Up 680% in 2016: Is it time to buy Resolute Mining Limited?

Fresh on the heels of announcing great drilling results from its Syama gold mine yesterday, Resolute Mining Limited (ASX: RSG) is back today with yet another key announcement.

Today the company released its full year unaudited results to the market, revealing just how positive the rise in the gold price has been on the company’s performance.

Key highlights include:

  • FY 2016 net profit after tax of $213 million (FY 2015: loss of $569 million).
  • Revenue from gold and silver sales up 21% to $555 million (FY 2015: $459 million).
  • Gross profit from operations up 135% to a record $167 million (FY 2015: $71 million).
  • Diluted earnings per share of 27.6 cents.
  • Total annual gold production for FY 2016 of 315,169 ounces at an All-in-Sustaining Cost of $1,200 per ounce.
  • Debt reduced by $91 million to $27 million.

I was very impressed with Resolute’s result and believe this stunning turnaround from last year’s abject performance goes some way to justifying the incredible 680% rise in its share price so far in 2016.

It is however worth pointing out that the net profit after tax includes $45m in profits booked on the divestment of Resolute’s residual Tanzanian interests in November 2015. This includes the extinguishment of net liabilities and an accumulated foreign exchange gain recognised in equity up to the date of the sale.

Managing director and CEO John Welborn said this about the result:

“Resolute has delivered above all expectations to generate a record net profit in FY16 of A$213m. The excellent result endorses our strategy of implementing strict discipline in the allocation of capital and applying an urgency to the need to reduce costs in every area of our business. We have been resolute in prioritising the repayment of debt and the accumulation of cash and bullion to strengthen the Company’s balance sheet and prepare for exciting investments in organic growth.”

If you strip out its one-off items, based on these results its shares are changing hands at around 8.7x earnings. I would class this as about fair value now, which would make Resolute a great long-term investment if the price of gold stays at the same level.

With its debt levels reduced, increased production potential at its Syama mine, and its low all-in-sustaining costs, Resolute is positioned well for long-term growth in profits in my opinion. But ultimately all this will count for nothing if gold prices come back down to earth with a bang.

Where the gold price goes next is anybody’s guess unfortunately. If you believe it will remain at these elevated levels or go even higher then Resolute would no doubt be a great investment. But if you feel gold prices may drop back then I would suggest avoiding shares like Resolute and its peers Newcrest Mining Limited (ASX: NCM), OceanaGold Corporation (ASX: OGC), and Northern Star Resources Ltd (ASX: NST).

If like me you are a little less than bullish on the gold price I would recommend considering an investment in these three high quality ASX shares instead.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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