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Morningstar | Regis Resources 1H19’s Profit Down on Higher Costs, AUD 3.20 per Share FVE Maintained

No-moat Regis Resources’ first-half fiscal 2019 net profit aftertax of AUD 80 million, 6% down from AUD 85 million a year ago. The half sees Regis tracking slightly below our unchanged full-year AUD 168 million forecast. However, we expect production and the Australian dollar gold price in the second half to be slightly higher. Gold sales revenue increased 6% to AUD 316 million versus the first half of 2018. Sales volumes rose 1.3% to 186,300 ounces with the average price 3.4% higher at AUD 1,696 per ounce. Despite solid sales growth, higher costs saw the EBITDA margin fall to 46% from 51% a year ago.

We maintain our fiscal 2019 earnings forecast and our AUD 3.20 per share fair value estimate. Regis shares remain overvalued. The market continues to credit the firm with considerable exploration success. Recent drill results incrementally extend life. But relatively short reserve life in Western Australia is a meaningful challenge the market appears sanguine about. Our fair value estimate credits Regis with a 100% chance of the McPhillamys development going ahead. We think the project should be developed but it still needs to formally secure water and environmental approvals. We estimate McPhillamys is worth AUD 0.95 per share.

First-half gold production of 181,400 ounces was broadly in line with the prior two halves. Net of royalties, Regis’ cash cost increased 13.4% to AUD 779 per ounce versus a year ago. Management confirms it’s on track to deliver to the mid- to upper-end of the 340,000 to 370,000-ounce production guidance range. All in sustaining costs should be at the mid- to lower-end of AUD 985 to AUD 1055 per ounce guidance. Our unchanged production and cost assumptions for fiscal 2019 are consistent with guidance. Longer term, we expect cash costs to rise as mines mature and grades decline towards the reserve average.

Regis’ balance sheet and financial position remains strong. Net cash of AUD 187 million represents a 56% increase over first-half 2018. The company declared a fully franked interim dividend of AUD 0.08 per share on a 47% payout, consistent with the past two years. The interim dividend is consistent with our full-year AUD 0.16 per share forecast. There’s scope for Regis to increase dividends given the strength of cash flow and robust financial position. However, the impending AUD 200 million plus investment to develop McPhillamys means management may be more conservative. We’re forecasting dividends to grow to AUD 0.25 per share by fiscal 2021 but sustaining that level of payout longer term will be hard given reserve depletion.

Investing cash outflows stepped up in the half, rising 40% to AUD 81 million. This was still well covered by net operating cash flows of AUD 127 million. It’s been an active half with the firm spending AUD 21 million on exploration expenditure and AUD 29 million on new satellite projects and tailings dams.