Australia | Jul 26 2007
By Chris Shaw
Gold producer Perseverance (PSV) yesterday delivered a quarterly result in line with estimates, the only problem being management had guided down these estimates significantly a few weeks ago when announcing plans for a capital raising to avert a cash flow crisis.
The problems at the company are well known, with grade issues contributing to a 19% quarter on quarter fall in gold production to 41,800 ounces at a cost of $592 per ounce, which was an increase of 23%.
This performance put the company in a perilous cash position, which required it to tap the market for an additional $26.5m via a share placement announced a couple of weeks ago. The dilution from the issue disappointed Merrill Lynch, suggesting it raised some questions about the credibility of the management team given it was not the first time the company had fallen short in performance terms.
Despite this the broker has retained its Buy rating as it expects the grade problems to be reversed in coming quarters, so improving the company’s cash position and giving it time to develop its operations.
Credit Suisse is not so sure, continuing with its Underperform recommendation in the expectation of negative cash flows continuing for the next four months and simply too much uncertainty for investors to approach the stock with any confidence.
Both brokers agree the stock is cheap assuming its current issues can be successfully addressed, Merrill Lynch pointing out the current market capitalisation of the company barely covers the cost of the plant at Fosterville, meaning the more than one million ounces of reserves and three million ounces of resources are a free option at current prices.
Credit Suisse has a DCF valuation on the company of 35c and estimates it is on a multiple of just 6x earnings in FY09, but the question remains as to whether management can deliver on expectations.
UBS agrees the outlook is uncertain, particularly as the Australian dollar and mining costs are moving against it and so making an improvement in cash flow difficult. As a result while it has a valuation on the stock of 24c the broker retains its Neutral 2 rating, as it expects management will need to again find additional funding.
GSJB Were also has a valuation well above the current share price, the broker suggesting while the base case valuation is 22c there is upside to 39c if the company can get everything right.
With a Neutral rating on the stock it appears the broker wants to see some evidence of this rather than simply giving management the benefit of the doubt.
Overall the FNArena database shows the stock is rated Buy twice, Neutral three times and Underperform once, with an average price target of 21.5c, down from 23c prior to the quarterly report.
Shares in Perseverance this morning are slightly stronger in a slightly weaker overall market and at 11.00am were up 0.5c at 13c.