Australia | Jul 06 2007
By Chris Shaw
A week ago Perseverance (PSV) was one of the most highly recommended companies in the FNArena database, scoring five Buy ratings, one Accumulate and just one Hold recommendation, the average share price target of $0.48 suggesting solid upside potential from the level at which the stock had been trading.
This week the story has changed completely, with the company seemingly in need of additional cash simply to avert a cash flow crisis it has on its hands that stems from a shortfall in June quarter gold production.
The company advised production for the quarter would be around 42,000 ounces, below the 47,000 ounces the market had factored in to forecasts. Add in a weaker gold price in Australian dollar terms and the ongoing strength of the Aussie dollar against the US currency and suddenly the company appears short on funds despite what ABN Amro views as a solid balance sheet.
The stock is now in a trading halt, an outcome Credit Suisse suggests is a little worrying given management has not advised the market of exactly what the pending announcement will be. The broker expects a capital raising, estimating $20-$30m should be enough to see the company through its current problem. With such an outlook the broker’s rating has been downgraded to Underperform from Outperform.
UBS also takes the view the company needs more capital as it faces a further 12 months of relatively heavy capex spending as it develops the underground operations at the Fosterville mine. As an example of why the cash is needed, the broker estimates the company will produce around 45,000 ounces of gold in the September quarter, but on the forecast cash costs it would require a gold price of around A$940 per ounce simply to break-even, which is optimistic given the gold price in Australian dollar terms is closer to $750 per ounce currently. The broker has dropped its rating from Buy 2 to Neutral 2.
Any capital raising probably can’t come soon enough as on Credit Suisse’s estimates the company is likely to have around $7.5m left in the tin, while anything below $10m is likely to make its bankers a little nervous.
Assuming the raising goes ahead the broker suggests the stock is worth around $0.30 per share, but it has slashed its price target to $0.15 from $0.30 to account for the increased risk. This is down from more than $0.40 prior to the production update earlier in the week.
Other brokers have followed suit, ABN Amro’s target falling to $0.40 from $0.48 and that of UBS to $0.25 from $0.47, meaning the average target is now $0.30. Further falls are possible given not all brokers have updated their outlooks following the company’s updates this week.
The stock is now rated as Buy twice, Accumulate once, Hold three times and Underperform once, but again the risk appears to be to the downside as not all brokers have updated for this week’s developments.
Shares in Perseverance today are untraded given the suspension pending an announcement but last traded at 19.5c.