RMS 2.97% 49.0¢ ramelius resources limited

RMS Detail Analysis

  1. 21 Posts.
    This is my first post in this forum so I like to make a detailed one.
    Just want to clear couple of things first:
    1. I am a Commercial Analyst by profession and my view is based on review of financial statements and market updates.
    2. I have been following daily posts on RMS and some of the comments were really interesting to me and made me write this post. (comments like 7 cent dividend, exponential growth potential etc.)
    3. Please note we are all investors. As investors its important to maintain a neutral position without bias on our investment and not to get emotionally attached to our trades. (I have done this before so speaking from experience it usually ends bad)

    Now lets get to RMS.
    My stand is bearish on this and my reasons are as below:

    2014 Financial Statements: (Year Ending June 2014)

    Screen shot below shows they have generated a net loss of $85m in 29014.
    This was $35m or 70% more than same period 2013.

    Now lets look at revenue and expenses separately.
    First Revenue:
    Table below from page 7 of financial statement reconciles revenue between 2013 and 2014.
    As you can see average realised price of gold for year ending June 2014 was $1,404 compare to $1,558 in 2013.
    Please note even with an average price of $1,558 in 2013 they had delivered $50m in net loss.
    As per today's announcement in H1 2015 (July to dec14) they achieved an average price of $1,398.
    In H2 (Jan - June 15) even if gold maintains at these levels and they achieve an average price of $1,600 their full year average would become $1,500 which is still less than 2013 levels.

    I know that they have been able to increase production and I'll cover that as well but for now lets assume FY2015 even at these high gold prices they will achieve and average of $1,500.

    Below Chart is analysis of price of Gold up to today in AUD:

    Now lets look at production (below table is from 2014 financial statements page 9)
    Production has increased to 93k in 2014 (16% increase to 2013)
    Latest FY production guidance was talking about 100k in 2015. (7% Increase to 2014)

    So if we add a potential increase in production by about 7% and a potential increase in avg gold price of 6% to $1,500 compare to $1,409 last year (thats if current level of $1600 gold maintains till June!)

    We can expect the total sales to grow by around 13% to $150m.
    Now based on today's announcement H1 sales is $67m which means $83m need to be achieved in H2 to achieve the $150m. (note there is down time in H2)

    For now lets be optimistic and assume gold will continue to shine and they'll achieve $150m revenue.

    Now lets talk about cost; This gets more interesting as there is significant swing YOY in their cost.
    I am not a mining expert but by looking at financial statement I noticed major cost element that results in the swing in cost for RMS is depreciation and asset impairment (happens when eplorations doesn't achive the expected results).

    Below tabel from page 54 of 2014 financial statements:

    Now why I am highlighting this is because in the recent markets updates they have talked about cost reduction and I think its mainly driven by change in depreciation/impairment.
    While this might look like a good news story we need to bear in mind that reduced depreciation is due to reduction in assets (mines in this case).

    Looking at the asset section in the last two financial statements you can see that asset has been shrinking in the past couple of years.
    This puts future of this company at great risk. As a mining company you need to replace your mines.
    As I am sure you all know a gold mine doesn't last forever.
    I have extracted below data from previous years financial statements.
    This clearly shows that the net asset (equity) of RMS is shrinking since 2012.

    I expect this trend to continue in 2015 Financial statement as there is now significant new project (asset build up) at the moment.
    This also why their cash at hand is increasing, it easy for a mining company to increase cash at hand if they don't reinvest in new mining activities.
    I have seen a lot of comments on cash position of RMS and framing it as a good news story.
    My view is cash at hand for a mining company is not necessarily good especially if it means they are not undertaking any new activities.

    This effectively means to sell your gold reserve and convert to cash without replacing your gold!
    As said before gold mines and hence gold reserves will not last forever, there is only certain amount you can take out from a mine then the mine will be decommissioned.

    This is why is important to look into segment reporting of the financial statement which I will get to next.

