Treasure Chest | Mar 21 2013
By Greg Peel
Mining in West Africa is an exercise fraught with risks, from the uncertainty of government policy to the difficulty of servicing equipment in remote parts. Gold explorer/producer Perseus Mining ((PRU)) has seen its share price almost halve over the past six months, which is a lot more than the pullback in the gold price over the period would imply.
Perseus has operations and developments in Ghana and the Cote d’Ivoire. In Cote d’Ivoire, the company’s promising Sissingue development has been held up for several months due to uncertainty over the government’s fiscal policy – whether or not it would impose a super profits tax – but it is the operating Edikan mine in Ghana which has caused Perseus the most grief.
The crusher required to process ore at Edikan has quite simply had a case of the gremlins, confounding the engineers. With problems persisting, Perseus’ gold production has fallen well short of guidance. A ray of light was shined, nevertheless, at last month’s interim profit result releases and operational update. The gremlins had finally been identified. New parts were on their way.
The crusher was shut down for four days in February to replace the parts and the first week of operation thereafter saw a return to 58% capacity. This doesn’t sound all that healthy, but as JP Morgan notes it’s a big improvement on the December quarter’s 44% capacity. While management warned at its interim result that previous full-year production guidance would not be met, the good news is that the crusher is now on a path back to re-achieving nameplate capacity.
Of seven brokers in the FNArena database covering the stock, six took a Buy or equivalent rating into the result release and made no change thereafter. The thumping of the PRU share price was enough to provide a buffer against any further delays on full production at Edikan. Now that the crusher is on the mend, JP Morgan has decided the stock has plenty of scope to re-rate further than its initial bounce as it becomes clear the crusher is indeed back working properly.
JP Morgan also notes the current Perseus share price is offering little value for the Sissingue project, but it is now expected the government will scrap its plans for a super profits tax (someone probably pointed out how successful one had been in Australia) and resort to a sliding royalty regime instead. JPM is assuming a top royalty rate of 6.5% to replace the previous flat rate of 3.5%, before sliding, and even on those numbers the broker considers Sissingue to be as a good as a “free option” in the current share price.
Perseus thus boasts a 3moz plus gold reserve to support what is low-cost gold production now Edikan is recovering, an option on Sissingue and a further Ghanian deposit at Kayeya. JP Morgan considers the current price to be “an attractive entry point” and has thus upgraded its rating on PRU to Overweight from Neutral.
That just leaves BA-Merrill Lynch with a lonely Hold in the database. Merrills suggested last month the Sissingue fiscal uncertainty prevented a more positive stance. The consensus price target among brokers in the database is $2.47, suggesting almost 50% upside.
The USD gold price has strengthened a little this last week or so, but clearly PRU has some re-rating potential to exploit before leverage to the price of gold again becomes the major earnings driver.
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