Perseus Renews Focus On Sissingue, Yaoure

This story features PERSEUS MINING LIMITED. For more info SHARE ANALYSIS: PRU

-Improved Perseus cash flow expected from H2 FY17
-Capital raising now supports full funding of Sissingue
-Re-rating potential from Yaoure DFS
-Grade control critical to Edikan's performance
 

By Eva Brocklehurst

Perseus Mining ((PRU)) is making progress in regaining investor confidence as it turns its focus to the development of Sissingue, and Yaoure beyond, to mitigate the disappointment with the Edikan gold mine in Ghana. The company has made no changes to its FY17 guidance for 205-245,000 ozs at cash costs of US$1,110-1,325/oz.

Canaccord Genuity found few surprises in the June quarter report and while the next six months will expose the high costs at Edikan, improved cash flow should be apparent from the second half of FY17. Newsflow on Sissingue and Yaoure should also provide catalysts.

Perseus will commence a drilling program in the current quarter to provide further confidence in the Yaoure resources as part of a definitive feasibility study (DFS). The company has previously suggested it may decide on a smaller project to reduce up-front capex. The DFS is currently expected to completed in mid 2017.

The broker expects lower grades, lower mill throughput and remaining re-location capital expenditure at Edikan to impact on costs before higher grades and reduced capex lead to significantly improved cash flow from the second half.

Canaccord Genuity, not one of the eight brokers monitored daily on the FNArena database, retains a Buy rating and $1.05 target, and believes the shares offer the best valuation upside potential and production growth of its gold producer coverage.

FY16 was a disappointing year for Credit Suisse, although it concedes the operating challenges have been resolved. Recent guidance on Edikan proved ambitious, the broker notes, with the bottom of the range now confirmed as likely, further undermining the projections for cash generation and funding.

The next six months are expected to be dull as the Edikan mine processes lower average grades and sustains elevated capex. The broker expects the move to fresh ore late in the December quarter should boost second half production in FY17.

In mid 2017 Yaoure's DFS should be ready and, at this time, the attributed risk discount on the project should be reduced, with the time to first production sorted out, the broker maintains. This would then suggest re-rating potential for the stock.

Early in 2018 the broker expects first evidence from Sissingue as to whether grades are meeting projections. Management has stressed it has learned from the experiences at Edikan and the Sissingue design is expected to be far more robust.

Yaoure is expected to commence production in early FY20 so its full potential value is unlikely to be attributed until the ramp-up and delivery of consistent operating results in 2021, Credit Suisse asserts, perhaps beyond the pricing horizon of current gold equity investors.

The company has raised $102m, a surprisingly large amount in Credit Suisse's view, which, along with additional gold hedging, signals management is unwilling to bet on its own forecasts of Edikan's performance. Credit Suisse believes that despite the achievements, the Edikan operation is insufficiently robust, based on years of operational disappointments, to support the previously proposed debt and internally equity-funded development of Sissingue.

Sissingue will soon be fully funded independent of Edikan. If delivered on budget and it performs to plan it should rapidly repay its debt and generate a satisfactory return, Credit Suisse believes, subsequently contributing to the future funding of Yaoure.

Macquarie expects the recently revised mine plan and ongoing re-investment should deliver a material improvement in the performance of Edikan. On the broker's estimates, assuming the benefits of the revised life-of-mine are realised and Sissingue is successful, Perseus should be in a position to develop Yaoure. Macquarie believes Perseus is now well on the way to becoming a significant West African gold producer.

The broker acknowledges Edikan's performance has been variable. The operation is low grade and a high strip ratio makes material movements and grade control critical to its success. Challenges have been compounded by unreliable power supply and plant availability. Still, Macquarie believes FY15 was a clear demonstration of what can be achieved when these two factors are brought under control.

Macquarie maintains a higher discount rate on the stock, given the West African location and high level of development ounces, and uses a 10% real weighted average cost of capital for its valuation.

FNArena's database shows two Buy ratings for Perseus (Macquarie, Credit Suisse) and three Hold (with Morgan Stanley, Citi and UBS yet to update on the production report). The consensus target is 69c, suggesting 16.6% upside to the last share price. Targets range from 54c to 90c.
 

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