Steppe Gold Offering Investors Production, Growth and Re-Rating Potential

Steppe Gold (TSX:STGO) is an emerging gold and silver producer operating in Mongolia with exciting expansion plans underway. In a recent interview, Aneel Waraich, Executive Vice President and Director of Steppe Gold, provided an upbeat update on the company's operations, growth strategy and outlook.

Steady Cash Flows Funding Growth

Steppe Gold is currently generating steady cash flows from its Phase 1 oxide heap leach mine in Mongolia, which came online in April 2020. Despite COVID-19 disruptions, the mine produced 35,000 ounces of gold in its first 9 months of operation. It is now running at a rate of around 4,000 ounces per month, or 48,000 ounces per year, with cash costs of $800-850 per ounce.

At $1,800 gold, the Phase 1 mine is generating around $3 million per month in cash flow. This reliable cash flow stream not only funds ongoing operations, but also exploration and the major Phase 2 expansion now underway. Phase 2 will tap into Steppe Gold's large sulfide resources and increase annual production to over 100,000 ounces for at least 12 years.

Fully-Funded Expansion Plan

Steppe Gold recently announced a $150 million project financing package to fully fund the Phase 2 expansion, with no need for further equity dilution. The low-cost financing comprises three separate tranches, including two fixed-rate loans from Mongolian banks. The company expects to start drawing down funds within weeks.

The Phase 2 expansion is already underway, with the crusher purchased and installed. Further construction will continue into 2023, with first production from Phase 2 expected in early 2025. The staged financing means Steppe Gold will not have to start repaying debt until 6 months after Phase 2 commences operation. This provides valuable flexibility during the ramp-up phase.

Once the expansion is complete, Steppe Gold will be generating significant free cash flow. At current gold prices, Phase 2 is projected to produce over $200 million in annual EBITDA. After taxes, interest and capex, this should result in $70-100 million in free cash flow per year.

Near Term Growth from New Oxide Resources

Beyond the Phase 2 expansion, Steppe Gold also sees potential to extend the life of its Phase 1 oxide heap leach mine by delineating additional shallow oxide resources on the existing mining lease. Any new oxide ounces discovered can be processed through the existing infrastructure at very low cost, delivering exceptionally high margins.

The company has drilling underway targeting oxide resource extensions and results are expected in the coming months. Discovering another 50,000-100,000 ounces could extend the Phase 1 heap leach by 2-3 years, realising substantial value from the existing operation.

Diversification Through New Peru Acquisition

Steppe Gold has also been diversifying into Peru through a strategic acquisition. In June, the company closed an all-stock deal to acquire Andean Gold's 2.4 million ounce Chala project. This gives Steppe Gold a second development asset in a tier-one jurisdiction to complement its Mongolian operations.

The Chala project already has substantial gold resources outlined and could be developed in phases over time. The Phase 1 CapEx is projected at around $100 million, which Steppe Gold expects to largely self-fund through cash flows from Mongolia. Chala adds valuable geographic diversification and a clear path to growing Steppe Gold into a 200,000+ ounce producer.

Undervalued Compared to Peers

Despite this attractive growth pipeline, Steppe Gold is currently valued at just 0.15 times NAV, a steep discount compared to gold developer peers trading at 0.6 times NAV. On a per-ounce basis, peers are valued at $70/oz while Steppe Gold trades at only $17/oz despite being in production and cash flow positive.

The discounted valuation appears due largely to Steppe Gold's Mongolia country risk profile. However, the country's mining policies have been stabilising under recent governments. Major miners like Rio Tinto have affirmed their commitment to Mongolia. Steppe Gold's successful Phase 1 mine has also demonstrated Mongolia's support for foreign investment in the mining sector.

In the coming months, several potential catalysts could serve to narrow Steppe Gold's large valuation gap compared to peers. Near-term catalysts include further Phase 2 construction updates, initial drawdowns from the Phase 2 financing facility, extension of the Phase 1 oxide mine life through exploration success, and progress towards a Hong Kong listing by year-end.

Hong Kong Listing to Boost Access to Growth Capital

Steppe Gold is currently pursuing a Hong Kong listing, targeted by late 2022. The Hong Kong market has a strong appetite for gold mining stocks and tends to value them at significantly higher multiples compared to North American markets. The Hong Kong listing will raise Steppe Gold's profile in Asia and expand its investor base. It should also give Asian institutional investors direct access to invest in Steppe Gold through a liquid, in-timezone market. In preparation for the Hong Kong IPO, Steppe Gold recently acquired the Peru project to gain asset diversification and scale ahead of listing. The company expects strong demand in Hong Kong for an emerging Asia-focused gold producer with operations in Mongolia and Peru along with an attractive growth outlook.

If Steppe Gold succeeds in closing its valuation gap to peer multiples, it could potentially see a 5-10x re-rating over time. Even after recent declines, the stock has the potential for enormous upside if the company continues executing its growth plans and recognition of its value increases post-listing.

Steppe Gold presents a compelling investment case as an undervalued gold producer with significant expansion on the horizon. Near-term appreciation potential appears strong given the numerous upcoming catalysts. With project financing secured and expansion activities ramping up, Steppe Gold is poised to become a mid-tier gold producer driving substantial cash flows over a long mine life. This makes the stock worthy of consideration for investors seeking value and growth exposure in the gold mining sector.

5 Key Takeaways for Investors:

1. Steady cash flows from Phase 1 oxide mining supporting growth plans
2. Fully-funded Phase 2 expansion will significantly grow production starting in 2025
3. Additional near-term oxide growth possible from exploration upside
4. Peru acquisition provides asset diversification and additional growth pipeline
5. Planned Hong Kong listing provides re-rating potential and access to new capital

In summary, Steppe Gold offers investors:

• Cash flowing production and exploration upside today
• Funded path to becoming a 100Koz+ low-cost gold producer
• Additional growth from the Peru development project
• Opportunity to close valuation gap through HK listing
• Experienced management team with a track record of delivery

For investors seeking an undervalued gold mining growth story, Steppe Gold ticks all the boxes and has multiple value-enhancing catalysts on the horizon.