Regis Resources: Acquires long life Tropicana

About the author:

Mat Collings
Author name:
By Mat Collings
Job title:
Research Analyst
Date posted:
13 April 2021, 1:30 PM
Sectors Covered:
Mining

  • Regis Resources (ASX:RRL) have announced agreement to purchase a 30% interest in the Tropicana gold mine for A$903m.
  • The transaction remains subject to a pre-emptive right by the majority owner of Tropicana, who has 60 days to determine whether to exercise its right.
  • A$903m appears to fully value Tropicana but the transaction is transformational for Regis long term outlook plus an immediate production and cash flow lift.
  • It will take time for RRL to demonstrate the upside it sees in the project and the market to digest.
  • We maintain our ADD recommendation and revise our target price (login to view), applying high level assumptions on the production and cost profile of Tropicana and the funding metrics announced today.

Tropicana acquisition changes the outlook for Regis

RRL has agreed to purchase a 30% stake in Tropicana. This would change the complexion of the company, moving annual gold production above 500koz next year (and towards 750koz p.a. within 2 years if McPhillamys is approved) and providing an asset with a minimum forecast life of 10 years.

As an operating mine, managed by majority owner Anglogold, it provides immediate cash flow and minimum integration challenges.

Management have guided that if successful, RRL’s operating cash flow will be sufficient to internally fund development of McPhillamys, subject to regulatory approval.

Valuing Tropicana upside

Regis appear to have offered near full value, with our estimated NPV for the stake being A$1.1b. This is driven by Anglogold’s “right of first refusal” in any transaction, meaning an offer substantially below value is unlikely to be successful.

While the price captures most of the value of the current Reserves and mine plan, substantial long term potential likely remains at the asset with a number of deposits open at depth and a large land package with minimal exploration.

It is here that Regis will need to demonstrate the long term potential of the asset to the market.

Our view

This transaction is likely to be a slow burn for RRL as they set about demonstrating the potential upside at Tropicana.

While they have paid a relatively high price for the asset, it appears to make a lot of sense corporately for the company, firmly positioning the company as the key Australia focused “large mid-tier” gold producer on the ASX.

The structure means RRL gets cash flow from day one, while management can continue to focus on organic growth at Duketon and the McPhillamys permitting process.

We retain an add rating for RRL, at a revised base case target price (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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