We’re nearing the end of the Q4 Earnings Season for the Gold Miners Index (GDX), and one of the first companies to report its results was SSR Mining (NASDAQ:SSRM). The company had a blowout year post-merger, with several highlights that were as follows:
- executing successfully on its buyback program
- raising its dividend by 40% to $0.28 annualized
- trouncing its cost guidance midpoint by more than 10%
- beating its production guidance, with record production of ~794,000 gold-equivalent ounces [GEOs]
This incredible performance was despite COVID-19 related headwinds sector-wide and inflationary pressures which weighed on costs, making it a more difficult year to deliver a beat than usual. The continued outperformance makes SSR Mining a special story. Given the incredible free cash flow generation, a special dividend in the next 18 months would not be surprising if the gold price stays above $1,900/oz. Having said that, the stock is up sharply from its lows and has tough comps ahead, so I see better value elsewhere in the sector currently on a relative basis.
SSR Mining released its Q4 and FY2021 results last month, reporting a blowout year. This was evidenced by the production of ~794,000 GEOs at all-in sustaining costs [AISC] of $955/oz, which smashed the company’s initial guidance midpoint of ~760,000 GEOs at AISC of $1,080/oz. The cost beat was the most remarkable, given the sector-wide inflationary pressures, and while the weakening Turkish Lira certainly helped, the ~11% vs. the guidance midpoint was beyond impressive. Let’s take a closer look at the results below:
As shown in the chart above, SSR Mining saw significant production growth in 2021, helped by a strong year across the board from Copler, Marigold, and Seabee. At Marigold in Nevada, production increased slightly year-over-year to ~235,300 ounces at improved costs ($1,187/oz), while Seabee’s production soared 45% to ~118,900 ounces at $804/oz. It is worth noting that the asset benefited from easy comps due to voluntarily placing the operation under care & maintenance for several months in late March 2020 due to this being a higher-risk fly-in, fly-out operation.
Moving east to Turkey, Copler had another exceptional year, with gold production of ~329,300 ounces at all-in sustaining costs of $713/oz. These costs were more than 30% below the industry average for 2021 of ~$1,080/oz, and this asset continues to have a very bright future with a ~20-year mine life based on the updated Copler District Master Plan Technical Report. This updated report includes reserves from Ardich, where growth capex comes in at roughly $70 million based on the most recent estimates.
Meanwhile, the Copler C2 Project could begin production by 2025 for modest growth capex of ~$220 million by building a 1.8 million tonne per annum copper concentrator to exploit the copper opportunity at Copler. The major benefit of this is the ability to work with a larger pit and extract significantly more gold, benefiting from the added value from the copper component. Under the current assumptions, average annual production would come in at ~300,000 ounces from 2022 to 2031 at industry-leading costs of $907/oz, with a mine life extending out to 2042, giving visibility into two decades of meaningful revenue without upside from near-mine/regional targets or further metallurgical optimization at Ardich/C2.
Financial Results
Given the significant increase in production at Seabee and higher contribution from Copler combined with higher silver prices and silver sales at Puna ($24.98/oz vs. $21.23/oz), it’s no surprise that SSR Mining saw strong revenue growth. As shown below, quarterly revenue increased 10% year-over-year to $407.9 million, while annual revenue increased to more than $1.47 billion. Notably, this strong revenue growth was achieved despite a lower average realized gold price in 2021 ($1,802/oz vs. $1,812/oz), a slight headwind.
Moving to costs and margins, SSR Mining ended the year on a high note, with AISC margins of $837/oz, up nearly 7% sequentially. AISC margins did decline on a year-over-year basis, but this was entirely related to the tough comps due to the higher gold price in Q4 2020 ($1,880/oz). If not for the lower gold price, we would have seen meaningful margin expansion on a year-over-year basis in Q4. Finally, on a full-year basis, AISC margins improved materially to $847/oz, up from $619/oz in FY2020. This was despite a $10/oz headwind due to the lower gold price.
Given the increase in revenue and margins, SSR Mining was a free-cash-flow machine in FY2021, posting an annual free cash flow figure of ~$444 million. This helped SSR Mining to finish the year with cash of more than $1.0 billion and net cash of ~$680 million and allowed it to return significant capital to shareholders. This included a dividend of $0.20 annualized and substantial share buybacks. The dividend was recently raised to $0.28 annualized, or $0.07 per quarter for those unfamiliar.
During FY2021, SSR Mining had one of the most aggressive buyback programs sector-wide, buying back ~8.8 million shares at US$16.82, which helped the company reduce its float by ~4% in less than 12 months. As it stands, the company has an additional ~1.2 million shares outstanding under its share repurchase program. Finally, from an earnings standpoint, and benefiting from a lower share count, SSR Mining grew annual EPS 25% year-over-year to $1.78.
These results are phenomenal, but the only negative is that the company has created difficult year-over-year comps for itself, given these incredible results. This is because the company will see slightly lower production year-over-year based on guidance (~740,000 GEO midpoint) and higher costs of more than $1,100/oz. While the higher gold price will pick up some of this slack, it will be challenging to grow annual EPS on a year-over-year basis with lower gold sales and higher costs.
This isn’t a huge deal, and SSR Mining is focused long-term, but it is worth pointing out since stocks can underperform their peers when they rally sharply into a year with difficult year-over-year comps. This is similar to what we saw with B2Gold (BTG) last year, which had a massive year in FY2020 but had to come up against tough comps in 2021 due to lower grades at Fekola. The stock underperformed significantly in 2021, declining 29% vs. an 11% decline in its benchmark, the Gold Miners Index. We could see a different outcome for SSR Mining, but with the stock outperforming into these comps, I think it’s wise to be a little cautious.
Valuation & Technical Picture
Looking at the chart below, we can see that SSR Mining has historically traded at ~10x cash flow since the tail end of the 2015 secular bear market in gold and closer to 9x cash flow over the past ten years. At a share price of $22.10, SSR Mining trades at approximately ~8.2x FY2022 cash flow estimates ($2.70), leaving the stock below fair value, even after its impressive rally. I would argue that a cash flow multiple of 9 is more conservative vs. the 5-year average of ~10x cash flow.
Using a more conservative multiple (9x cash flow) and assuming SSRM meets FY2022 estimates, this would translate to a fair value for the stock of ~$24.30 per share. This might be enough upside for some investors to justify starting new positions here, but I prefer at least a 25% discount to fair value to enter new positions. Assuming a fair value of $24.30, this would require a pullback towards $18.00 per share. Obviously, a pullback of this magnitude may not materialize if the gold price continues its upward trajectory.
Moving to the technical picture, SSR Mining punched through its previous resistance near $21.00 per share but now has a major resistance level overhead at $23.30. Meanwhile, the next support level doesn’t come in until $17.80. This corroborates the view that this is not a low-risk buy point for SSR Mining, given that there’s $1.20 in potential upside to resistance and more than $4.00 in potential downside to support, translating to a reward/risk ratio of 0.28 to 1.0. The unfavorable reward/risk ratio doesn’t mean that the stock can’t go higher; it simply means that there is an elevated risk to entering new positions at current levels.
SSR Mining had a blowout year and arguably had a top-5 performance sector-wide. Given the company’s continued ability to massively over-deliver on its promises, I see the stock as one of one the best buy-the-dip candidates sector-wide. However, in my view, the time to buy the stock was below $16.00 per share, not at ~9x cash flow currently. So, while I think this is a name to keep at the top of one’s shopping list, my preference from a valuation standpoint currently is Alamos Gold (AGI), which trades at a much lower market cap, but could generate up to $650 million in free cash flow in FY2025.
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