Regis Resources Outlook Hinges Fresh Production

This story features REGIS RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: RRL

-Potential for mine life extensions
-But does this add up for valuation?
-Limits to further cost reductions
 

By Eva Brocklehurst

Regis Resources ((RRL)) has reached a more reliable level of production, with a better realised price for its gold in the March quarter improving margins and lifting cash flow. Brokers observe the company's Duketon operations in Western Australia are now more stable and there is potential for exploration to yield reserve extensions and replace depleted mine output.

Exploration results continue to improve the outlook for all the Duketon operations, Credit Suisse observes, particularly in terms of the short life for Moolart Well. The broker cobbles together imagination and hope and suggests a ten year or more mine life is possible, but models for 6-7 years.

March quarter production was 75,656 ozs at an all-in sustainable cost of $856/oz. Year to date production means the company only needs to deliver 48,000 ozs to reach the bottom end of guidance in the June quarter. Once again, a strong performance at Rosemont supported the outcome driven by grade, with positive reconciliation a highlight after the problems in the past.

Overall, Morgan Stanley notes production appears on track for the upper end of guidance at 275-305,000 ozs and the broker lifts FY16 forecasts by 4.0% to 303,000 ozs. The broker likes the cash being generated but prefers Evolution Mining ((EVN)) on that basis.

The broker also suspects the market is factoring in gold prices and/or a mine life projection for Regis Resources that are well above current levels. Organic growth could add mine life to Moolart Well, but this is already factored in, while Baneygo could add another two years to Garden Well. Results from Idaho and Tooheys Well suggest potential but their development carries risk, the broker adds.

In summary, for Morgan Stanley's valuation to reach the current share price, more than 1m ozs in additional gold is needed. Hence, for the medium term, the broker retains an Underweight rating and $2.00 target.

UBS disagrees, believing the growing potential from satellite deposits, which can add to mine life and grades, is not fully accounted for yet in its price target of $2.30. The cash balance is growing and FY16 guidance is an easy target with the company well positioned to compete in the mid tier gold segment, the broker contends. UBS has a Neutral rating.

Macquarie has few qualms about Idaho and Tooheys Well and, based on recent drilling, expects both will enter the production profile. The grade at Tooheys Well looks particularly attractive and the broker estimates it could deliver a minimum of 150,000 ozs at 1.6g/t.  The maiden reserves at both Baneygo and Gloster in the March quarter were released with plans to bring both into production in the near term.

Macquarie expects head grade at both mills will improve around 10% although this is largely traded off by an increase in strip ratio assumptions. It is this increase in strip ratio assumptions for a number of future satellite pits that results in a downgrade of 4-9% for the broker's FY17-20 estimates.

The company has stated that further cost cutting will be limited although recent diesel hedges should limit any fuel-driven cost inflation. The company has hedged around 60% of its diesel consumption over the next 18 months. Macquarie acknowledges the company is wringing the last drops out of cost reductions, with benefits form the lower oil price and consumable costs.

Deutsche Bank attributes a further $100m in nominal exploration value to future opportunities but still finds the stock's valuation stretched. Significant savings are noted stemming from the re-negotiated Moolart Well mining contract and lower fuel, reagent and grinding media costs.

Better throughput at mills and positive grade reconciliation should also drive out-performance at Rosemont and Deutsche Bank expects this to continue for at least the next year. Still, while the free cash flow and the dividend outlook is robust, it doesn't add up enough to warrant the broker changing its Sell rating.

FNArena's database shows two Buy, two Hold and three Sell ratings. The consensus target is $2.34, signalling 9.2% downside to the last share price. Targets range from $2.00 (Morgan Stanley) to $2.84 (Citi).
 

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