Tower Hill Acceleration And Mill Expansions Will Reshape Long Term Performance

Catalysts

About Genesis Minerals

Genesis Minerals is a gold producer with operations centered on the Leonora and Laverton regions in Western Australia.

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

• Acceleration of the Tower Hill development, supported by key permits, rail agreements and mining agreements already in place, is expected to bring higher grade ore into the mill earlier, which would directly influence future revenue and earnings.
• Mill expansion work at both Leonora and Laverton, backed by strong ore stockpiles of 1.4 million tonnes at 1.2 grams per tonne, is set up to support higher throughput over time, which can lift group production, revenue and operating leverage on fixed processing costs.
• The move to Byrnecut as underground contractor at Leonora, together with a rightsized mine schedule, is aimed at improving productivity at Gwalia and Ulysses, which can support more consistent output and better net margins through cost efficiencies.
• Internal cost initiatives under Project TALO, with broad workforce buy in, are already targeting a meaningful cost out program. If sustained, this culture of owner like thinking can support all in sustaining cost discipline and therefore future margins and cash generation.
• Ongoing drilling and project reviews across assets such as Beasley Creek, Bruno, Jupiter and the Bardoc project refresh are focused on turning a larger resource base into mine plans, which can extend mine life, support the ASPIRE 400 growth ambition and influence long term revenue visibility.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Genesis Minerals's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.5% today to 40.9% in 3 years time.
• Analysts expect earnings to reach A$1.1 billion (and earnings per share of A$1.26) by about August 2029, up from A$601.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.7x on those 2029 earnings, down from 16.2x today. This future PE is about the same as the current PE for the AU Metals and Mining industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 2.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A large part of the current profitability is tied to what management calls a buoyant gold price. If the gold price weakens over the long term, the A$6,057 per ounce sales price and very strong cash generation could come under pressure and reduce revenue and earnings.
• The company is bringing forward A$220 million to A$240 million of growth capital for Tower Hill and pursuing mill expansions at Leonora and Laverton. If long term capital intensity is higher than expected or projects run over time or budget, this could weigh on free cash flow and net margins.
• The move to a new underground mining contractor at Gwalia and Ulysses is intended to lift productivity. Any disruption during the handover or lower than expected productivity gains over time could affect output volumes and all in sustaining cost performance, which would impact earnings and margins.
• About 4 million ounces, or close to 20% of the resource base, is refractory ore that requires different processing or alternative monetisation. If long term solutions for these tonnes are limited or more expensive than expected, it could constrain future production optionality and put pressure on revenue and margins.
• The company is using up its tax losses and expects to start paying income tax instalments in FY26. As operations mature and taxable income rises over the long term, cash tax payments could reduce free cash flow and the portion of NPAT that can be reinvested into growth projects.

Valuation

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

• The analysts have a consensus price target of A$8.6 for Genesis Minerals based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$10.0, and the most bearish reporting a price target of just A$6.7.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be A$2.7 billion, earnings will come to A$1.1 billion, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 8.6%.
• Given the current share price of A$8.32, the analyst price target of A$8.6 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.