Ramelius Resources (ASX: RMS)

The company earned A$0.41/share during the year, or more than double the preceding year’s result. The stock was priced at A$2.87 prior to the announcement, meaning that it was trading at only about 7-times trailing earnings. However, the company’s financial performance over the past 12 months is not indicative of what it will do in the future. We expect that the company will remain very profitable, but earnings per share are expected to fall sharply over the next two years due to the merger with Spartan Resources and lower gold production. Earnings should then start to ramp up as new mines are brought on-line.

The balance sheet is very strong (almost A$700M of working capital and no long-term debt after the Spartan acquisition) and RMS’s management did the right thing by declaring a final dividend of A$0.05/share.

Our intermediate-term target for RMS remains at A$3.50/share and our long-term target is in excess of A$5.00/share.

RMS’s stellar profitability of the past year is not representative of what the company will achieve in the future, because production is projected to decline substantially over the next two years and then trend upward as new mines are brought on-line. The production decline is well known and is factored into the current stock price.

The company has no long-term debt and more than A$800M of cash (about A$540M after the cash component of the Spartan Resources takeover is paid), so we expect that management will declare a dividend when the full-year results are issued late this month. However, the dividend won’t be significant (our expectation is $0.03/share) and isn’t a reason to own the stock.

The reason to accumulate the stock on weakness is that it’s a low-risk way to obtain exposure to gold. In particular, it’s a profitable gold producer with a strong balance sheet and substantial long-term organic growth potential operating in the world’s premier jurisdiction for mining (Western Australia), which stands a good chance of outperforming gold bullion over the next few years.

We wrote two weeks ago that the up-coming merger with Spartan Resources had been weighing on the RMS stock price and that the stock probably would trade better relative to most other gold producers after completion of the merger. It has traded better. To be specific, over the past 2 weeks the RMS stock price gained 15% while GDX gained only 3%.

The next milestone for RMS is expected to be the completion of its merger with Spartan Resources, which is scheduled to happen by the end of this month and will add Australia’s highest-grade undeveloped gold project to RMS’s portfolio. Development of this project should enable RMS’s annual production rate to reach 500K ounces by 2030. However, over the next two years RMS’s annual production rate is expected to decline — to around 200K ounces in FY2026 and 136K ounces in FY2027.

The performance of the RMS stock price from here will be determined by the willingness of the stock market to look beyond the scheduled 2-year production decline to the large increase in production that is expected to subsequently occur as new mines are brought on line. Additionally, it’s likely that the up-coming merger with Spartan Resources has been weighing on the RMS stock price and that RMS will trade better relative to most other gold producers after completion of the merger late this month or early next month.

The company expects FY2025 production (production for the FY ending 30th June 2025) to be 290K-300K, which is the top one-third of its guidance range. Year-to-date production is 228K ounces, so the company expects to produce 62K-72K ounces during the current quarter. This should mean that the June quarter is another quarter of very strong cash generation.

The most important upcoming milestone for RMS will be the completion of its merger with Spartan Resources, which is scheduled to happen by early-August. The merger will have the initial effect of reducing RMS’s per-share production, earnings and cash flow, but it will lead to much better numbers within a few years.

We have A$3.50 in mind as a share price target for this year.

Prior to the start of trading last Monday (17th March) the news that we were concerned about was announced. Specifically, RMS has agreed to buy SPR at a price that values the target company at about A$2.4B.

This is a very high price to pay, but the RMS-SPR combination makes sense given the close proximity of SPR’s deposits to RMS’s Mt Magnet production hub. Moreover, the purchase of SPR means that RMS now has an organic growth path from the FY-2026 expected production of 200K ounces of gold to an annual production rate of around 500K ounces/year in 2030. Previously, the company was expected to have an average annual production rate of around 240K ounces for the next ten years. Also, the in-ground gold resources that will be contributed by SPR have a much higher average grade than RMS’s existing resources and should result in RMS’s overall cost/ounce being well below what it would have been. Consequently, the high entry price possibly will be justified within the next few years by a massive increase in cash-flow.

Fortunately, the market took the news in stride. The takeover news prevented RMS from rallying with other gold producers last week, but the stock ended the week unchanged.

RMS has 1155M shares outstanding, giving it a current market cap of A$2.54B (US$1650M) at last week’s closing price of A$2.20. For the current financial year (the year ending June-2025) the company should meet its production guidance of 270K-300K ounces of gold at an AISC of around A$1600/oz (US$1040/oz).

The company has a very strong balance sheet, with A$379M of working capital, A$360M of listed investments (a 20% stake in Spartan Resources (SPR.AX)) and no long-term debt. This means that its enterprise value is about A$740M lower than its market cap.

The following daily chart shows that the RMS stock price plunged last week from around A$2.80 to its 200-day MA in the low-$2 area before recovering a little to end the week at A$2.20. The catalyst for the price plunge was an updated mine plan and long-term production forecast from the company that obviously came as a negative surprise to many traders. As far as we can tell, the reason for the sell-off is that production will be lower than expected, especially over the next two years.

According to the production forecast issued last week, production will fall from 270K-300K ounces this FY (FY2025) to 200K ounces in FY2026 and only 136K ounces in FY2027 before picking up as new mines are brought into production. Average annual production over the next 10 years is expected to be 244K ounces at an AISC of A$2130/oz (US$1380/oz).

Even with the lowered production forecast, RMS’s projected earnings and cash-flow create meaningful upside potential. Specifically, we think there’s a good chance of the stock price rising to A$3.50 (60% above the current price) before the end of this year.

There is strong support at A$1.80-$2.00 and in our opinion this would be the ideal place for new buying, but an opportunity to buy at the ideal level may not arise and the risk/reward is sufficiently attractive at the current price to warrant some buying.

The main company-specific risk is that due to the company’s lack of organic growth potential, management will make a large, high-priced acquisition.

RMS has been added to the TSI List as an intermediate-term trade with a target of A$3.50.