Australia | Jul 25 2011
– Regis Resources again beat expectations for quarterly production
– Garden Well mine to lift output to 300koz from FY13
– Quality assets, potential mine life expansion make the company an acquisition target
– RBS downgrades to Hold on valuation grounds
By Chris Shaw
Emerging gold producer Regis Resources ((RRL)) has again delivered a strong quarterly production report, with both production and costs for the period coming in better than the market had expected. As an example, production of 26,100 ounces beat the RBS Australia forecast of 24,800 ounces, while costs of $593 per ounce beat the broker's estimate of $611.
As Citi points out, the better than expected production result was helped by the mill running at annualised production of 2.5 million tonnes. This compares to nameplate capacity of 2.1 million ounces, the result for the period coming in 21% above Citi's estimate.
On the back of the better than expected production result, earnings forecasts for Regis Resources have been lifted. Citi's numbers for FY11 have increased 11% to 9.3c in earnings per share (EPS) terms, while in FY12 Citi expects EPS of 11.1c.
Deutsche is more bullish in later years, forecasting similar FY11 EPS outcome of 9c but rising to 17c in FY12. Consensus EPS estimates according to the FNArena database stand at 9c and 12.6c respectively for FY11 and FY12. Note: as there are only three brokers in the FNArena universe covering this stock, a bullish Deutsche Bank has quite some influence on the "consensus" estimate.
Looking beyond FY12 the attraction of Regis Resources becomes more apparent, as Deutsche notes from an expected 81,000 ounces of gold this year the company should be producing around 300,000 ounces annually by FY13.
This increase will be driven by the Garden Well project, where a Definitive Feasibility Study was completed in June. Deutsche expects Garden Well to add 200,000 ounces in output in the first year, with production likely to begin in the September quarter of next year.
Helping drive early output will be initial high grades, while Citi notes the project is currently forecast to average production of 180,000 ounces annually for an initial nine-year mine life. RBS expects mine life will grow to at least 11 years on the back of additional exploration drilling.
For Citi, while Regis Resources is not the cheapest of the mid-cap gold producers, the company offers the combination of quality assets and the potential for mine life to be extended. This also makes Regis an attractive M&A target in Citi's view, so justifying a Buy rating.
This leaves Citi on its own in rating terms, as RBS Australia has downgraded to a Hold rating on Regis citing valuation grounds. As RBS points out, while the recent Anchor discovery adds value at Moolart Well, this is being factored in by the market given recent share price gains.
As a result, RBS estimates Regis is now trading at a 22% premium to valuation. This implies there is better value elsewhere, RBS suggesting investors switch into diversified base metals play Independence Group ((IGO)).
RBS Rates Independence as a Buy, while the FNArena database shows a Sentiment Indicator rating on the stock of 0.5.
Deutsche Bank tends more to the RBS view, suggesting while metrics from FY13 and beyond are compelling, the Regis share price is fair value at present. While Deutsche's target has risen to $2.80 from $2.50 the broker retains a Hold rating.
Shares in Regis today are unchanged at $2.95, which compares to a consensus price target according to the FNArena database of $2.85. Over the past year Regis has traded in a range of $0.93 to $3.00, the current share price implying downside to the consensus price target of around 3.0%.
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