Interesting market (over) reaction today to a minor move in the...

Interesting market (over) reaction today to a minor move in the gold price. You could argue that RMS has not moved in proportion to recent gold moves up but has over-corrected to the downside now.

• Current AUD gold price is $5,200/oz - at 80,000 oz per quarter = $416m gross cash flow (ignoring hedges as I don't have the detail to analyse their quarterly delivery into these residual hedges).

• AISC is around $1,700 = $136m
• Net margin per quarter = $280m
• Capex is running at $20m per quarter (but will ramp up with future projects) - so free cash flow before tax = $260m per quarter.

Let's assume $1,100m annualised free cash before tax. So maybe around $750m free cash annualised after tax.

• Current cash + gold balance (end March) = $657m

Market cap today = $2,960m, less cash & gold & SPR (I will ignore SPR takeover for this analysis) gives an operational Enterprise Value of $1,800m or 1.64x pre-tax cash flow / 2.4x after tax cash flow.

Unless the assumption is that gold is about to crash back to the mid-US$2,500 levels, the current valuation of RMS looks very cheap. Indeed, if you apply even just a 5x multiple to current earnings (then add back the value of cash, gold, SPR), we should be looking at a market cap closer to $4,900m or +65% from today's levels (so circa $4.20 per share).

Markets are irrational in the short term but then tend to a rational basis in the long term. I think this is the case for RMS at the moment and unless Mr Market's crystal ball is correctly forecasting a big and permanent fall in gold prices, then in time we will see RMS re-rate towards its intrinsic value based on gold price at the time.

I think if you then include SPR with its resource base plus RMS existing infrastructure plus continued elevated gold price, its starts to look even more interesting.