Australia | Jul 20 2012
– Coverage picking up on Regis Resources
– Macquarie and BA-ML initiate with Buy ratings this week
– Production growth, quality assets and management team the attractions
– Blue sky from exploration a further positive
By Chris Shaw
Emerging gold producer Regis Resources ((RRL)) is garnering increased attention in the market of late, with both Macquarie and BA Merrill Lynch initiating coverage on the stock with Buy ratings this week. This brings to seven the number of brokers in the FNArena database to cover the stock, Regis scoring five Buy ratings and two Hold recommendations.
For Macquarie, the attraction of Regis is the combination of a quality asset base, some blue sky potential and a standout management team. The assets are centred on the Duketon gold project in Western Australia, which contains the Moolart Well, Garden Well, Rosemont and Erlistoun deposits.
Regis is currently producing around 100,000 ounces per year from the Moolart Well mine. Macquarie expects this could increase to as much as 400,000 ounces per year by FY14 as the Garden Well and Rosemont operations ramp-up. Deutsche Bank agrees post a recent site visit, the broker forecasting total production in FY14 of 410,000 ounces.
At present, Regis has reserves of 2.9 million ounces at 1.52 grams per tonne gold, while resources stand at 6.5 million ounces at 1.25 grams per tonne gold. Macquarie estimates this equates to a remaining four-year mine life at Moolart Well and mine life of around eight years at both Garden Well and Rosemont.
Assuming production increases to around 400,000 ounces per year as expected, BA-ML notes this would equate to a capitalised annual growth rate in production of 33%. This compares favourably to the mid-tier average of 6% growth.
This growth in production comes with the benefit of low costs, BA-ML estimating cash costs for Regis are around US$500 per ounce. There is also low capital intensity at the company's projects, which will mean the Garden Well project will be self-funded and so lower risk.
Beyond the expected ramp-up in production, BA-ML notes exploration offers additional upside to both reserves and resources. The Garden Well project offers potential from significant depth and southern strike extensions, while satellite prospects and regional exploration could also deliver further gold discoveries.
This leads BA-ML to suggest Regis can deliver production of at least 350,000 ounces per year for around 10 years, with potential for this to be extended. Payback should also be quick, as the Garden Well and Rosemont projects are expected to generate positive free cash flow within the first 2-3 years of production.
Shareholders stand to benefit from this, as management at Regis have stated their intention to declare dividends in the near future. Macquarie expects an initial interim dividend of 5c fully franked in the June half of 2013, while Deutsche is forecasting a payout of 7c for the same period.
In terms of value, Regis is seen as attractive relative to peers, this despite strong recent outperformance. On BA-ML's numbers Regis trades in line with North American mid-tier gold peers at present, though this will shift to a significant discount once both the Garden Well and Rosemont operations are in production.
While the share price is at a premium to BA-ML's base case valuation of $3.85, the broker suggests this is justified given the quality of assets on offer at Regis and the production growth expected in coming years.
Assuming production lifts to around 400,000 ounces and mine life is extended to more than 10 years, the current share price premium to valuation is justified in the view of BA-ML. Macquarie agrees, while noting the current share price is factoring in Garden Well operating at greater than nameplate capacity from ramp-up in the current quarter.
Macquarie also notes Regis is not cheap relative to peers on enterprise value to resource and reserve measures, though again this premium can be justified given management's proven ability to consistently deliver high margin projects. JP Morgan offered a similar argument when initiating coverage on Regis in May with an Overweight rating.
Price targets for Regis in the FNArena database range from RBS Australia at $3.84 to Citi at $5.30, with a consensus price target of $4.66. This implies upside of around 7% relative to the current share price. Targets are based on consensus earnings per share forecasts of 15.7c this year, rising to 62.4c in FY13.
Shares in Regis today are higher despite a mixed overall market and as at 10.50am the stock was up 4c at $4.37. This compares to a range over the past year of $2.34 to $4.43.
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