Gold Price Reliance And Hedge Limits Will Pressure Earnings Despite Production Plans

Catalysts

About Aura Minerals

Aura Minerals is a precious and base metals producer with operating mines and growth projects across the Americas.

What are the underlying business or industry changes driving this perspective?

• Dependence on elevated gold prices to sustain recent record adjusted EBITDA of US$344 million over the last 12 months creates risk if pricing normalizes, which could pressure revenue and compress earnings.
• Large, multi year capital commitments at Borborema, Era Dorada, Matupá and MSG, together with exploration in Carajás and other areas, increase execution and cost overrun risk that could weigh on free cash flow and net margins.
• Heavy use of gold collars with a US$2,400 strike on roughly 80% of expected Borborema output through 2028 caps upside from higher gold prices, while realized and unrealized hedge losses already affected results, limiting potential EBITDA and net income expansion.
• Plans to lift group production with Borborema ramp up, MSG turnaround and potential development of Era Dorada or Matupá add operational complexity, which could lead to underperforming assets that dilute consolidated margins and earnings.
• Reliance on new underground and higher grade sources at assets like Almas and MSG, as well as on future permitting and social acceptance in Guatemala, exposes the company to geological, regulatory and community risks that could disrupt volumes and affect revenue visibility.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Aura Minerals compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Aura Minerals's revenue will grow by 17.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 23.2% today to 37.1% in 3 years time.
• The bearish analysts expect earnings to reach $772.3 million (and earnings per share of $9.52) by about August 2029, up from $298.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.4 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.8x on those 2029 earnings, down from 24.5x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 19.5x.
• The bearish analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.83%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained high gold prices, such as the Q2 realized price of about US$3,185 per ounce and recent levels around US$3,400, could continue to support Aura Minerals' revenue and adjusted EBITDA. These prices have already coincided with US$190 million of quarterly net revenue and US$344 million of last 12 month adjusted EBITDA, which may support earnings rather than pressure them.
• The ramp up of Borborema, which is already producing and targeting commercial production around September with all in sustaining cash costs below the current group average, together with potential future contributions from Era Dorada and Matupá, could increase group production and improve consolidated net margins and earnings.
• Management's focus on containing costs, with Q2 all in sustaining cash cost at US$1,449 per gold equivalent ounce in line with guidance and prior periods despite inflationary pressures, suggests that stable or lower unit costs alongside higher volumes could support both EBITDA margins and free cash flow.
• The NASDAQ listing, planned TSX delisting and ongoing dividends and buybacks, including a last 12 month dividend yield of 7.4% and additional capital returns, could support investor interest and trading liquidity. This, in turn, may provide valuation support for the share price relative to earnings and cash generation.
• Ongoing growth initiatives such as the acquisition of MSG, higher exploration spend in areas like Carajás, Serra da Estrela, Matupá and Almas, and the focus on increasing resources and reserves, could extend mine lives and future production capacity. Successful execution of these projects close to budget may underpin longer term revenue and EBITDA.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Aura Minerals is $76.4, which represents up to two standard deviations below the consensus price target of $95.38. This valuation is based on what can be assumed as the expectations of Aura Minerals's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $122.0, and the most bearish reporting a price target of just $76.4.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $2.1 billion, earnings will come to $772.3 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 8.8%.
• Given the current share price of $87.26, the analyst price target of $76.4 is 14.2% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.