Phase Two Expansion And Diesel Plant Purchase Will Drive Reliability

Key Takeaways

• Phase 2 expansion, diesel power plant acquisition, and tailings footprint investment drive increased production, efficiency, and long-term revenue growth.
  
• Exploration in high-grade areas could enhance asset value and production, supporting future revenue improvements.
  
• Increased CapEx, regional power issues, and execution risks from accelerated Stage 2 plans pose significant short-term challenges to Orezone Gold's liquidity and profitability.

Catalysts

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

• Orezone's commencement of the Phase 2 hard rock expansion, with construction beginning in 2024, is a significant growth catalyst. This expansion is expected to ramp up gold production and improve revenue by exiting 2026 at a run rate of 220,000 to 250,000 ounces annually.
  
• The company’s strategic decision to purchase a fully installed diesel power plant, replacing rental equipment, aims to ensure grid availability of 100%. This initiative is likely to enhance operational efficiency and reduce long-term costs, positively impacting net margins.
  
• Orezone's investment in expanding its tailings footprint for the complete life of mine, involving $11 million to $13 million, supports future production scalability through Stage 1 and Stage 2 expansions. This provides an opportunity for sustained revenue growth as production capacity increases.
  
• The rescheduling of Stage 2 hard rock expansion, potentially advancing from 2028 to 2026, and the substantial capital raised for this purpose, signal a proactive growth strategy. Achieving this expansion ahead of schedule could significantly boost earnings.
  
• The ongoing exploration focus, especially in the high-grade P16 and P17 areas, holds the potential for identifying new mineral reserves. Successful exploration could lead to increased asset value and higher future production outputs, positively impacting future revenues.

Orezone Gold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orezone Gold's revenue will grow by 27.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.6% today to 39.0% in 3 years time.
• Analysts expect earnings to reach $226.6 million (and earnings per share of $0.34) by about April 2028, up from $55.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.7x on those 2028 earnings, down from 6.1x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 13.9x.
• 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 7.52%, as per the Simply Wall St company report.

Orezone Gold Future Earnings Per Share Growth

Risks

• The increase in Stage 1 CapEx by about 16% is due to added contingency and preparations for Stage 2, which may strain cash flows and impact net margins in the short term.
  
• Regional power issues and resulting high costs are noted as factors beyond control, which affects the all-in sustaining costs and could negatively impact earnings if these challenges persist.
  
• The decision to purchase a diesel power plant, although providing operational reliability, represents a significant up-front expense that could impact liquidity and short-term profitability.
  
• A decline in mining rates earlier in the year due to temporary contractor issues, albeit resolved, highlights potential risks to achieving stable production levels and revenue consistency.
  
• The accelerated plan to bring Stage 2 hard rock production forward could add financing complexity and execution risk, potentially affecting earnings stability if delays or cost overruns occur.

Valuation

• The analysts have a consensus price target of CA$1.512 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$2.15, 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 $580.7 million, earnings will come to $226.6 million, and it would be trading on a PE ratio of 3.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of CA$0.94, the analyst price target of CA$1.51 is 37.9% 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.