Future Production Will Benefit From High-Grade Ore At Cue And Penny, But Uncertainties In Ore Grades And Gold Prices Pose Risks

Key Takeaways

• Implementation of high-grade ore and upgraded logistics is set to grow revenue through increased gold production and enhanced margins.
  
• Expected expansion in margins and production capabilities could drive revenue growth with improved earnings and efficiency.
  
• Uncertain geological outcomes, volatile gold prices, and strategic investments risk future revenue growth and profitability.

Catalysts

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

• The introduction of high-grade ore from the Cue and Penny operations, which significantly increased the mine grade, is expected to enhance revenue due to higher future gold production with reduced mining activity.
  
• The completion of intersection upgrades on the Great Northern Highway will facilitate increased haulage capacity from Cue, contributing to higher revenue and potentially improving net margins with efficient logistics.
  
• The anticipated increase in gold production and earnings from Cue as its operations ramp up in H2 FY 2025 is likely to drive revenue growth and improve net margins due to higher-grade yields.
  
• The expected expansion of the all-in sustaining margin to 61% for FY '25, supported by current gold prices and reduced hedge book commitments, suggests a positive impact on earnings and an improvement in net margins.
  
• The potential mill expansion at Mt Magnet, combined with updated mine plans, will support higher production capabilities and could lead to an increase in revenue and potentially improved earnings through economies of scale.

Ramelius Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ramelius Resources's revenue will decrease by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.2% today to 26.9% in 3 years time.
• Analysts expect earnings to reach A$245.0 million (and earnings per share of A$0.18) by about April 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$298.8 million in earnings, and the most bearish expecting A$118.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from 7.7x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 11.2x.
• 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 7.83%, as per the Simply Wall St company report.

Ramelius Resources Future Earnings Per Share Growth

Risks

• The completion of mining activities at Edna May and the use of low-grade stockpiles could lead to higher production costs, impacting net margins and earnings negatively.
  
• The company's future performance is dependent on the continued ability to optimize mill feed and maintain high-grade mining, which might be challenged if ore grade does not continue to meet expectations, potentially affecting revenue and profitability.
  
• There is uncertainty related to Cue's ore performance as the geological model reconciliation is still pending, and if performance does not meet anticipated grades, revenues and net margins could be negatively affected.
  
• The cash investment into Spartan could divert attention and resources away from core operations, potentially impacting future revenue growth and cash flow if the investment does not yield expected returns.
  
• The company's increasing exposure to a fluctuating gold price and reliance on reduced hedge book commitments may result in unpredictable future revenues and earnings, particularly if gold prices decline or there are hedging missteps.

Valuation

• The analysts have a consensus price target of A$2.79 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$2.35.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$911.2 million, earnings will come to A$245.0 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of A$2.29, the analyst price target of A$2.79 is 17.9% 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.