Highland Gold offers income, growth and value

At present, the company’s value sits in four producing mines: the ageing Mnogovershinnoye (or MNV for short), mid-life Novoshirokinskoye (Novo), the smallish Belaya Gora and Valunisty, which was recently acquired in an all-share deal with a company owned by various Highland directors and shareholders, including the oligarch Roman Abramovich. Among Highland’s exploration and growth projects, the most advanced is Kekura, which is expected to boost group-wide output by more than 40 per cent when it starts producing in 2021.

Naturally, this will cost money. Broker Numis expects combined capital expenditure of $359m (£274m) for 2019 and 2020, almost three times the combined figure for 2016 and 2017. The long-term hope is that Kekura’s projected all-in sustaining costs (AISC) – the industry standard measure of overheads to maintain output – of just $541 an ounce will help offset the ageing MNV and Novo mines, and hold group-wide AISC at the current level of $700 an ounce, a level matched by few peers anywhere.

But free cash flow is still likely to be minimal or negative this year and next, and gearing will most likely jump. Should gold also dip in this time, the shares could suffer, and investors could see a reduction in the usually very generous dividend payments.

Numis isn’t pessimistic about the income case, though. It expects dividend payments of $75m and $81m in 2019 and 2020, respectively. That’s based on expected production of 293,000 ounces (oz) this year following the Valunisty deal, and 338,000 oz in 2020, as a project to increase Novo’s processing capacity by more than 50 per cent helps to arrest the decline in ore grades. A 24 per cent uptick in cash profits to $183m in 2020, it should be noted, also assumes a bullish average gold price of $1,400 an ounce.