We are positive on Bahvest Resources Bhd (“Bahvest”) gold mining activities and their current share price weakness makes it an attractive proposition as it is set to ride on current gold price upcycle. BUY with a target price of RM0.68 premised on average 2-year P/B of 2.4x at an implied 14x PER FY21 which is below the regional average of listed gold mining companies of 22x.

Bahvest’s foray into gold mining is expected to pay off when it realises the potential by 2020 and will see significant earnings accretion by FY21 with up to an estimated 100kg of monthly gold production as compared to the average of 50kg currently. In August 2018, the Company started its mining operations in Bukit Mantri with a maiden production of 23.69kg of gold via a sustainable open pit mining concept that is more cost effective as compared to underground mining.

Bahvest literally strike gold when it acquires Wullersdorf Resources Sdn Bhd for RM96m by issuing shares to major shareholder Dato Lo Fui Meng. The asset is a sub-lease term on a tract of mining land measuring 317.7ha in Bukit Mantri Tawau Sabah with mining rights until September 2048 or another 29 years. To-date Bahvest has invested close to RM50m to set up gold extraction and processing plant with daily production capacity of up to 1,200 tonnes which could produce in excess of 100kg gold monthly. They have identified 28ha of mining area that should sustain them for the next 10 years by just focusing on the top 200 meter of the hill surface anticipated to contain a total gold reserve of 207,000 troy ounces as indicated by the Joint Ore reserves Committee report, issued by Optiro, an independent mining consultant in Perth Australia for the acquisition of the said asset Wullersdorf back in 2017.

For the 1H2019, Bahvest has extracted a total of 296.44kg of gold. Bahvest’s cost to extract per ounce of gold is estimated to be USD430 making them an efficient producer even despite a relatively short 2 year track record. The recent bullish run on gold price to current level of USD1,500 per troy ounce should be an unexpected windfall for Bahvest when it decided to venture into gold mining back in 2017 when prices were just below USD1,200 per troy ounce then. We believe the lucrative earnings from their gold mining will be the catalyst that may transform Bahvest into a pure gold play with an expected net margin of close to 40%.

Source: Rakuten Research - 21 Oct 2019