Independence Group: Focus Shifts To Nickel

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Independence Group has released an interim report from its Long Island study, which should de-risk the Tropicana gold project. The focus is expected to return to the upside potential at Nova.

-Significant upgrade to Tropicana resources and improved production outlook
-Challenge to keep unit costs down with increased material movement
-Nickel to account for 50% of the company's revenue from FY18
 

By Eva Brocklehurst

Independence Group ((IGO)) has released preliminary findings from its Long Island study, which is optimising the production and cost profile at the Tropicana project (30% owned by Independence). Results include a significant upgrade to resources and an improved production outlook through to 2019. The study should be completed by mid 2017.

UBS was expecting a full update but notes management has cited recent drilling results have meant that estimates needed to be updated. Hence, the full release is subsequently delayed. Production is to grow slightly to over 450,000 ounces by FY18, supported by increased milling rates to 7.9mtpa as well as higher grades. Annual material movements are expected to increase to 80mtpa. In this regard, the broker notes the challenge will be in keeping unit costs down.

The company is expecting costs to be reduced by 25-30% from 2019, when a bulk mining approach will be fully utilised. UBS believes this latest announcement will help to de-risk Tropicana and investors will again renew their focus on the upside potential at Nova, which is on track for nameplate production by the end of FY17.

Nova will shift the company's revenue split towards nickel and away from gold. By FY18, nickel will account for around 50% of revenue, up from less than 15% in FY16. Tropicana accounts for around 60% of the broker's group net present value and, while it has genuine mine life, UBS suspects the market will view the stock as more a nickel producer rather than gold producer going forward.

Canaccord Genuity expects the longer-term production profile at Tropicana to average 400-450,000 ozs per annum and updates its model in accordance with the company's guidance, extending mine life by two years to capture the enlarged reserve base and potential for further upgrades. The broker, not one of the eight monitored daily in the FNArena database, has a Hold rating and $4.05 target.

The company has announced a return to grade streaming, preferentially stockpiling lower grade ore, which will mean head grade increases to 2.3g/t from 1.8g/t. The broker notes, while FY17 guidance is unchanged, the company expects costs will be at the high-end of the range of $1150-1250/oz as a result of accelerated mining rates and increased capitalised stripping expenditure.

Ore reserves are increased by 58% to 60mt at 1.97g/t for 3.8m ozs. The company has foreshadowed further resource/reserve upgrades for the Havana South and Boston Shaker pits in the first half of 2017. Canaccord Genuity now assumes production at Tropicana up to FY27, implying a 10-year mine life.

The so-called value enhancement update for Tropicana is well named, in Citi's opinion, given it is a blend of reserve and resource increases, higher mill grades and an increasing production. The next milestone is finalising the strip mining strategy in the first half of 2017. The broker retains a Neutral rating on the stock, based on valuation. The increase in gold production from Tropicana means higher earnings in FY17-19 and this increases Citi's target to $4.50.

The broker also notes that nickel will dominate the company's profile once Nova is in full production in 2017. The company has three other operating assets: 100% of the Long Nickel and Jaguar Bentley underground mines and a 30% stake in Tropicana, with the latter and Nova being the drivers of value.

Macquarie found the study slightly better than it anticipated but considers most of the upside is already captured in its price target of $5.10. The broker retains an Outperform rating. The continued ramp up of Nova, which appears to be running ahead of guidance, remains the next major potential catalyst.

The broker makes some changes to assumptions to incorporate the updated estimates and only a minor adjustment to assumptions regarding the mining inventory, having already expected a major upgrade to reserves.

Macquarie also expects resources at Boston Shaker and Havana South will be upgraded next year. FY17 gold production forecasts rise by 4% for Tropicana, to 431,000 ozs. The broker's earnings estimates are largely unchanged for FY17, while FY18 and FY19 are raised by 7% and 12% respectively.

The database has two Buy ratings, three Hold and one Sell (Deutsche Bank). The consensus target is $4.28, suggesting 6.0% upside to the last share price. Targets range from $3.70 (Deutsche Bank, Morgan Stanley) to $5.10 (Macquarie).

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