Disclosure: Steppe Gold Ltd. has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.
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An updated Preliminary Economic Assessment (PEA) for the recently acquired Tres Cruces project (Peru) has confirmed the inputs used in a PEA completed in 2022. The latest study returned an AT-NPV5% of $159M (previously $166M). STGO is trading at 39% of the ATNPV5%; suggesting that the market is attributing zero value to the ATO mine.
We maintain a positive outlook on gold prices, as we anticipate the Fed will initiate rate cuts within the next six months, driven by rising unemployment, financial instability, mortgage costs, and consumer confidence, and cooling inflation.
STGO is trading at a 26% discount to junior gold producers.
As Q3 was stronger then expected, we are raising our 2023/2024 production, revenue, and EPS forecasts. With gold recently surpassing $2,000/oz, we anticipate a stronger Q4.
Production and Financials
Source: Company / FRC
Q3 production was up 18% QoQ, and 7% higher than our estimate, due to higher than expected throughput
Cash costs increased 14% QoQ amid lower grades, but were in line with our estimate
As a result of higher production, revenue, EBITDA, EPS, and funds from operations improved QoQ
Revenue and EPS exceeded our estimates by 10% and 29%, respectively
EBITDA margins improved as well
Source: Company / FRC / S&P Capital IQ
Source: Company / FRC / S&P Capital IQ
Healthy balance sheet
Updated PEA for Tres Cruces (Peru)
Tres Cruces is 10 km from the Lagunas Norte open-pit mine, which has produced 10+ Moz gold.
Location Map
Source: Anacortes Mining
In Q3, Steppe completed an updated PEA for the recently acquired Tres Cruces project
Excellent infrastructure in place including access to a national highway, electricity, and a deep-water port
Tres Cruces hosts a high-grade open-pittable oxide gold deposit.
Resource
Source: Anacortes Mining
Indicated resources account for 96% of total resources, implying high confidence
We note that open-pittable oxide resources tend to be low grade (<0.8 gpt) vs 1.3 gpt at Tres Cruces
2022 PEA vs 2023 PEA Comparison
Although both sulfide and oxide material exist, the 2023 PEA considered oxide and transition mineralization only, accounting for just 25% of total resources
No changes in forecasts for CAPEX, annual gold production (68 Koz/year conventional heap leach operation), grades, and recovery
However, cash costs were increased by 4%
Sensitivity Analysis
Source: Company
AT-NPV5% of $158M (previously $166M), and a high AT-IRR of 31% (previously 33%), using $1,700/oz gold
FRC Projections and Valuation
Source: FRC
As Q3 production was higher than expected, we are raising our near-term EPS forecasts
Source: FRC
Sector multiples are up 11% since our previous report in August 2023
STGO is trading at a 26% discount to junior gold producers
Due to higher production forecasts, we are raising our fair value estimate from $2.93 to $2.97/share
We are reiterating our BUY rating, and adjusting our fair value estimate from C$2.93 to C$2.97/share. We believe the market is underestimating Steppe's fully funded plan to triple its production within the next two years. As the company unveils advancements in its expansion efforts, we believe the market will begin to recognize its inherent potential. With gold recently surpassing $2,000/oz, we anticipate a stronger Q4.
Risks
We believe the company is exposed to the following key risks (not exhaustive):
1. The value of the company is dependent on gold prices
2. Like most producers, the company has debt
3. Geopolitical
4. Exploration and development
5. FOREX
6. Ability to ramp up production
