Is Roxgold's (ROXG) Guidance Miss A Buying Opportunity?
Roxgold Inc. (TSX: ROXG) released production results for 2019 Q4 along with three-year production guidance. The total gold production was slightly below guidance, overall results were below analyst estimates, and guidance was softer than expected. ROXG was down as much as 10% in morning trading.
Does this dip present a buying opportunity for investors?
Looking at their balance sheet and cash flow, there is a lot to like about ROXG. They have a cash balance of $41.8 million with long term debt of only $14.2 million as of Q3 and in 2019 H2 they generated free cashflow of over $47 million.
There stock's performance also looks appealing; ROXG has underperformed compared to the GDXJ Gold Juniors index since the start of Q4. Initially, this may present as a value buying opportunity, however, below the surface there are always reasons.
ROXG and GDXJ Since Start of Q4
Source: YCharts.com
To make a long story short, Roxgold's operational outlook disappointed investors. Guidance was lower than expected, while cash costs and AISC were higher. This is driven by the grades they are obtaining and is also expected to affect Q4 financials.
Putting this into context, some analyst estimates had AISC for 2020 in the mid-700's, however, it's not expected to fall in the mid-900's. At an annual mid-point production of 125 Koz, that's approximately $25 million left on the table. On a positive note, AISC are expected to drop to $750-850 for 2021/2022.
These disappointing operational numbers also come at a time when the company is achieving record gold production and plant throughput. Clearly the mine development at their Yaramoko mine has been more challenging than expected.
Investors should look to management for a detailed explanation of these higher costs and whether challenges might persist beyond 2020.
While the company won't meaningfully struggle financially with their strong balance sheet and higher gold prices in 2020, it also means they won't capture the benefits like many of their peers. Capital has likely moved to other companies with more 2020-torque, precipitating the substantial drop in share price.
However, not all hope is lost for ROXG shareholders. Catalysts are key in the slow-burn game of mining, and Roxgold has some on the horizon.
At a time when gold juniors are capital-starved and large gold discoveries are far and few between, even modestly positive brownfield exploration results can look highly attractive.
Management lists the following upcoming catalysts for 2020:
Drill results from two exploration properties along with infill below the surface drilling
Update Seguela resource (includes maiden resource estimates)
Seguela PEA
Seguela feasibility study (leading into 2021)
Given Roxgolds ability to maintain a seven-year life of mine over four years of operation, it seems likely they will continue maintaining reserves and resources, if not increasing them.
While we are not close to the Seguela developments, they could serve as a substantial catalyst for the company if positive results emerge.
Longer-term, the outlook for Roxgold is solid. However, shorter-term we need to see more clarity on the likelihood of successful 2020 drill campaigns and mine developments. Unfortunately, Roxgold's higher 2020 costs and lower than expected production guidance mean they won't see the same benefits from gold's recent surge as their junior peers.
Overall, we believe there are more attractive junior gold miners that will see a greater upside from gold's strong pricing in 2020.
More details on ROXG's operational challenges and catalysts will likely be provided during their quarterly conference call, scheduled on March 5th 2020, after market close.
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