Galiano Gold: After Over 100% Achieve, There Are Higher Alternatives In The Sector

In my March 2023 article on Galiano Gold Inc. (NYSE:GAU), I mentioned how traders have been getting the corporate’s 45% stake within the Asanko gold mine (Ghana) at no cost, as GAU had ~US$102 million in money, gold, and receivables and no debt, and a market cap of US$103.5 million.

My bullish thesis highlighted how Galiano was buying and selling at money worth, but latest information confirmed a much-improved outlook for the Asanko gold mine, which the market had but to acknowledge.

At $1,800 gold, Galiano’s 45% financial curiosity in Asanko would generate after-tax free money circulate of US$275 million for GAU and had an after-tax NPV of virtually US$200 million, or roughly $1 per share of worth. GAU was buying and selling at slightly below $0.50, and after considering the money available, the honest worth was ~$1.50 per share, or greater than 3x its value on the time.

Since then, the bullish thesis has performed out as anticipated. GAU has elevated by over 110%, smashing the efficiency of the HUI (an index of gold mining shares), which has returned simply over 4%. GAU has spiked over the past month as traders reacted positively to the information of the corporate buying Gold Fields’ (GFI) 45% stake within the Asanko mine, which I forecasted would occur. Whereas there may be nonetheless worth in GAU, there at the moment are higher danger/reward alternatives within the sector. Consequently, GAU is a promote. Let’s talk about why in additional element.

It’s been my argument for the previous few years that the Galiano/Gold Fields JV possession of Asanko ought to be consolidated, as I noticed no motive for GAU to stay a public firm. Galiano both wanted to be acquired or buy Gold Fields’ 45% stake. The latter can be bullish information, too. I didn’t imagine the three way partnership would proceed below its possession construction, and as talked about in an article final October, I leaned in direction of GAU shopping for out GFI’s stake as I wasn’t satisfied the money circulate was sufficient for Gold Fields or that it could be prepared to pay near honest worth for GAU.

In late December 2023, GAU introduced that it was buying Gold Fields’ 45% stake within the Asanko mine (the federal government of Ghana owns the opposite 10%). The deal was applauded because it solely requires GAU to concern US$20 million in shares upfront, with GFI additionally holding its share (or US$65 million) of the JV’s money place. Over half of the whole consideration is deferred and as follows:

• US$25 million on or earlier than December 31, 2025
• US$30 million on or earlier than December 31, 2026
• A contingent consideration of US$30 million as soon as 100,000 ounces of gold are produced (on a 100% foundation) from the Nkran deposit, which isn’t anticipated to happen till the tip of 2028.

GFI additionally receives a capped 1% NSR royalty on the Nkran deposit, which solely goes into impact as soon as 100,000 ounces are produced.

This deal provides Galiano 90% management of Asanko, doubles its gold manufacturing to 240,000 ounces per yr, and the corporate nonetheless has $128 million of money.

Nonetheless, there may be now as a lot as US$85 million of debt due to the deferred funds, so web money will probably be far decrease than earlier than as soon as the deal closes this quarter.

The back-end loaded money circulate of the up to date mine plan additionally complicates the scheduled debt funds.

The Asanko mine will common 240,000 ounces of gold manufacturing per yr at an AISC of $1,063 per ounce over its remaining ~8-year mine life. On paper, it feels like a robust mine plan, however the overwhelming majority of web money circulate isn’t realized till late within the mine life because of the ~US$230 million of pre-stripping required on the Nkran pit from 2025-2027 (which is excluded from the AISC). Because of this the pre-tax money circulate chart under (utilizing a $1,700 gold value) reveals solely modest web pre-tax money circulate by means of 2027. The deferred money funds in 2025 and 2026 will imply cumulative web money circulate is near zero over the subsequent 4 years at that very same gold value. On the present gold value of $2,000+, which I really feel is a extra reasonable value assumption, the pre-tax money circulate every year will probably be a lot increased, resulting in far better web money circulate by the tip of 2027, however it’s nonetheless closely weighted towards the previous few years of the mine life. The mine’s manufacturing will enhance this yr, whereas AISC is anticipated to be US$1,581 per ounce per the mine plan. Final yr’s AISC was a lot decrease than forecast, so it’s doable that the pattern will proceed. If it doesn’t, then I solely count on modest free money circulate from Galiano in 2024.

Accounting for the extra shares to be issued to GFI, the market cap of Galiano at its closing value in the present day is US$258 million. The after-tax NPV (5%) at $2,000 gold is $630 million on a 100% foundation. Factoring within the pro-forma web money and 90% possession, GAU remains to be buying and selling at lower than half its honest worth. Nonetheless, many shares within the sector are buying and selling at comparable and even decrease valuations and supply extra diversification and/or a lower-risk mining jurisdiction. Aside from a serious discovery, there aren’t any near-term catalysts to drive GAU a lot increased vs. the remainder of the group. I don’t imagine GAU will be capable to proceed to push north with out the remainder of the group additionally collaborating, and even then, I feel GAU will, at greatest, carry out roughly in keeping with its small-cap friends. Due to this fact, I see higher alternatives elsewhere within the sector.

I’ve stated it numerous instances: one of many keys to outperforming on this sector is to play the divergences. With GAU gaining appreciable floor over the past 9-10 months, that is the right alternative to rotate into mining shares with higher or equal worth which have near-term catalysts to drive outperformance.