Insiders Are Buying Guyana Goldfields: Should You?
- Guyana Goldfields is closing in on first gold production at its Aurora gold project.
- CEO insider buying is bullish and a strong vote of confidence regarding the company’s future prospects.
- We give Guyana Goldfields a buy rating and target price of US$4.40 per share for a projected return of 57.14%.
Guyana Goldfields (OTCPK:GUYFF ) is a Canadian gold developer currently focused on advancing its 100% owned Aurora gold project in Guyana. The company started to commission the mill plant last month with expectations of achieving first gold production in 3Q15. About $44 million in capital expenditures ("capex") remains to commercial production. We estimate Guyana Goldfields to make after-tax cash flows of $10.7 million based on the company's low-end production target of 30,000 to 50,000 ounces of gold in 2015.
There has been positive signs of insider buying activity in the company, largely from Guyana Goldfields' President & CEO Scott Caldwell. Insider buying reflects confidence from the company's management team view on current business operations. We think the stock price remains undervalued based on our valuation analysis. We think Guyana Goldfields provides considerable upside as we increase our target price to US$4.40 per share from US$4.30 and maintain a buy rating. The projected return is 57.14% from the current market price of US$2.80 per share.
Guyana Goldfields has entered the commissioning phase of the development plan at its Aurora gold project in Guyana. The commissioning of the SAG mill, power plant generators, and the water and air support system will continue throughout this month. The company remains on schedule to start-up the gravity and saprolite production circuits for mid-2015. This will allow for pre-commercial production through the processing plant. Project construction is 85% complete as of last month, which includes all surface and on site construction.
The company has spent $205 million in initial capex as of the March 31 from the budgeted $249 million to complete the Aurora gold project. About $44 million in initial capital costs remains to development completion. This amount excludes $10 million needed for
working capital, capitalized operating costs and financial costs, thus taking total required capex to $54 million. Equity and debt deals over the past two years have contributed to financing project development activities. The company has drawn $106 million from its $160 million tranche 1 debt facility, with expectations to use up the rest to fund the final portions of total capex.
In addition, the company secured a second debt facility worth $25 million solely for cost overrun purposes. We do not expect the Aurora gold project to come above the budgeted $249 million initial capex amount, so we have no expectations of the company taking on more than $160 million in debt onto the balance sheet. The management team has been solid on project execution, and with production closing in, the risk of capital costs going over budget has declined. In a scenario where the project does come over budget, the company has $52 million in net overfunding to fund the add-ons.
"At this stage in the game, we are so close to production that it has eliminated a large portion of capital over-spending risk. Our next focus is producing ounces at or above our target for 2015 gold production and join the ranks of producers," Guyana Goldfields' President & CEO Scott Caldwell said in the press release.
Principle debt repayments will start on Dec. 31, 2015, and continue quarterly thereafter over the tenor of the facility. The company will have to repay $4.3 million on Dec. 31, followed by $6.8 million on Mar. 31, 2016. We estimate Guyana Goldfields to make after-tax cash flows of $10.7 million based on the company's low-end production target of 30,000 to 50,000 ounces of gold in 2015.
That is enough to cover the first debt repayment at year-end. In 2016, we expect after-tax cash flows of $53.6 million, which should cover $28 million in debt repayments scheduled for the year. We assume $1,200 long term gold to calculate the projected cash flows in our DCF model for the Aurora gold project.
Debt repayment schedule as of Mar. 31, 2015Source: m.seekingalpha.com