Australia | Jul 03 2007
By Greg Peel
Never was a company so aptly named, it would seem.
Perseverance (PSV) used to be one of the hottest stocks in the FNArena database as far as Buy/Hold/Sell recommendations were concerned. At 6/1/0 the consensus among analysts was that a ramp-up to full production in 2008 and ongoing exploration would see this junior miner, with its unusual bacteria driven recovery method, join the ranks of Australia’s star performers in the sector.
But Perseverance appears to have become a text book victim of Murphy’s law of late, where anything that can go wrong will. The latest news is that management has been forced to announce a production downgrade for the June quarter, just when analysts were expecting that good news was soon to be flowing. Production will be 42koz when analysts were looking for around 50kz.
Is hasn’t helped that the US dollar gold price has been perilously weak of late, having failed to break through US$690/oz and fallen as low as US$640/oz. It also hasn’t helped that the Aussie dollar has been heading skyward. But it also hasn’t helped that Perseverance has suffered from a lot of nagging other problems as well – although as a miner the company is hardly alone.
Grades at Stawell have, indeed, been lower than was hoped, but Merrill Lynch is quick to point out that 26koz production for the quarter was still a “very solid” result. Merrills notes that unlike nearby Bendigo Gold (BDG), Stawell’s problems are not so much related to serious grade issues but more to a series of equipment and labour issues – the bane of any miner at this point in time. To top it off, Forestville has suffered from adverse weather conditions which, again, is not an uncommon story.
Macquarie notes that FY08 was meant to be a “watershed” year for Perseverance, transforming the company into a 200koz producer and further unlocking the value of Forestville through aggressive exploration. However, FY08 now looks challenging, with non-essential expenditure being diverted. This means exploration will take a back seat for now. The analysts are now forecasting FY08 production of 153koz.
Macquarie is the most disappointed of the four (of seven) brokers reporting on the company this morning. The analysts feel another capital raising will be forthcoming as the company’s cash position begins to dry up. Other analysts don’t disagree. This has resulted in a recommendation downgrade from Macquarie to Neutral and a cut in the 12-month target price from 45c to 23c. This was not the only target price slash, although it was the most aggressive. Merrills pulled back only from 53c to 45c, while Credit Suisse moved from 45c to 30c. However, the other brokers were not quite as underwhelmed as Macquarie.
“We believe that PSV offers a potentially attractive future and at a market capitalisation of just A$150M PSV is cheap”, said Merrills. “Our discounted cash flow valuation for PSV is A$0.37/share, making it exceptionally cheap for a gold stock, provided that management targets can be achieved”, said Credit Suisse. GSJB Were believes the market has already factored in the poor result, but that there is significant value in the Forestville and Stawell reserves and the market should begin to re-rate the shares once short term cash flow issues are resolved.
The consensus thus suggests that at this level, Perseverance is a pretty good buy for the investor who is happy to wait to perhaps FY09 for some real results. What’s more, the poor June quarter production result, which analysts agree is not indicative of more major problems at the company’s mines, may present the perfect opportunity for a predator to emerge. Gold analysts expect there will be much consolidation in the industry ahead as significant global gold deposits become as rare as hen’s teeth. Lihir’s (LHG) takeover of Ballarat Goldfields and Oxiana’s (OXR) takeover of Agincourt are indicative of sector intentions.
So perseverance is the call on PSV. The FNArena B/H/S ratio slips only to 5/2/0, and the average target price from 48c to 39c.