Unsustainable High Grades At Cue And Penny Will Impact Future Earnings

Key Takeaways

• Overperformance in grades may not sustain, potentially lowering production and net margins long-term amidst hard rock mining challenges.
  
• Future capital focuses, like infrastructure and development projects, may increase expenses, constraining free cash flow and earnings.
  
• Strategic cost reduction and high-margin operations bolster financial stability, potentially supporting share price amidst market pressures.

Catalysts

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

• The unexpected strength in grades from Cue and Penny may not be sustainable in the longer term, potentially leading to lower-than-anticipated production and revenue, impacting future revenue forecasts.
  
• Overperformance in grades during the superficial mining phase may not continue into the hard rock phase, posing a risk to sustaining high margins and impacting future net margins.
  
• A possible shift in the financial focus towards the completion of large infrastructure projects, such as the Eridanus underground studies, Mt Magnet processing upgrades, and the Rebecca Roe feasibility study, could lead to higher capital expenditures and consequently lower net earnings in the near term.
  
• With significant investments already made and more planned for development projects, free cash flow and earnings may be constrained if the anticipated production growth or high-grade output fails to materialize.
  
• The substantial liquidity position and potential for capital allocation changes indicate that future acquisitions or projects may demand significant investment, which could dilute the focus on shareholder returns and constrain earnings.

Ramelius Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ramelius Resources's revenue will decrease by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.5% today to 26.7% in 3 years time.
• Analysts expect earnings to reach A$190.2 million (and earnings per share of A$0.17) by about February 2028, down from A$216.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$259.2 million in earnings, and the most bearish expecting A$61.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, up from 14.0x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 13.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Ramelius Resources Future Earnings Per Share Growth

Risks

• The significant increase in quarterly gold production and operation of high-grade sources such as Cue and Penny can lead to continued strong revenue and earnings potential, thus supporting the share price.
  
• The strong cash flow generation, with A$174.5 million of free cash flow recorded, highlights improved net margins and strengthens the company's financial position, potentially offsetting any downturn in share price.
  
• The company's strategic focus on reducing costs, shown by the 25% decrease in all-in sustaining costs, can lead to higher net profit margins, providing resilience in the face of a declining share price.
  
• The company's ability to maintain high margins of 60% despite forward contracts suggests robust earnings potential, which could counteract downward pressure on the share price.
  
• The substantial liquidity position of over A$1 billion in available liquidity, coupled with disciplined capital management strategies, enhances financial stability and may buoy the share price.

Valuation

• The analysts have a consensus price target of A$2.574 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$3.2, and the most bearish reporting a price target of just A$1.32.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$711.5 million, earnings will come to A$190.2 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$2.63, the analyst price target of A$2.57 is 2.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they 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.