Australia | Feb 17 2012
– RBS Australia initiates on Alacer Gold with a Buy rating
– Attracted to upside potential from Copler
– Exploration has potential to deliver material resource increase
– Production at Copler expected to grow strongly in coming years
By Chris Shaw
Splitting production between assets in Western Australia and Turkey and with growth options from the latter operations in particular, Alacer Gold ((AQG)) is the second largest gold producer listed in the S&P/ASX200 Index.
Around half of current output of around 400,000 ounces per year comes from the Higginsville and South Kalgoorlie operations which are 100% owned by Alacer, while the balance is from the 80% owned flagship Copler asset in Turkey.
For RBS Australia, which has initiated coverage on Alacer today with a Buy rating, it is the Copler asset that offers the growth potential going forward. At present, Alacer has a stated target of 800,000 ounces of output by 2015, with Copler expected to deliver the lion's share of the increase. RBS has taken a more conservative longer-term view, forecasting total production in 2015 of just over 700,000 ounces.
Short-term, guidance is for Copler to produce 180-190,000 ounces in 2012 at a cash cost of US$400-$420 per ounce. The production guidance implies output of 46,000 ounces per quarter, a number RBS sees as conservative given production in the December quarter of 2011 was 58,000 ounces and there are no obvious reasons why output would decline so significantly in coming quarters.
Copler, where Alacer has an 80% stake, is an open pit operation and has a present mine life of around six years, but as RBS points out there is material resource upside at the project. Exploration late last year delivered positive results and this trend is expected to continue for at least another two years before the limits of the mineralisation are found.
This upside potential makes Copler the key to delivering value for Alacer, as while the Higginsville and South Kalgoorlie operations are solid producers there is less upside potential from exploration success according to RBS. This is because drilling at the projects is largely geared towards extending mine life by finding additional resources in old pits rather than genuine exploration activity.
There is some upside from South Kalgoorlie though, as while RBS has factored in 1.9 million tonnes per annum of ore from a new plant at Jubilee, management has set a target for throughput of 2.5 million tonnes per annum.
The share price of Alacer has been soft of late, RBS attributing this to market disappointment on production guidance relative to expectations. But post a site visit to Western Australia revised earnings guidance is expected to be met comfortably, RBS seeing potential upside from the potential for higher grades at Copler.
Such a positive outcome should see Alacer regain positive share price momentum in RBS's view. Given the longer-term upside of Copler, RBS suggests a premium to valuation is appropriate, so while discounted cash flow (DCF) valuations stands at $7.81 RBS's price target has been set at $10.15.
This is slightly below the consensus price target for Alacer according to the FNArena database of $10.56. Targets range from BA Merrill Lynch at $8.70 to Macquarie at $12.00.
As with RBS, most brokers to cover Alacer are positive, as the database shows five Buy ratings, one Hold and one Sell recommendation. This comes from BA-ML and reflects the broker's concern Alacer's full year production guidance may not be achieved given some ongoing issues at both Higginsville and South Kalgoorlie.
In taking a neutral view, Citi has factored in the risk of further cuts to production guidance through 2015, though this view is not shared by others. As an example, UBS sides with RBS in suggesting there remains good potential for mine life extensions in coming years. Macquarie has already factored this into its model by extending mine life assumptions for the Australian operations by two years.
Shares in Alacer today are slightly weaker and as at 11.15am the stock was down 5c at $8.52. This compares to a trading range over the past year of $7.60 to $12.30. The current share price implies upside relative to the consensus price target in the FNArena database of around 24%.
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