Australia | Jul 13 2007
By Chris Shaw
Perseverance (PSV) last week announced production issues would limit its gold output for both FY07 and FY08, while management also revealed the production problems in conjunction with lower grades and higher costs meant the company’s cash flow position was very poor.
The result was a capital raising, the company yesterday proposing a placement of 177m shares and attaching options at 15c to raise $26.5m. The proceeds of the raising will be divided up with $9m going towards current operations, $10m to increase working capital, $3m on an accelerated drilling program and $4.5m to be held in case of any unforseen issues.
Brokers have responded to the new share issue by cutting earnings per share (EPS) forecasts in coming years to account for the additional shares on issue, Merrill Lynch lowering its FY08 forecast 68% to 0.1c and in FY09 by 21% to 2.6c and Credit Suisse cutting its estimates by 200% and 37.1% to minus 1.1c and 2.2c respectively.
The key according to both brokers is will the current problems prove to be just a temporary blot on the share price, or are they suggestive of more deep seated issues. Assuming it is the former both see the stock as cheap, as earnings of more than 2c in FY09 suggest a P/E (price to earnings multiple) of less than 8x.
This is enough for Merrill Lynch to rate the stock as a Buy on the theory the bad news is now priced into the stock and the only way from here is up assuming all goes to plan. The plan includes production improving from a flat 42,000 ounces in the September quarter to 45,000-50,000 ounces in the December quarter as grades at both Fosterville and Stawell improve.
Additionally, the broker points out the company is now capitalised at around $115m, which is roughly equal to the cost of the Fosterville plant. This means buying at current levels gives investors a free option over the company’s one million ounces of reserves and 2.8 million ounces of resources.
It accepts management now has a credibility issue but isn’t letting this cloud its view, which is in contrast with Credit Suisse. The broker rates the stock as Underperform given the credibility issue is unlikely to be resolved in the short-term, particularly as management has also announced plans to review the development program for the Fosterville mine and that the company will be cash flow negative for the first four months of FY08.
According to both GSJB Were and Credit Suisse this raises the issue of possible further capital raisings in coming months, as with negative cash flow expected for at least four months and only $4.5m of the money being raised now to be set aside for any future contingencies there is little margin for error.
While the current share issue gives the company some time to correct its problems Weres takes the view if this plan fails to deliver it might be the last chance for management, as it suggests the banks or equity market investors are unlikely to provide additional funds.
The broker’s rating of Neutral, L/T Hold suggests it is giving management the benefit of the doubt for now, as are Macquarie and UBS with similar ratings. Overall the FNArena database shows the stock is now rated as Buy twice, Accumulate once, Hold three times and Underperform once, with an average price target of 25c, down from 30c at the start of the week.
Shares in Perseverance are slightly higher today in a stronger overall market and at 12.25pm were up 0.5c at 16.5c.