Small Caps | Mar 27 2014
-Production skews to second half
-Local govt negotiations in train
-Potential for dividend policy
By Eva Brocklehurst
Gold miner Beadell Resources ((BDR)) has taken a deviation. The company has revised its mine plan in order to cope better with the wet season in Brazil, that runs from January to June. Rain has significantly affected the Duckhead pit and affected production at the Tucano project. Hence, mining is suspended at Duckhead and the company has turned up its focus on the Tucano and Urucum pits for the remainder of the wet season, as these have better roads.
Despite the obvious interruption to production in the first half the company has increased 2014 guidance to 200-220,000ozs from 190-210,000ozs. Cash costs are forecast at US$535-585/oz. The company has also rolled over debt to the second half but requires more hedging. As a condition of the deferred project debt repayments an additional 55,000ozs of hedging has been required at US$1313/oz. Macquarie observes 85% of the full year's production is now hedged. This could mean that further interruptions to production will leave the company requiring gold purchases to meet hedging obligations.
Macquarie believes the revised mine plan is suggesting weak March and June quarters and the catalyst will be the re-starting of Duckhead in the second half. The extent of the hedges implies a good deal of operational risk but Macquarie is not perturbed. Only a major interruption, such as losing access to Duckhead for 12 months, would seriously impact the outlook. The broker notes the majority of the hedges are deep in the money and Beadell is not expected to make a loss on the book.
With a weather-induced slowdown, and given the short remaining life at Duckhead, mining is suspended and a restructure of operating arrangements is being thrashed out with the local Mines Department and the holder of the tenement, Zamin. The company favours continuing the contractual arrangements rather than obtaining a mining lease. Mining is expected to shift back to Duckhead from July.
The main issue for brokers is the matching of debt repayments with cash flow, as this has been a problem in 2014. Macquarie thinks the company can deal with this, forecasting a $120m profit for the year that's sufficient to close out the project debt facility and pay a maiden dividend. Macquarie expects 2c per share, based on a 20% pay-out ratio.
Citi also expects Beadell to be able to generate sufficient free cash flow to pay the remaining project debt of $96m. The new mine schedule has skewed production heavily to the second half but negotiations with lenders appear to have accommodated the repayment schedule. Citi notes Duckhead's reserve continues to expand and near-mine exploration looks promising, despite the suspension. While the company expects to resolve this in coming weeks, Citi thinks it poses a risk to 2014 production of which Duckhead is forecast to contribute around 31%.
Deutsche Bank doesn't think Duckhead is performing to expectations. The updated reserve, underpinning the production guidance increase, disappointed the broker. High grade drill results over the last 12 months have not translated into as many volume ounces as was expected. The local government audit of the existing mining agreement between Beadell and Zamin, to ensure gold and iron ore royalties are being captured, is seen as a further delay. The company considers this a short-term issue but Deutsche Bank thinks there's a risk a mining permit will be required and the suspension may extend beyond a few weeks.
To UBS, the era of Duckhead is coming to an end. This has been an incredibly valuable deposit for Beadell and the broker thinks it should enable the repayment of debt by the end of this year. Still, there's some uncertainties which UBS lists as the iron ore by-product production levels, the ability to operate at the increased 5mtpa throughput at the mill, given limited volumes of low grade stockpiles, and viability of Urucum Deeps underground development. In the case of Urucum Deeps development the broker's cost profile shows a significant increase in 2017 and 2018, as the stripping ratio increases. The broker looks forward to the company's potential cash positive position at the end of 2014 and the implementation of a sustainable dividend policy.
Beadell posted a maiden 2013 profit of $113.5m, its first full year of production from Tucano. Beadell finished the year with cash of $9.8m and net debt of $91.3m. Gearing was 28% at the end of 2013, down from 80% at the end of 2012. On the FNArena database Beadell has two Buy and one Hold rating. The consensus target is 74c, suggesting 20.3% upside to the last share price.
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