Better Times Ahead For Perseus Mining

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

After making a significant loss in FY16, the outlook is improving for gold miner Perseus Mining brokers believe.

-Building a future with three mines and production target of 500,000 ozs by 2021
-FY17 likely to still be loss making but Edikan grades should be better
-Construction of Sissingue to begin, with first gold in December quarter 2017

By Eva Brocklehurst

Perseus Mining ((PRU)) was loss making in FY16 but brokers are quietly confident the next year will be better. The net loss was larger than expected because of higher depreciation charges and also affected by a write-down of exploration in the first half.

Despite the negatives in the results, cash flow was considered reasonably robust and the cash balance at the end of the year stood at $151.3m. Brokers believe the balance sheet has been preserved for the development of Sissingue underpinned by the planned US$60m debt facility and potential of $61m in funds from outstanding warrants.

The June half was transformational for the company as it builds its future to incorporate three mines compared with just one (Edikan). Perseus also now operates in two countries – Ghana and Cote d’Ivoire – versus just one country (Ghana) and  has a stated production target of 500,000 ozs of gold from 2021.

Canaccord Genuity expects the second half of FY17 will produce a better performance with reduced capital expenditure, lower strip ratios coming into play and higher grades at Edikan. Given the strong organic production profile the broker, not one of the eight monitored daily on the FNArena database, retains a Buy rating and $1.05 target.

The company is currently completing a major reinvestment program at Edikan, upgrading the plant, and the June quarter production results held early signs of improvement, although Macquarie still expects FY17 production will be weighted towards the second half. Along with the implementation of Edikan upgrades and delivery on plans for Sissingue, the company is expected to be soon in a position to progress its third project, Yaoure, the broker maintains.

Construction of Sissingue is expected to begin during the current quarter and first gold is scheduled for the December quarter of 2017.

Citi also expects improvements will come, but will take time. The broker anticipates FY17 will still be loss-making, albeit not to the same extent as FY16. If investors are prepared to wait, the broker suggests FY18 will look a lot brighter. Citi incorporates near-term earnings estimates into its valuation and reduces its target to 51c, retaining a Neutral rating.

There was no change to FY17 guidance for 205-245,000 ozs at an all-in cost of US$1,110-1,325/oz. If the company can now deliver on Edikan guidance and not fall short in developing and commissioning Sissingue, then Credit Suisse believes it will be well on the way to regaining investor confidence, and closing the material discount to net present value at which it currently trades.

Edikan has laboured under lower average grades and elevated capital expenditure, the broker notes, and now has passed its first milestone, a material reduction in costs. Credit Suisse emphasises that expectations are predicated on rising grades and the plant performance improving.

In mid 2017 the broker expects the Yaoure definitive feasibility study will be delivered, and at this point the attributed risk factor discount should be reduced with the timeframe to first production shortened. This, in turn, may provide re-rating potential.

Yaoure should commence production early in FY20 but full attribution of the potential value is unlikely to be made, Credit Suisse contends, until the mine is delivering consistent operating results. Perhaps beyond the pricing horizon of current gold equity investors, the broker acknowledges, emphasising the five-year growth plan is contingent on the success of Sissingue and transformation of Edikan.

Early in 2018 there should be first evidence from Sissingue that the grades are meeting, or perhaps exceeding, projections. Management has stressed that its design and position on Sissingue is far more robust than it was for Edikan at the same point in time.

There are two Buy ratings and three Hold on FNArena’s database and not all brokers have updated on the results as yet. The consensus target is 70c, suggesting 46.8% upside to the last share price. Targets range from 51c (Citi) to 90c (Credit Suisse, Macquarie).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms