With its half-year results boasting a 56pc leap in operating profits this week, Goldplat’s (LSE:GDP) niche strategy of recovering gold from the mining waste of other firms in South Africa and Ghana is enjoying its strongest run in years. As the business initiates the global expansion of its recovery services while increasing the profitability of its traditional mine in Kenya, it looks well poised to reach it’s 100,000oz a year gold production target in the next few years.
With Goldplat also looking to start recovering platinum group metals and launch a state-backed clean-up scheme in Ghana over the longer-term, it looks under-valued at a current enterprise multiple of 3.7x, below its peer-group average. Plans to increase international recovery shipments and deliver near-term acquisitions in the primary mining space mean plenty of news flow could be on the way. With that in mind, Goldplat’s current 7.2p share price could soon look cheap.
Responsible recovery
Most of Goldplat’s production currently comes from its gold recovery plants, where residual gold is recovered from by-products formed in the mining process before being sold on for revenue. This method of production gives miners a handy outlet for their waste materials that also meets their environmental standards. As a result, it has proved very popular with clients ranging from blue-chip corporates to private and local producers.
Goldplat is targeting gold production of 50,000oz a year from its recovery plants within the next two to three years, which is only a modest increase on the 39,000oz it produced from recovery in FY 2017. Goldplat’s biggest recovery plant is currently GPL, which is based in South Africa. GPL produced nearly 14,000oz of gold in the six months to December 31, 2017, up from 12,500oz in the same period a year previous. Its tailings also currently contain in excess of 32,000oz of gold, the largest amount of reserves the plant has held in five years. It is hoped that this waste will be able to feed the site’s mills for the next 12 months.
Going forward, Goldplat aims to maintain production of around 29,000oz per year at GPL, in line with the 29,418oz the plant produced in 2017. This modest goal certainly looks achievable when one considers the plant’s favourable geopolitical backdrop and upcoming pipeline of work.
After years of instability, South Africa’s president Jacob Zuma recently resigned. His replacement, president Cyril Ramaphosa. has already agreed to postpone a potentially damaging review into the country’s mining charter. Furthermore, Goldplat has secured a new contract for GPL that will see it be used to clean up decommissioned gold operations for a large South African gold miner. This is due to be completed by the end of FY2018.
In an exclusive interview with ValueTheMarkets.com, Goldplat’s chief executive Gerard Kisbey-Green said GPL’s modest production goals can be put down to the fact it is now a mature asset.
He told us: ’We already service all but one of the big producers of gold in South Africa. We have recently made a number of improvements at GPL and future growth is going to come through further cost reductions, productivity innovation, and increasing throughput.’
Indeed, going forward, growth in Goldplat’s recovery business is likely to be driven by GRG, its recovery plant in Ghana, where annual production is expected to reach 20,000oz within two to three years. At first look, this may seem like an ambitious goal given that GRG produced 10,031oz in FY2017 and just 2,681oz in the six months to December 2017. However, due to its coastal location and Ghana’s low rate of taxation, Goldplat is planning to transform the site into a booming international recovery hub.
Encouragingly, the wheels of this expansion are already in motion. Goldplat has secured additional contracts across Africa and is getting regular shipments of mining waste from three South American producers. It is also in discussions with contractors across the rest of Africa and is exploring opportunities in North America. A recent successful trip to Peru is also expected to yield a number of new clients. Progress is also being made back at home. Goldplat has constructed a $1m elution plant that will increase GRG’s processing capacity and has also removed huge amounts of material from a tailings dump to make additional space.
Kisbey-Green is very confident in GRG’s potential, telling us:
‘Over time we are going to be appointing people to head up our forays into different regions and we will see what comes out of it. There is no reason to believe that Eastern Europe and Russia won’t be equally as productive for us as South America has been so far. We cannot go everywhere instantly but we have a strategy to expand our footprint into most parts of the world in time.’
Primary opportunity
The rest of Goldplat’s production is found in more traditional, primary mining. Currently, its main asset is the Kilimapesa Gold Mine in Kenya, which has a JORC resource of 671,556oz of gold. The company extended Kilimapesa’s processing capacity last year by installing a second processing plant, which helped production hit 2,681oz in the six months to December 31, 2017, up from 1,190oz in the same period in 2016. This marked its first period of profitability. Production would have been even higher as well had it not been for disruption following Kenya’s national election due to lengthy protests. Regardless, the firm says it is on track to reach planned production of 5,800oz this year, up from 3,408oz in 2017.
Going forward, Goldplat hopes to further develop the primary mining side of its business and expects gold production to reach 50,000oz per year within two to three years. This would put both sides of its operations in line with each other. This is no doubt ambitious, but Kisbey-Green is confident that the goals can be met by further developing Kilimapesa and acquiring additional producing and near-term production projects in Africa. He told us:
‘Aside from the recent election troubles, Kenya is quite benign politically. We have good relations with ministers, local communities and other companies in the country, so we are well placed to make Kilimapesa a very profitable operation. We have done all the groundwork there and now we can deliver. To reach our 50,000oz per annum target for primary mining, we need to quite aggressively go about finding new production ounces. Some will come from Kilimapesa but mostly they will come from acquisition, and we are currently assessing several opportunities.’
