Australia | Jul 23 2008
By Chris Shaw
As mining companies start new projects there are usually teething problems but emerging gold producer Sino Gold ((SGX)) has, according to Merrill Lynch, now shown it can deliver on a project by releasing a solid quarterly production report to the market.
The group produced 35,412 ounces of gold in the June quarter, an outcome comfortably within previous guidance and one that showed operationally at least all is going according to plan. GSJB Were notes financially the result was impacted by an appreciating Chinese currency and some growing cost pressures but, Credit Suisse adds, the cost pressures the group are experiencing remain well below those at similar operations in Australia.
As Merrill Lynch added the result also showed the company has improved its flotation recovery performance in the processing of its ore at Jinfeng, which should allow management to pursue some initiatives designed to keep operating costs as low as possible going forward.
Even with these initiatives costs will still rise, as management has indicated full year operating costs at Jinfeng mine will now be around US$390 per ounce compared to previous expectations of US$370 per ounce. As well, the capital expenditure budget for the White Mountain project now looks like coming in about 15% above previous estimates.
But while these higher costs have resulted in some minor cuts to forecasts there are no changes to the largely positive views on the stock in the marketplace, the FNArena database showing four Buy recommendations and just the one Hold rating.
This reflects the group’s growth potential in coming years, Merrill Lynch pointing out the core Jinfeng mine will be joined by the commencement of production at White Mountain next year, while the Eastern Dragon and Beyinhar heap leach projects should begin production in 2010.
Exploration offers further upside as Credit Suisse notes while resources and reserves were lifted last year on the back of exploration success and have already been increased further this year, there will be a total of around 90,000 metres of greenfields drilling completed by the end of this year at what remain prospective areas.
This leads Merrill Lynch to suggest the company is well on the way to becoming a 500,000 ounce per year producer while its operations are both cash positive and fully leveraged to the rising gold price. The earnings outlook appears solid, the broker forecasting earnings per share (EPS) to grow from 12.7c this year to 29c in 2009, which appears conservative given Credit Suisse revised its numbers down slightly post the result but still expects EPS of 16.2c and 32.3c respectively. By way of comparison GSJB Were is somewhere in the middle, forecasting EPS of 10.9c this year and 31.3c in 2009.
Post the result Merrill Lynch also lifted its price target to $8.00 from $7.50 given it views the stock as cheap compared to peers both in Australia and internationally. As evidence of this the broker notes on its numbers the stock is now trading at around 1.04 times its net asset value while the sector average in Australia is around 1.59 times and in North America is 1.88 times.
Macquarie’s price target is identical but is down from the broker’s previous $9.00 target on the back of modestly lower earnings forecasts post the quarterly, while the FNArena database shows an average price target of $7.38, little changed from $7.55 prior to the quarterly report. What hasn’t changed is the positive view on the stock as the database shows four Buy recommendations and one Hold rating.
Shares in Sino Gold today are weaker despite a stronger overall market and as at 1.20pm the stock was down 14c or 2.3% at $6.03, which compares to a trading range over the past year of $3.92 to $8.87. The TechWizard has reported gold displayed a key reversal trend signal overnight (see story “Sellers Taking Control Of Crude Oil, Precious Metals”, FNArena Technicals earlier today).