High Real Rates And Decarbonisation Will Crush Gold Margins

Key Takeaways

• Persistently high interest rates and global green investment shifts may weaken gold demand, increasing Ramelius' financing costs and straining profit margins.
  
• Rising mining costs, lower-grade resources, and stricter regulations threaten earnings growth and heighten vulnerability to gold price and market competition.
  
• Strong gold demand, disciplined expansion, operational synergies, low costs, and sustainability initiatives position the company for resilient profitability and long-term growth.

Catalysts

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

• The possibility of enduringly high real interest rates over the long term could erode gold's appeal as an investment, diminishing investor demand and likely leading to materially lower gold prices, directly compressing Ramelius Resources' future revenue and profit margins.
  
• A global acceleration towards decarbonisation and the transition to green assets can reduce the attractiveness of gold producers among institutional investors, potentially restricting Ramelius' access to low-cost capital and increasing its cost of financing, negatively impacting future earnings and return on equity.
  
• The depletion of higher-grade oxide resources at Cue has provided a boost to recent production and cash flow, but as operations transition to fresh rock zones with lower grades and higher expected mining costs, group-level margins are likely to decline, directly threatening earnings growth and reducing free cash flow.
  
• Increased reliance on a single commodity, gold, amplifies the company's exposure to future commodity price volatility, and as global competition increases from larger, lower-cost or more geographically diversified producers, Ramelius may struggle to maintain market share and stable revenues over the coming years.
  
• Escalating ESG regulations and resource nationalism globally are expected to drive up compliance and operating costs for miners, and as new gold recycling technologies and non-mined alternatives emerge, long-term demand for primary gold may weaken, putting additional pressure on Ramelius Resources' revenue growth and net profit margins.

Ramelius Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ramelius Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ramelius Resources's revenue will decrease by 14.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 33.2% today to 32.5% in 3 years time.
• The bearish analysts expect earnings to reach A$212.6 million (and earnings per share of A$0.19) by about July 2028, down from A$345.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, up from 9.1x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 13.5x.
• 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 7.01%, as per the Simply Wall St company report.

Ramelius Resources Future Earnings Per Share Growth

Risks

• Persistent strong demand and secular tailwinds for gold, driven by ongoing global monetary instability and inflation concerns, could continue to lift gold prices, directly supporting increases in Ramelius Resources' revenues and sustaining or expanding its high net margins.
  
• The company's disciplined approach to exploration and resource expansion, demonstrated by positive drilling results at Break of Day, Hesperus, and Penny, may enable significant mine life extensions and resource growth, which could underpin long-term growth in net asset value and future earnings.
  
• Successful integration of the Spartan merger and realization of associated operational synergies could further enhance production scale, reduce unit costs, and boost long-run cash flow generation, improving overall company profitability.
  
• Ramelius' technology investments and ongoing cost optimization efforts at key operations, especially at Mt Magnet, are resulting in sector-leading low all-in sustaining costs, which if maintained, could safeguard or expand profit margins even in volatile gold markets.
  
• The company's proactive focus on sustainability initiatives, including its hybrid renewable power agreement and regular sustainability reporting, may strengthen access to capital and maintain investor support, potentially lowering its cost of capital and enabling stable long-term earnings.

Valuation

• The assumed bearish price target for Ramelius Resources is A$2.7, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ramelius Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.2, and the most bearish reporting a price target of just A$2.7.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$654.0 million, earnings will come to A$212.6 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of A$2.72, the bearish analyst price target of A$2.7 is 0.7% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• 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.