Bargain deal
As the chart below shows, Goldplat is currently trading at an enterprise multiple of around 3.7x, significantly below the 5.7x average of its peers. This looks particularly cheap when one takes a closer look at the factors holding the firm back.
For a long time, Goldplat has been restricted by overhanging concerns around a dispute between GPL and Rand Refinery. Goldplat believed it was owed around £780,000 from Rand Refinery to process a batch of silver sulphide metal from GPL, but Rand Refinery refused to pay. After months of deliberations, the issue finally came to a conclusion this month, with the two parties agreeing to settle for an undisclosed amount. What’s more, Goldplat has ensured that the issue will not be repeated by taking steps to reducing what it describes as ‘single refiner risk’.
Kisbey-Green told us: ’To reduce single refiner risk, we have gone about developing relations and filling pipelines with a number of other refiners around the world and that has been very successful. We can take any product now and send it any one of two or three different refiners around the world without missing a beat. That has definitely de-risked our business to a significant extent.’
When Goldplat’s results for the six months ended 31 December 2017 were released last week, its shares fell by 10.3pc, ending a strong run that had lasted since the beginning of the year. Investors were understandably perturbed by a drop in profit before tax from £1.4m to £832,000. However, it is worth noting that this fall was caused by a foreign exchange loss, a currency matter that is largely out of Goldplat’s hands.
Taking a multi-year view of the firm’s profit before tax paints a different picture. Indeed, Goldplat booked a loss of £800,000 in FY2015 before making £1.9m in FY2016 and £2.8m in FY17. A look at some of the other figures in the most recent results also paints a different picture of the company’s progress. Operating profits surged 56pc to £1.6m, revenues rose 27pc to £18.2m, and cash also rose to £918,000 from £835,000.
Kisbey-Green told us the firm was very happy with the results and is comfortable on both the operational and financial sides. He said:
‘The losses in profit before tax can no doubt look alarming, but they were caused by foreign exchange losses, so they do not concern us as a management team. The previous year we actually benefitted from currency movements, which shows how quickly these things can change.’
Platinum future
As stated, Goldplat’s short-term goal is to produce 50,000oz of gold from both sides of its operations within the next few years. But beyond this, it has plenty of additional work in the pipeline that could add an unlimited amount of value.
Aside from expanding internationally at GRG, Goldplat is also looking to bring in extra business at the plant with mining ‘clean up’ services that would process harmful contaminants including mercury and cyanide. It was in talks with the Ghanian government to secure a long-term contract to assist in the clean-up of artisanal mining tailings, but these were recently delayed following tests on a pilot plant. A committee has been set up to manage discussions around the plant where Goldplat sits. Who knows where this could lead?
Likewise, in South Africa, Goldplat is currently trialling the recovery of platinum group metals (PGMs) This future diversification of its revenue streams could prove particularly valuable given Goldplat’s dependence on gold prices. Kisbey-Green said this could give Goldplat some protection if gold prices start to decline in South Africa. He told us:
‘Gold production as a whole in South Africa is on the decline so it would be reasonable to expect that our plant could see this too over the coming years. As a result, we are focusing on developing a business in PGMs because South Africa is the biggest producer in the world and, as such, this area is unlikely to decline in line with gold. We have done a lot of work in this area. If we can do recovery for South Africa’s PGM producers then we will pretty much be covering the global PGM universe.’
Good as gold
While Goldplat’s recent results may have appeared middling on the surface, as already covered, a deeper look paints an entirely different picture of the company’s position as a whole.
The firm has carved out a niche for itself in the gold recovery market and its ‘responsible’ tag has already attracted plenty of interest in South Africa and Ghana. With GRG’s position allowing for rapid international expansion, there is no reason why this interest cannot be replicated across the world, and some headway has already been made in this regard.
Recovery production sat at 17,000oz for the six months to 31 December 2017 and hit 39,000oz in FY 2017. So with expansion on the cards, Goldplat’s goal of hitting 50,000oz a year from recovery seems highly achievable. The company is also looking to diversify into PGM metals at GPL and take on more clean-up work domestically at GRG. If it can make inroads in these new markets, then long-term recovery revenues could extend even further.
On the primary mining side, Goldplat’s road to 50,000oz a year gold production looks less clear-cut. So far, the firm has made little publicly-announced progress in its strategy of buying new mines and extending production at Kilimapesa. But given that Goldplat was able to make Kilimapesa profitable during a period of intense geopolitical instability in Kenya, there are reasons to have faith in its future abilities in this area.
Broadly speaking, Goldplat has plenty of irons in the fire and is generating the profits to funds them. Indeed, it is making repayments towards a $2m loan facility taken out last March while maintaining decent cash on its books and is in a very strong position relative to peers with a similar enterprise multiple. With plenty of news on the way, it may be worth buying Goldplat now before something triggers a big rise in its share price.
As Kisbey-Green put it to us: ‘On most metrics, we would be seen to be undervalued. I think the market is waiting to see something significant in our growth. This could come from some big contracts in South America on the recovery side or a mining acquisition to add significant ounces on primary mining side. I think that if we did that we could re-rate and be more in line with where our true valuation should be.’
Author: Daniel Flynn
Disclosure:
The author does not own shares in the company mentioned in this article
