Cue And Hesperus Will Unlock Mining Synergies Amid Risks

Key Takeaways

• The combination with Spartan and new exploration results promise lower costs, improved margins, and potential revenue growth.
  
• Expanding operations at Mt Magnet and focusing on high-grade exploration support long-term revenue and earnings growth.
  
• Transition challenges and operational inefficiencies at key sites could lead to increased costs and unstable revenue, pressuring Ramelius Resources' earnings and margins.

Catalysts

Engages in the exploration, evaluation, mine development and operation, production, and sale of gold.

• The reconciliation of the resource model at Cue resulted in a 31% increase in production, pointing to potential revenue growth through unexpected increases in grade.
  
• The transformational combination with Spartan promises significant synergies, which could lower costs and improve net margins and earnings.
  
• New exploration results from high-grade projects like Cue and Hesperus indicate potential for future mine life extension and production increases, positively impacting future revenue.
  
• The plan to produce 350,000 ounces from the Mt Magnet operation by FY '30 could drive long-term revenue growth, especially with its demonstrated low all-in sustaining costs.
  
• Continued focus and increased expenditure on exploration, with significant finds like high-grade extensions at Break of Day, could enhance resource projections and, in turn, future earnings potential.

Ramelius Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ramelius Resources's revenue will decrease by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.2% today to 27.6% in 3 years time.
• Analysts expect earnings to reach A$255.3 million (and earnings per share of A$0.19) by about May 2028, down from A$345.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$292 million in earnings, and the most bearish expecting A$118.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Ramelius Resources Future Earnings Per Share Growth

Risks

• The transition of Edna May to care and maintenance and its higher processing costs could lead to reduced cash flow from this operation, affecting overall revenue and margins.
  
• The production at Edna May is depleting and transitioning, which might impact Ramelius's ability to hit cost-efficient production targets and could pressure overall earnings if not compensated by other assets.
  
• Challenges in stoping areas, hanging wall failures, and drill equipment availability at Penny may hinder production efficiency and lead to increased costs, impacting net margins.
  
• The reduction in ore tonnes milled and dependency on higher-grade but limited stockpiles from Cue suggests potential volatility in future output, which could affect revenue stability.
  
• The assumption that fresh rock mining at Cue will perform in line with predictions may not hold, risking unexpected cost increases or lower-than-expected output, which could impact earnings and revenue forecasts.

Valuation

• The analysts have a consensus price target of A$2.948 for Ramelius Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.55, and the most bearish reporting a price target of just A$2.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$923.7 million, earnings will come to A$255.3 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of A$2.63, the analyst price target of A$2.95 is 10.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.