Australia | Nov 30 2011
– UBS initiates with Buy rating on Regis Resources
– Attracted to solid production growth and exploration potential
– Buy ratings dominate for the stock
By Chris Shaw
Emerging gold producer Regis Resources ((RRL)) has assets containing resources of 6.5 million ounces in Western Australia, with production currently coming from the 95-105,000 ounces per year Moolart Well project.
The stock has been picked up by UBS, the broker initiating coverage with a Buy rating and price target of $4.40. The attraction is expected growth in production, as UBS's numbers suggest output for Regis should grow to around 369,000 ounces per year in FY14.
Adding to the 100,000 or so ounces per year from Moolart Well will be the Garden Well project, which UBS expects will produce an average of 202,000 ounces annually at a cash cost of $586 per ounce. Regis is currently in the construction phase at Garden Well after a Definitive Feasibility Study was completed in June.
At present, Garden Well is slated as a four million tonne per annum open pit operation with average production of 180,000 ounces for nine years. UBS's model suggests some upside to these numbers, this stemming from reserve growth at the southern extension of the orebody and the ability to develop satellite deposits such as Erliston and Rosemount.
This is enough for UBS to model a 10-year mine life at Garden Well, with production expected to commence in the September quarter of 2012. Exploration should also boost operations at Moolart Well, as Regis plans infill drilling of oxide gold. This should support a six year mine life on UBS's estimates.
In total, Regis also owns more than 2,000 square kilometres of tenements in the Duketon gold belt in Western Australia. This offers additional exploration potential in the future, with Regis planning to spend around $10 million per year on exploration.
UBS also has confidence in the management team at Regis, as to date the track record has been good given the Moolart Well project was brought in on time and under budget.
Based on the expectations of UBS, Regis Resources looks cheap at current levels. The current share price implies a discount of 16% to the broker's estimate of net present value and a 24% discount to valuation.
Regis also looks attractive relative to peers based on FY13 earnings multiples, which helps underpin the Buy rating of UBS. This assumes somewhat conservative earnings assumptions for FY13 in particular, as earnings per share (EPS) forecasts for UBS stand at 22c in FY12 and 50c in FY13. Consensus estimates according to the FNArena database stand at 17.2c and 58.6c respectively.
Others in the market agree, as the FNArena database shows two Buy recommendations and one Hold rating among the other three brokers to cover the stock. Deutsche Bank is behind one of the Buy ratings, the broker increasingly confident given reserve increases recently announced by Regis will assist in the plan to triple production by FY13.
Included in the update was a maiden ore reserve at the Rosemount project of 8.7 million tonnes at 1.73 grams per tonne, for 487,000 ounces of gold. Rosemount is located just 10 kilometres from Garden Well and with further extension drilling to commence in the short-term, there are likely to be a range of development options available to Regis in the future.
The dissenter in terms of positive view is RBS Australia, who argues the value on offer in Regis is fair rather than attractive at present. This is reflected in the broker's price target of $2.87, which is below both the current share price and the consensus target according to the FNArena database of $3.62.
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