Rudi's View | Feb 06 2007
By Rudi Filapek-Vandyck
Determining which stock deserves the tag Most Highly Recommended in the Australian share market remains a matter of open debate.
Last week, FNArena published its monthly Australian Super Stock Report and according to the listed ranking as at January 31, 2006 Spark Infrastructure Group (SKICA) was leading the rest of the market with a perfect score of 1.0 on the Market Sentiment Indicator.
This is the maximum score possible and indicates that all experts who cover the stock rate it (an equivalent of) Buy. The system is not free of criticism as Spark is only covered by four experts out of the ten we monitor daily. But since we determined that coverage of four was the minimum required, and all four experts rate the stock a Buy, Spark Infra has won the title for this month fair and square.
In fact, there is a fifth expert in our database who also covers Spark, but Deutsche Bank hasn’t bothered to update its view since initiating coverage with a Buy in February last year. We anxiously await the broker’s update during the February interim results season, but do not take its rating into account in the meantime.
One of the stocks that could soon join Spark with a perfect score of Buys is Victorian gold miner Perseverance (PSV). If our observations are correct, market sentiment towards the company is improving. Macquarie joined the likes of Merrill Lynch, UBS and Credit Suisse with a positive rating this month, pushing the total amount of Buys up to six, two more than Spark.
However, as the resources team at GSJB Were so far has kept its recommendation on Marketperform/LT Hold our Sentiment Indicator still ranks Spark higher, and will continue doing so until GSJBW joins ranks.
We checked with three brokers outside the ten in our daily universe and they too all rate Perseverance as a Buy.
So what’s so special about Perseverance that makes everybody, except GSJBW, rating it as Buy?
Well there is, for starters, an overall bullish view regarding the gold price in the year ahead. Not everybody is convinced that spot gold is going to march past the US$800/oz by year end, but most experts seem to agree that US$700/oz is possible.
Macquarie believes spot gold is poised to rise to US$700/oz and beyond by the second half of the year for an average price of US$683/oz in 2007.
At Merrill Lynch, the analysts have only penciled in an average gold price of US$653/oz for the year. Credit Suisse seems to have the lowest price forecast predicting an average spot price of just under US$600/oz for the year ahead, but this in itself is a major reversal as the broker until recently was of the view that gold would trend back towards US$500/oz over the next few months.
In addition, there are some company specific factors that make the stock look attractive at current price levels. Even though Perseverance operates in Victoria, which is still Australia’s second most important gold province and one of the top ten locations for the metal across the globe, it has so far failed to captured the imagination of investors the same way as Bendigo Mining (BDG) and Ballarat Gold (BGF) did.
This despite some market experts’ view that out of these three Victorian gold miners Perseverance always looked like the most solid one for the longer term. One expert who has visited all three mining locations told us this week he already concluded in 2005 that Bendigo Mining was very unlikely to achieve its production targets, because of the tricky nature of its resource, while big question marks were surrounding Ballarat’s operations as well. This expert who prefers to remain anonymous believes it was always clear that Perseverance’s Fosterville operation appeared the less risky one.
Victorian gold miners have gravely disappointed the market in 2005 and Perseverance has had a tough first few quarters following the start up of its Fosterville project as well. This has had an impact on its share price which peaked at 48c in May last year and never recovered since. A common theme throughout all the positive research reports is that the shares are currently considered “cheap” – if not in absolute terms than at least relative to its peers.
It didn’t help that the company had hedged (forward sold) nearly half of its annual gold production at prices far below the spot price. The company’s profile and outlook changed dramatically with the successful takeover of Leviathan Resources (LVR), another struggling Victorian gold producer. Perseverance has recently moved to compulsory acquisition for the remaining shares in Leviathan and is expected to announce soon it has achieved 100% ownership.
With the acquisition, Perseverance has effectively doubled its gold output to 200,000 ounces per annum. Equally important is that Leviathan carried no hedge book and as a result Perseverance’s negative obligations will only affect less than a quarter of its production.
Due to Leviathan’s patchy exploration record, Perseverance only paid for the existing operations. As it happens, the company has achieved some promising drilling results over the past year and some experts believe this is where the real upside will come from. Perseverance now owns the largest gold tenement holdings in Victoria.
The acquired Stawell mine may only have three more years of production left, but analysts believe Perseverance can only gain from the takeover as it has acquired skilled and experienced personnel plus hard needed mining equipment at times of acute shortages. As one expert put it: worst case scenario the company can simply relocate everything to its expanding Fosterville mine (or another of its tenements which may be considered ready to mine in a few years from now).
The upcoming interim result is likely to show a loss, but analysts seem convinced the outlook is all uphill from here. Current share price targets vary from $0.42 to $0.55.
According to Thomson One, market consensus is that Perseverance will report a loss for the current fiscal year ending June 30, 2007 of circa 2c per share.
FY08 should see a positive EPS between 2-4c which is forecast to increase to 3-5c in FY09.
Perseverance shares closed at $0.39 on Tuesday.
