Australia | May 24 2012
– JP Morgan initiates with an Outperform rating on Regis Resources
– Production growth a positive
– Macquarie also sees value in gold stocks
– Adds Alacer to Marquee Ideas Portfolio
By Chris Shaw
In initiating coverage on Regis Resources ((RRL)) this week with an Overweight rating, JP Morgan summed up the stock as one of the better quality gold miners to emerge on the Australian market is recent years.
This reflects a combination of experienced management, reasonable asset life, low costs and little sovereign risk given group assets are all located in Western Australia. As well, Regis offers a production profile that should expand significantly in coming years, JP Morgan expecting production will increase from a forecast 100,000 ounces this year to more than 400,000 ounces by FY14.
The assets of Regis include 100% of the Duketon Gold project, which includes the Moolart Well mine, the Garden Well mine and the advanced deposits of Erlistoun and Rosemont along with a number of smaller satellite deposits. JP Morgan notes resources for Regis currently stand at 6.5 million ounces, with reserves of 2.9 million ounces.
These numbers should increase over time as the Garden Well deposit remains open at depth and to the south, while Moolart Well offers a number of targets for further drilling. The six satellite deposits within trucking distance of Regis's treatment plants require further drilling to prove up. Regis is currently budgeting to spend $5 million on exploration in 2012.
Financially JP Morgan views Regis as well placed, noting operational cash flows, cash and bullion on hand should be enough to fund remaining capital requirements without the need to draw down any further debt.
As production increases so too will operating cash flows, to an estimate of just under $400 million in FY14. On JP Morgan's numbers the implied earnings multiple for Regis stands at 5.4 times in FY13 and 4.9 times in FY14.
A sum of the parts approach values Regis at $4.04 per share, while on a discounted cash flow basis valuation stands at $4.10. Rolling the former forward by six months sees JP Morgan set its price target on Regis at $4.21.
This target appears somewhat conservative given a consensus price target on Regis Resources according to the FNArena database of $4.48. Targets range from RBS Australia at $3.84 to Citi at $5.30. Overall the database shows Regis is rated as Buy three times and Hold twice.
JP Morgan's positive initiation on Regis fits with the Macquarie view the recent sell-off in the Australian gold sector is not justified. Macquaire suggests the share prices of key names in the sector are implying a gold price of US$1,000-$1,200 per ounce.
Macquarie believes this presents an opportunity to move into quality producers that have fallen by more than the physical gold price. In line with this view Macquarie has added Alacer Gold ((AQG)) to its Marquee Ideas portfolio, while remaining confident in Newcrest ((NCM)), which already forms part of this portfolio. The attraction of Alacer for Macquarie is solid cash flows and the upside potential of an ever-growing resource base at the Copler project.
Macquarie rates Alacer as a Buy, while the FNArena database shows the stock is rated as Buy five times and Hold twice.
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