New gold producer Bellevue eyes impending free cashflow as key to share re-rate

Bellevue Gold (ASX:BGL) boss Darren Stralow has got a lot to be excited about.

The company joined the ranks of Aussie gold producers a month ago when it poured its first gold at its namesake mine near Leinster in WA’s Northern goldfields.

Then there is the sweet timing of first production and the ensuing ramp-up, coinciding as it does with the gold price being at near-record levels of $A3,040/oz ($US1,993/oz).

Or could it be that that commissioning/ramp-up is going well, and that definition drilling is confirming Bellevue’s high-grade stopes and exploration continues to excite.

All of the above are reasons for the strapping ex-Northern Star operative to get excited.

But at his recent presentation to the Resources Rising Stars conference in Melbourne, Stralow left little doubt about really excites him.

It is the re-rate that will come as the company moves into steady state production and begins to throw off lots of free cashflow.

At that point, the market will shift from valuing the stock on a discounted cashflow basis to a free cashflow (FCF) multiple basis.

Get things right, and investors will start placing a premium on the stock over that paid for stocks where for all sorts of reasons, FCF can be non-existent, even at record prices.

Much of the gold sector actually falls into that later space. Examples where premium pricing is being paid by investors for impressive FCF outcomes are Capricorn Metals (ASX:CMM) and Gold Road (ASX:GOR).

Investors like free cash. Look across the Aussie gold sector and there is a massive bifurcation between the low FCF multiples applied by investors to high-cost, low-growth names and the higher multiples applied to those like Capricorn and Gold Road and African producers Perseus (ASX:PRU) and West African Resources (ASX:WAF), minus their Africa location discounts.

It helps it seems to be a new producer. Bellevue is certainly in that category and comes from the crawl before walking, and walking before running school in that it has yet to post production/cost guidance.

All it says is that based on the 1Mtpa processing of 6g/t dirt, Bellevue will be good for initial annual production of 200,000 ounces at sub-$1,000 an ounce.

But it does point out that an over-sized crushing circuit in the 1Mtpa plant means a virtual no-cost expansion to a processing rate of 1.25Mtpa could be possible ahead of an upgrade to 1.5Mtpa.

Stralow said now that the platform for growth had been established, the intention was to grow the mine to one that would not be out of place in a major mining company. So that 1.5Mtpa ambition is certainly there.

But again, the company wants to crawl first. On that score, Stralow said the commissioning/ramp up was going well. Apart from the establishment of 40 development headings, stoping of the mine’s high-grade shoots is “rapidly stepping up”.

“And what we drill, what we fire, what we expected, is what we are getting,” he said.

The focus is now on optimising underground mining rates (already at the required rate), milling rates, and growing the reserves and resources (more than three million ounces).

He said that with the start to production, Bellevue was expected to be cash flow neutral through the December quarter. He stopped short of tipping a cash-flow take-off in following quarters.

But there are clear indications of that happening, meaning Stralow’s desired re-rating of the stock on a FCF multiples basis is not that far off, assuming the commissioning/ramp up to full production next financial year continues to progress well.

The stock traded higher on Thursday at $1.57 a share for a market cap of $1.77 billion. That compares with the average 12-month price target of analysts of $1.73 share.

So there is a recognition out there, in part at least, that Bellevue’s re-rate is around the corner. But should it capture Capricorn and Gold Road-type premium valuations, it won’t be stopping at $1.73.

EQ Resources (ASX:EQR):

Australia has an unheralded national champion in the critical/strategic metals space - EQ Resources (ASX:EQR).

Its focus is not lithium, nickel, tin, manganese, copper or any of the other metals that governments around the world have on their list of the critical/strategic metals need for global decarbonisation through electrification.

EQ’s focus is tungsten, a metal that has been around for a couple of hundred years and which has more uses than in the defence, aerospace, oil & gas and other industries than can be listed here.

Its many uses stem from it having the highest melting point of all metals and a hardness second only to diamonds. So it is critical all right.

It is also strategic because about 90% of global production comes from our friends in China, Russia and North Korea. If supply was cut off overnight, the rest of the world would run out of the stuff inside of two months.

Surprisingly though, it is a small market in volume terms. But it is a market that suits EQ nicely from its Mt Carbine operation near the well-known mining town of Port Douglas in Queensland, and the recently added Barruecopardo mine in Spain.

Combined, the two operations rank EQ as the biggest non-Chinese supplier of tungsten, making it a national champion in the metal, as suggested above.

Mt Carbine is a re-restart of a previous operation, with the re-start initially based on the re-treatment of low grade tailings. Recently it started mining higher-grade material from the open-pit after it was dewatered.

EQ’s success at Mt Carbine with an ore sorting technology has given it street cred in the industry, so much so that Barruecopardo’s previous owner, the global investment manager Oaktree, sought out EQ to take over the operation for a nominal sum and the assumption of debt which was largely funded by Oaktree taking up a $25 million placement in EQ at a premium to the market.

EQ has got cracking on introducing its ore sorting expertise at Barruecopardo and early signs are good that the previously troubled operation can be turned around.

The stock last traded at 6.7c for a market cap of about $100 million. Veteran mining analyst at Morgans, Chris Brown, has been following the EQ story and values it at 16c a share.

He then discounts that by 20% to arrive at a target price of 13c a share.