Australia | Jun 14 2012
– JP Morgan initiates on Perseus with Overweight rating
– Broker attracted to production growth profile
– Exploration offers additional upside
By Chris Shaw
Perseus Mining ((PRU)) is an emerging West African gold producer, having the Edikan mine already in operation and with plans to have the Sissingue mine commence production by the end of 2014. JP Morgan has initiated coverage on Perseus with an Overweight rating.
A major attraction for JP Morgan is the expected ramp-up in production Perseus should achieve. From FY12 guidance for gold output of 135-140,000 ounces, production should increase to more than 450,000 ounces in FY15.
Much of the growth in production will come from the Edikan mine, where output is expected to effectively double to around 280,000 ounces from FY14. The Sissingue mine will add to group output in the first few years in particular, as production of 340,000 ounces is expected in the first two years before production settles at around 100,000 ounces annually.
Longer-term, JP Morgan sees potential upside for Perseus from exploration. The group has been successful with its exploration efforts in recent years, as since Edikan was acquired in 2006 Perseus has lifted its resource base from around 300,000 ounces initially to more than six million ounces.
Exploration will continue given a number of drill rigs currently in place, JP Morgan noting annual exploration spend for Perseus is around US$20 million. Extensions to existing mineralisation and new discoveries are considered likely given solid drilling results to date from projects such as Tengrela in Cote d'Ivoire.
Based on current resources and reserves and production expectations, JP Morgan values Perseus at $3.37 on a sum-of-the-parts basis. A price target of $3.45 for the end of December this year is based on a roll-forward of this valuation.
JP Morgan's price target compares to a consensus target for Perseus according to the FNArena database of $3.28. Targets range from BA Merrill Lynch at $2.15 to UBS at $4.40. Perseus receives reasonable coverage among brokers in the FNArena database, scoring four Buy ratings and one Sell, this from BA-ML. Valuation is the issue for BA-ML, as the stock is trading above the broker's price target.
The rest of the brokers covering Perseus see valuation upside. While Macquarie has some concerns with respect to a pending tax increase in Ghana there continues to be solid upside on the broker's numbers, especially as operating costs have shown some improvement in recent months as plant reliability at Edikan is increasing.
Shares in Perseus today are slightly higher in a weaker overall market and as at 12.40pm the stock was up 1c at $2.81. This compares to a range over the past year of $2.12 to $4.05 and implies upside of around 16% relative to the consensus price target in the FNArena database.
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