    2014 and 2013 Segment reporting below (from 2014 financial statement Page 51 and 52)

    Notice main revenue generating asset at the moment (and as its obvious from company activity updates in Mt Magnet)

    Also notice net asset (net of liabilities) of this mine is getting down to $16m which to me it indicates its getting close to end of its life.
    Net asset of Mt Magent was $91m at in 2013 ($141m - $50m)

    Also notice there has not beem much exploration and new asset build up (Only $13m in 2014)

    Now below is same report for 2011 and 2012.

    Note Mt Magnet net asset has increased by $66m (2014 asset minus liabilities - 2013 asset minus liabilities)

    Wattle Dam with the net asset of $22m was decommissioned in 2012 and the amount moved to impairment expenses.

    So as you can see above future of this company is at risk due to lack of investment in new explorations etc.

    I think Mt Magent will either be decommissioned in 2016 or production will decline significantly.
    RMS needs to reinvest in a new project to replace Mt. Magnet production, problem is I cant see much investment in their numbers at the moment.

    Now we have covered 2015 revenue and future of RMS, lets talk about 2015 cost and see how they are likely to land in terms of net profit.

    Below is 2014 and 2013 detailed P&L (page 54 of 2014 financial statements)

    I think their amortisation and depreciation and impairment cost will reduce significantly in 2015 (due to reduction in assets as covered above).

    Its more difficult to estimate their cost in 2015 as some of this depends on management decisions but I think their cost of production will reduce by around $30m and other expenses will reduce by $40 so total cost down $70m to around $165m (I think thats quite optimistic as their total cost in 2014 was $236m and that means 30% reduction).

    Even with that reduction and with the estimated revenue of $150m (as covered above) I expect them to have around $10m net loss after tax.

    Now I know in todays announcement they said they have delivered $6m pre tax profit.
    This is a quite a surprise for me because I can't see how they can deliver it.
    They might have not included any impairment or down time in H1 and might have this in H2.
    Delivering $6m profit in H1 with $67m revenue means that their total cost in H1 was $61m, if you simply multiply that by 2 you get to total FY cost of $122m which to me is almost impossible as its half of 2014 FY cost of $236. ($69 +$166 +$1m other as shown in screen shot above).

    I can revisit this when they publish their full half year results.
    But even if they deliver FY profit in 2015 it won't be more than $10m. (Still almost impossible to me)

    And as I covered before in asset section I don't expect this to be replicated in 2016.

    Now last but not least lets talk about dividend.
    In the past dividend payments has resulted in temporary spikes in price of RMS and I recently saw a post about 7 cent dividend and how share price can sky rocket!

    Its really interesting as this is a basic accounting rule; to be able to pay dividend a company need to have retained earnings (accumulated earning).

    If you look at 2014 financial statement page 30 you can see they have retained loss of $44m (Accumulated in 2013 and 2014)

    For any dividend to be paid out company needs to make $44m net profit first to wipe out the loss from previous years.

    Then on top for even 1 cent dividend they need to have $4m net profit (based on 396m shares as per 2014 financial statements).

    So to pay even 1 cent dividend in 2015 year they need to have around $50m net profit in 2015!!

    Anyway I think my post got really long but thats ok as I wanted my first post in this forum to be comprehensive.

    For conclusion:

    While I agree that company has done some improvements in increasing production and reducing cost I think this is not sustainable as they are not really reinvesting in new projects.

    Therefore I think the 200% increase in the past 1.5 month as per below is a temporarily overvaluation let alone any further increase!

    The good newses maybe can justify 50% or even 100% increase in share price but 200% and more?! I can't see any fundamental reason for it.

    As a reminder I will post price chat of the last 13 month an exact same hike and drop happened same time last year.
    notice how price plummeted after the hype in Jan (and as more financial information was published by the company).

    Anyway I hope above analysis is useful to you all, please note I understand most people here are on the bullish side and don't intend to upset anyone.
    I tried to analyse based on facts mainly from financial statements.
    In the end as I said before its very dangerous to be emotionally attached to any investment since it creates bias and might result in wrong investment decisions.

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Last update - 16.10pm 18/01/2019 (20 minute delay) ?
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