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Great Panther Mining: Valuation Improving, But Reserve Growth Is Imperative (NYSEMKT:GPL)

It’s been a volatile couple of months for most gold producers as the correction in the price of gold (GLD) has taken a bite out of many miners’ share prices. Great Panther Mining (NYSEMKT:GPL) is one of the names that has run into some selling pressure with the stock correcting 25% from its August highs. While this has likely left some investors that overpaid for the stock frustrated, the good news is that the stock just came off another solid quarter, with quarterly production of 39,800~ gold-equivalent ounces (GEOs). Given the higher metals prices and improved operations this year, we’ve seen analysts pull their earnings estimates higher, with FY2021 annual EPS estimates now sitting at $0.21. While I see more attractive producers elsewhere in the sector, I see Great Panther as a Speculative Buy at $0.72, given its very reasonable valuation.

(Source: Company Website)

Great Panther Mining released its preliminary Q3 production results last week and reported quarterly production of 39,800~ GEOs, a 3% increase from the 38,500~ GEOs produced last quarter. The company’s flagship Tucano Mine has now produced 93,400 ounces of gold year-to-date, and the mine remains on track to meet its FY2020 production guidance midpoint of 125,000 ounces. While the share price has been under pressure recently due to the sector-wide slump, it’s worth noting that Great Panther has only gotten more attractive as earnings estimates have continued to climb over the past two months. Based on current estimates of $0.21 for FY2021, the stock is trading at just below 5x FY2021 annual EPS estimates. Let’s take a closer look at the most recent quarter below:

(Source: Company News Release)

Beginning with the company’s Tucano Mine in Brazil, it was a relatively soft quarter, with gold production coming in at 31,800~ ounces vs. 35,400~ ounces last quarter, and 36,300~ ounces in Q2 2019. This translated to a 10% drop sequentially, and a 12% drop year over year. Even though processed tonnes came in at the same levels as Q2 2020 at 823,000~ tonnes, grades dropped off significantly, coming in at just 1.31 grams per tonne gold. The reason for the drop-off was because mining transitioned from the Urucum Central North Pits to softer ore at TAP-AB3 and the Urucum Central South Pit. This area produced much lower grades at 1.31 vs. 1.48 grams per tonne gold sequentially. It’s worth noting that these grades are still in line with the trailing-twelve-month average grades of 1.30~ grams per tonne gold.

(Source: Author’s Chart)

If we look at the chart above, we can see that tonnes processed have remained relatively stable at Tucano, with the fourth consecutive quarter of over 800,000 tonnes processed. The average quarterly throughput in FY2020 is now sitting at 819,000 tonnes, a massive improvement from the 630,000~ tonnes processed on average per quarter in FY2019. Therefore, I see no reason to be alarmed by the weaker quarter at Tucano as most operating metrics continue to trend in the right direction. As long as Tucano can produce 31,400 ounces in Q4, it will meet FY2020 production guidance of 125,000 ounces at the midpoint. This shouldn’t be an issue, though it’s worth noting that the rainy season for Northern Brazil begins in October, which could be a slight headwind to productivity.

(Source: Company Website)

Moving over to the company’s Topia Mine, it was a bit of a disappointing quarter with quarterly GEO production of just 4,266 ounces, a 32% decline year over year (Q2 2019: 6,268 GEOs). The weaker performance was due to a 6% drop-off in throughput year over year to 20,300 tonnes vs. 21,800 tonnes in Q2 2019. This was driven by COVID-19-related delays that resulted in a key component for one of the mills being delivered and installed later than expected. Fortunately, this component has since been installed as of the beginning of Q4, so we should see better performance when it comes to throughput in Q4.

