Analyst says REZ worth at least 6x more thanks to gold production, nickel potential
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REZ is ticking all the boxes for one analyst who believes the company is worth 6x its current market cap.
Richard Poole-led Resources & Energy Group (ASX:REZ) is on the radar of Spark Plus analyst Cyprus Sia who says the company should have a market cap of at least $120m.
“We hold a speculative view on REZ with a valuation of $A119.5m, or 563.9% higher than its current [market cap] of A$18.0m, based on an [enterprise value/gold equivalent] resource multiple of 100x,” he said in a December research note titled ‘Catching the Next Million Ounce Gold Producer’.
According to Sia, from an enterprise value/gold equivalent resource (EV/AuEq Resource) perspective, REZ is trading at a 23.2% discount to its peers’ average.
But he believes REZ should be trading within the top quartile among its peers.
REZ has been “catapulted” into a cashflow generative gold producer, which greatly reduces the risk of needing funding.
The company completed its first gold pour from the Granny Venn deposit in late October this year and completed its first milling campaign at higher grade recoveries than expected at the end of November.
REZ has since started the second milling campaign at Granny Venn. REZ’s progress means January is shaping up to be a highly productive month for the project, with between 40,000 and 50,000 tonnes of ore expected to be mined.
Another point Sia highlighted was that REZ has about two-thirds of its land unexplored and about 94% of its total project area pending a resource estimate, which increases the potential to uncover multi-million-ounce gold “mega” projects.
“The mid-point within the top quartile would equate to an EV/AuEq resource multiple of about 172.2x or 114.9% higher than REZ’s current EV/AuEq resource multiple of 80.1x,” Sia noted.
In addition to the gold potential, further nickel (Ni) and platinum group elements (PGE) hits at the Springfield prospect, within the East Menzies gold project (EMPG) in WA, could lead to a “positive re-rate”, according to Sia.
After realising Springfield was also playing host to nickel, REZ got its hands on two historical drilling reports, one by Australia’s CRA (now Rio Tinto) in 1969 and the other by BHP in 1986.
These reports both included strong intervals of nickel sulphides. However, CRA and BHP did not follow the discoveries up because they were only interested in gold.
This is particularly interesting, given the nickel price – along with the share prices of companies in the nickel space – have continued to head north on market expectations that demand for electric vehicle batteries will outstrip supply in the next few years.
Sia pointed to Chalice Gold Mines (ASX:CHN), which saw a major re-rate of over 6x following the discovery of nickel, copper and palladium at its Julimar project in March last year. Chalice hit a peak of $10.48 a share or 65x in November this year.
“We note that the Julimar project’s size (>2,000ksq.km) is far greater than REZ’s
(103km2), however it provides a reference to the potential for a bull case scenario if REZ could prove up the Ni-PGE resource,” he said.
“On a more realistic view, the average MCap of 10 Nickel explorers (ex. Chalice) on the ASX is $A144m, which is about 8x REZ’s current MCap of $A18m.”
But it’s not just REZ’s WA project that gives it a leg up, the company’s Mount Mackenzie project in Queensland also has a lot of potential.
Sia pointed to a scoping study completed in July 2020 that estimates free cashflow of $63m over five years with the potential to increase.
“With the recent drilling and metallurgical studies underway in 2021, REZ is accessing the economics of implementing an on-site flotation circuit which would increase the recovery rate, extend the mine life, and likely boost the overall free cashflow of the project,” he said.
This article was developed in collaboration with Resources & Energy Group, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.