Australia | Apr 13 2007
By Chris Shaw
St Barbara Mines (SGM) has had something of a chequered history, including a period a few years ago where the board were at odds with one another and the company’s financial position was something less than solid.
A more focused management team is turning around the company’s fortunes though, enough that Intersuisse rates the stock as Buy for exposure to long-term production growth.
The company is currently producing at the Southern Cross mine at the rate of around 175,000 ounces per year, which the broker notes is up 6% from least year’s output. Cash costs are around $480 per ounce, so the mine is a good money spinner. And provides cash flow to fund other developments.
The growth attraction comes in a number of areas, possibly the most significant being the purchase of the gold assets of the previously listed Sons of Gwalia. The company has recently completed a feasibility study on the Gwalia Deeps zone at the Sons of Gwalia mine it attained as part of that purchase that suggested expenditure of around $110m should see a mine producing 100,000 ounces a year by the second quarter of 2008.
The broker expects production at the project should at least double by 2010, while it notes estimates are for an initial mine life of eight years and cash costs of $395 per ounce, while additional production could come from the development of the Marvel Loch mine.
In the broker’s view this will help the company achieve its target of 450,000 ounces of production by 2008, the longer-term target being output of one million ounces and reserves of 10 million ounces by 2010.
As part of its plan to accumulate reserves the company took a 10% stake in Bendigo Mining (BDG) when shares in that company fell recently, the broker seeing this as a solid strategic move given the exploration potential on offer.
Additional upside is available through the company’s interests in exploration ground prospective for nickel and other base metals, with exploration already underway on its tenements in the Leonora region of Western Australia. With the Gwalia mill close by, the broker suggests any success here could be a nice addition to earnings.
The company’s earnings have of late been held back by large depreciation charges, so Intersuisse sees FY07 as being little better than a break-even year. From next year the improvement in profits should be apparent, as on the broker’s estimates the company is on track to generate earnings of $30.1m, equivalent to earnings per share of 3.6c. This would put the stock on a P/E ratio of around 15.6x, which appears reasonable given the potential production growth on offer.
Among the brokers in the FNArena database only Macquarie covers the company, recently initiating coverage with a Neutral rating and price target of $0.55 on the expectation production in FY10 will reach more than 400,000 ounces at a cost of around $430 per ounce. This suggests upside for the stock if the target of 450,000 ounces by next year is achievable.
Currently the stock is trading about in line with Macquarie’s target, with a price range over the past 12 months of 40-77c. As at 12.50pm today the stock was up 0.5c at $0.56.