Future Looks Golden For Kingsgate

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This story features KINGSGATE CONSOLIDATED LIMITED, and other companies.
For more info SHARE ANALYSIS: KCN
The company is included in ASX300 and ALL-ORDS

By Chris Shaw

Full year earnings for junior gold producer Kingsgate Consolidated ((KCN)) came in at $75.6 million, Macquarie noting this was 3% better than it had forecast and slightly above market consensus estimates.

Details provided with the result showed the construction phase of the expansion of the Chatree project is progressing as expected, with the third quarter of 2011 still the expected date for first production from this part of the Chatree operations.

Existing production at Chatree remains solid. Kingsgate management offered guidance for FY11 output of 120-130,000 ounces, which RBS Australia notes is down slightly from previous expectations of a result in line with FY10's output of 133,000 ounces.

RBS points out production in FY11 will be skewed to the second half as in that period Kingsgate will be accessing higher grade material. BA Merrill Lynch is expecting cash costs in FY11 of around US$380 per ounce and Macquarie of US$354 per ounce, which compares to the US$335 per ounce achieved in FY10.

Post the result and to reflect new guidance from Kingsgate management there have been some modest changes to earnings estimates in coming years. Even allowing for these changes, RBS Australia still expects earnings will more than double between FY11 and FY13.

RBS Australia is forecasting earnings per share (EPS) for Kingsgate of 66.5c in FY11, 130.1c in FY12 and 160c in FY13, while BA-ML expects EPS of 85.1c, 159c and 187c respectively. Consensus EPS estimates according to the FNArena database stand at 84.8c in FY11 and 148.6c in FY12.

Dividends are also on offer and the fact the Chatree expansion is being debt funded leads Deutsche Bank to suggest such payouts are likely to continue in coming years.

The expected increase in earnings reflects both organic growth as the Chatree expansion comes into production next year and new projects. RBS Australia expects an announcement on one new project by the end of this year and possibly one or two more projects sometime in 2011.

As well as dividends, BA-ML notes the debt funding of the Chatree expansion means the company can use its available cash to pursue merger and acquisition opportunities through South-East Asia. What could raise additional funds is the potential listing of Akara Mining, Kingsgate's Thai operating subsidy.

Aside from acquisitions, Macquarie sees further exploration upside for Kingsgate, not least from the Q pits, the A pit and previously mined pits at Chatree. Success here should extend mine life at the project but also, in the view of Macquarie, enhance mining flexibility as it will allow the mills to operate in a more static environment. Current mine life at the Chatree complex extends to 2023.

Kingsgate appears well placed to fill the void in the Australian market left by the merger between previously listed Lihir and Newcrest Mining ((NCM)). The merger means a large gap between Newcrest and other Australian gold producers, with Kingsgate's production growth expectations making it a leading candidate to emerge as an Australian gold producer of some size.

Macquarie expects further share price upside as exploration success and ultimately higher production flow through to a higher earnings multiple. Macquarie rates Kingsgate as Outperform, with a price target of $12.40.

BA-ML doesn't see the same share price upside however, taking the view while the production growth outlook at Chatree is a positive this is partly priced into Kingsgate at current levels. Given this, BA-ML has a Neutral rating on the stock, with a target of $10.75.

RBS Australia also has a Neutral rating on Kingsgate with a target of $9.73, while the FNArena database shows the stock is rated as Buy five times and Hold twice. The average price target for Kingsgate stands at $11.90, down from $12.00 prior to the profit result. Shares in Kingsgate today are higher and as at 10.55am the stock was up 18c at $10.10. This compares to a trading range over the past year of $7.01 to $10.90 and implies upside of around 14% to the average price target in the FNArena database.

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