Inclusion in ASX 200 another boost for Resolute

It has been a stellar 12 month period for Resolute Mining (ASX: RSG) and this is reflected in its share price which has increased from approximately 25 cents this time last year to hit a recent high of $2.10.

However, recent weakness in the gold price has seen it retrace approximately 15%, and Friday’s closing price of $1.87 implies a significant discount to most analyst’s price targets.

In reviewing the company’s fiscal 2016 performance last week, Trent Allen from Citi noted that fiscal 2016 wasn’t just a positive year for Resolute in terms of its operational performance, but it also was significant in terms of strengthening its balance sheet.

He noted that the stock is trading on a fiscal 2017 PE multiple of 5.3 (based on a share price of $1.77). Allen views this as relatively low given the company’s production growth through to fiscal 2020 at which point it is expected to be producing at a rate of 450,000 ounces per annum.

Allen said that he expects a further rerating through fiscal 2017 as development milestones are reached at Syama and Ravenswood. The following snapshot demonstrates the key strengths of the company’s operations.

Allen revised his earnings per share estimates for fiscal years 2017, 2018 and 2019 last week, upgrading his numbers by 22.4%, 18.7% and 40.2% respectively.

Another potential share price catalyst emerged on Friday with the announcement that Resolute would be included in the S&P/ASX 200 as at September 16, 2016.

This should increase the company’s institutional appeal, and this perhaps accounted for Friday’s circa 6% increase in share price which occurred under the third-highest volumes in the last 12 months.

Index bound institutions will need to wait for Resolute to be included in the ASX 200 on September 16 before buying into the stock which perhaps provides retail investors with an opportunity to move ahead of what could be a fairly intensive buying period.

However, it is worth noting that the rise and rise of Resolute over the last 12 months has resulted in significant institutional activity in the stock, indicating there is no guarantee that its inclusion will trigger a share price rerating.

This backdrop combined with the fact that Resolute’s key Syama gold mine is located in Mali, an area that carries sovereign risk suggests investors need to view the stock with a high degree of caution and bear in mind that any share price variations to date may not be replicated in the future. Furthermore, broker estimates should not be used as a basis for an investment decision.

While this represents a long list of caveats it could be argued that Allen’s observation regarding the company’s heavily discounted PE multiple accounts for some of the inherent risks.

He upgraded his 12 month price target from $1.80 to $2.04, implying upside of nearly 10% to Friday’s closing price. Duncan Hughes from Somers and Partners also upgraded his 12 month price target.

At a gold price of US$1300 per ounce his valuation and price target stands at $2.07, but increases to $2.40 at US$1400 per ounce, highlighting Resolute’s leverage to positive movements in the price of the precious metal.