(Source: Company News Release)

However, grades were also a challenge in the quarter, with gold and silver grades coming in at 353 grams per tonne and 0.83 grams per tonne, respectively. This compares to 418 grams per tonne gold and 0.86 grams per tonne silver in the prior-year period. Based on the significant drop-off in grades and a minor decrease in throughput, it’s no surprise that it was a much softer quarter for its primary Mexican mine. The good news is that higher metals prices have offset the weaker quarter operationally for Great Panther, with earnings estimates continuing to climb.

(Source: YCharts.com, Author’s Chart)

As we can see in the chart above, annual earnings per share (EPS) estimates were sitting at $0.01, $0.16, and $0.18, respectively, for FY2020, FY2021, and FY2022 as of three months ago. Since August, we’ve seen annual EPS estimates increase materially to $0.05, $0.21, and $0.23. This is a very positive development, and it explains Great Panther’s strong quant rating of 4.93 on Seeking Alpha. Great Panther is currently ranked #2 out of 45 gold miners (GDXJ), suggesting that it’s leading the pack by a wide margin. This industry-leading rank is the result of a strong value score [A-], strong growth [A+], and strong momentum [A+].

(Source: Seeking Alpha Premium)

If we look at Great Panther’s earnings trend below, there’s a lot to like here as well, as the company has finally turned the corner. As we can see, Great Panther was not a company worth writing home about in FY2013 through FY2019 as it was one of the only precious metals companies unable to generate positive annual EPS. However, the Tucano acquisition in FY2019 has paid off for the company after some early hiccups, and the company is getting ready to report its first year since FY2017 of positive annual EPS. Even more exciting, annual EPS is expected to grow by over 300% in FY2021 based on current estimates ($0.21 vs. $0.05).

(Source: YCharts.com, Author’s Chart)

As shown below, this earnings trend is coupled with strong revenue growth, with quarterly revenue estimates for Q3 sitting at $80.5 million, a new multi-year high for the company. Assuming the company can meet these estimates, which are looking a little conservative, this would translate to 13% growth year over year despite being up against tough year-over-year comps (Q3 2019: $71.0 million). Given that this increase in earnings is being driven by improved margins and double-digit revenue growth, the improvement in the earnings trend looks sustainable. Generally, I would be wary of earnings growth coming from cost-cutting or one-time benefits, as this is not sustainable long term.

(Source: YCharts.com, Author’s Chart)

So, why not pay up for the stock here?

(Source: Company News Release)

There’s no question that Great Panther is trading at a very reasonable valuation at less than 5x FY2021 annual EPS estimates; the company is a Tier-2 jurisdiction producer, which makes it a little less attractive. The company is currently operating out of Brazil and Mexico, which are less favorable jurisdictions. It’s also worth noting that Tucano has a relatively low mine life, with 646,000 ounces of gold reserves reported as of September 2019. Since September 2019, we’ve seen over 127,000 ounces produced, so the current mineral reserve estimate is sitting below 520,000~ ounces after depletion. At an annual production rate of 125,000 ounces per year, this is less than four years of mine life after accounting for Q4 2020 production, and Tucano makes up over 75% of Great Panther’s metal production. Therefore, replacing reserves is imperative here and is likely a reason for the discounted valuation relative to other gold producers.

(Source: Company News Releases, Author’s Notes)

While the reserve life is short, the earnings growth is quite impressive, as is the turnaround story here. If we assume gold prices stay above $1,725/oz, Great Panther is likely to earn over $0.20 in FY2021, meaning that the stock is trading at less than 5x FY2021 annual EPS forecasts. Therefore, for investors comfy with Tier-2 jurisdiction producers, there’s no denying that Great Panther is a name worth keeping an eye on at the right price. I believe the valuation would have to drop to $0.72 to bake in a significant margin of safety and to offset the industry-lagging costs, less favorable jurisdiction, and relatively short mine life. For now, I continue to see more attractive opportunities elsewhere in the sector like Kirkland Lake Gold (KL), but I believe any pullbacks below $0.72 on Great Panther would provide a low-risk buying opportunity.

Disclosure: I am/we are long GLD, KL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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