grade producer, which means it could be more impacted than its peers with higher-grade underground deposits, which can lead to labor pressure. work, but a less dramatic increase in fuel costs. So while Nkran Cut 3 certainly offers the opportunity to reduce costs with a shorter transport distance due to its proximity to the factory and higher qualities, some of these advantages will be offset by the inflationary pressures that most producers are feeling across the sector. So while we will see better costs once Galiano upgrades to Nkran Cut 3, I still expect Galiano to be a higher cost producer over the life of his mine.

Investors should get a better idea of ​​the expected costs and timing of mining at Nkran Cut 3 in the updated reserve and mining plan expected in the first half of this year. In this mine plan, I would be shocked if we didn’t see much higher costs than the $1,135/oz estimated in the previous mine plan. As things stand, single-asset producers are a group of miners that I generally avoid, since all potential problems are magnified due to a single operation. However, when it comes to being a high-cost, single-asset producer in a less favorable jurisdiction, I simply don’t see any case for investment here. That doesn’t mean the stock can’t rise, but it is a high-risk, high-reward bet.

Evaluation

Based on a current stock price of $0.66, Galiano trades at a market cap of approximately $149 million and an enterprise value closer to $100 million. That leaves the shares trading at less than 6x FY2022 earnings estimates and less than 0.40x P/NAV. This is a very reasonable valuation, with most gold producers under 500,000 ounces trading at 8x earnings or more and closer to 0.70x P/NAV.

As it stands, single-asset producers are a group of miners I generally avoid, as any potential issues are magnified. However, when it comes to being a high-cost, single-asset producer in a less favorable jurisdiction like Galiano, I simply don’t see any investment case here. That doesn’t mean the stock can’t rise, but it is a high-risk, high-reward bet. In a sector already quite risky in itself and with many quality diversified producers on sale, I see no reason to favor Galiano. So while the stock would hit oversold levels at $0.60 if this weakness continues, I continue to see several more attractive bets elsewhere in the sector.