Australia | Apr 15 2008
By Chris Shaw
As one way of playing direct exposure to China’s demand for natural
resources given its gold mining operations in that country Sino Gold
((SGX)) has enjoyed something of a dream run in recent years, having
risen from less than $2.00 per share in 2005 to almost $9.00 per share
recently.
But in the view of Macquarie the company may now need to deliver a
couple of solid quarters of production to undo the damage done
yesterday when the group revealed lower production guidance and grades
and higher costs at its core Jinfeng operation.
Production for 2008 is now expected to be in the order of 150-160,000
ounces at cash costs of around US$370 per ounce, which compares to
previous guidance of 170-190,000 ounces at US$300 per ounce and
Macquarie’s previous forecast of 185,000 ounces at US$314 per ounce.
While recent power outages at the Jinfeng operation provide something
of an excuse Merrill Lynch suggests the revised guidance is a
disappointment, largely as it reflects lower grades at the mine. The
broker notes this trend will continue, with grades now expected to
average 4.4 grams per tonne gold, down from 5.1 grams per tonne
previously. On the plus side total resources and reserves have
increased, the former up 16% to 5.3 million ounces and the latter up by
11% to 3.5 million ounces.
To factor in the revised production expectation the broker has cut its
earnings forecast for the full year by 23% to US$23.1 million, which
when converted to Australian dollars implies earnings per share (EPS)
of 9.4c this year. This is broadly in line with Macquarie’s revised
forecast, its 38% cut to EPS this year resulting in an expected outcome
of 10c.
Despite the hit to earnings forecasts both brokers retain their Buy
ratings on the stock, Macquarie noting the project pipeline including
White Mountain, Eastern Dragon and Beyinhar means the company should
emerge in a few years times as a 500,000 ounce per year producer at
cash costs of around US$300 per ounce. Having said that the broker
acknowledges the group faces a tougher time as it moves from delivering
on exploration expectations to production expectations, which is
generally more difficult.
Merrill Lynch agrees, pointing out the White Mountain project remains
on track and on budget for first production early next year
while the initial 10-year mine life is seen as likely to be
extended given the resource remains open at depth and along strike.
As well the broker takes comfort in the fact the company is in
a net cash position yet is trading at around net asset value (NAV),
well below its Australian peers at around 1.5x and north American
mid-cap gold producers at closer to 2x NAV.
The cuts to earnings forecasts have seen Merrill’s price target fall to
$8.00 from $9.00 and Macquarie’s to $9.00 from $10.00, while GSJB Were
and Aspect Huntley are the others in the FNArena database to rate the
stock and both have most recent recommendations of Hold, Were’s with a
price target of $7.30.
Shares in Sino Gold today are slightly weaker and as at 12.15pm were
down 16c at $5.55, which compares to a trading range for the past 12
months of $4.55 to $8.87.