Hard Rock Expansion To Increase Production Capacity Starting Q4 2025

Key Takeaways

• Orezone Gold's expansion plans and cost efficiencies aim to significantly boost gold production and improve net margins through enhanced operational efficiency.
  
• Strong financial health supports further investment in growth projects, enabling potential long-term production and earnings improvements.
  
• Environmental challenges and strategic decisions are increasing costs and risks, potentially impacting margins, revenue, and financial health.

Catalysts

Engages in the mining, exploration, and development of gold properties.

• Orezone Gold's expansion of its hard rock plant is expected to increase gold production to over 170,000 ounces per year starting in Q4 2025, with further growth anticipated to reach approximately 225,000 to 250,000 ounces per annum. This will significantly impact revenue growth.
  
• The ongoing exploration program aims to expand reserves and resources, providing potential long-term production growth beyond the current projections. Successful outcomes could further improve Orezone's earnings potential.
  
• The stability and expected improvement in all-in sustaining costs (AISC), aided by a higher mining volume and reduced strip ratios, should enhance net margins as operations become more cost-efficient.
  
• The planned acceleration of the Stage 2 hard rock expansion, with the hope of increasing annual production capacity to 5 million to 7 million tonnes, presents significant future growth opportunities, likely impacting future revenue and net margin enhancements if successful.
  
• Orezone's healthy financial state, with a cash balance of $66.9 million and continued free cash flow generation, facilitates further investment in growth projects, contributing to revenue growth and potential earnings improvements.

Orezone Gold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orezone Gold's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.4% today to 24.1% in 3 years time.
• Analysts expect earnings to reach $97.6 million (and earnings per share of $0.21) by about February 2028, up from $29.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 8.7x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 13.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

Orezone Gold Future Earnings Per Share Growth

Risks

• The all-in sustaining costs per ounce remained high due to increased strip ratios and the processing of lower-grade stockpiles caused by environmental challenges, impacting net margins.
  
• Heavy rainfall affected mining operations by restricting access to higher-grade ores, leading to increased reliance on lower-grade stockpiles, which could continue to impact revenue if weather issues persist.
  
• The company's expansion into hard rock mining involves significant capital expenditures, and any delays or cost overruns in the expansion could impact future earnings.
  
• Ongoing arbitration related to a power purchase agreement represents both a financial and operational risk; if unresolved, it could impact costs and margins.
  
• VAT receivables have increased significantly, and any difficulties in recovering these could affect cash flow and financial health.

Valuation

• The analysts have a consensus price target of CA$1.67 for Orezone Gold 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 CA$2.25, and the most bearish reporting a price target of just CA$1.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $405.9 million, earnings will come to $97.6 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of CA$0.8, the analyst price target of CA$1.67 is 52.1% higher.
  
• 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.