Australia | Jan 21 2013
-Production solid in Dec quarter
-Questions remain over Copler plans
-Divestment still probable
By Eva Brocklehurst
Mid tier gold producer Alacer Gold ((AQG)) delivered a firm finish to a challenging year. Nevertheless, brokers are divided over what to focus on for this stock. There are concerns around life-of-mine recoveries and the sustainability of production initiatives at Copler, according to JP Morgan. This broker is sticking with a Hold recommendation and doesn't expect that to change until the release of 2013 guidance and a revised sulphide study, in conjunction with Q412 cost data.
Alacer produced 113,900 ounces of gold in the December quarter, up 14.9% on the prior corresponding quarter and 1.5% above JP Morgan's estimate. This was driven by a significant grade bounce at the Copler (Turkey) and Higginsville (Australia) mines, while South Kalgoorlie (Australia) was broadly flat. Unit costs will be disclosed in March, but JP Morgan expects cash costs to show improvement on the US$747/oz reported in September quarter 2012.
Construction of an oxide mill (under investigation) should significantly boost production potential and reliability at Copler, the broker maintains. The value proposition, however, will be determined by the additional capex required for the project against remaining oxide reserves. At Higginsville, JP Morgan notes the company has reported a rainfall event restricted the haulage of ore from Chalice to the processing plant which has lowered the tonnes treated. However, the broker notes the drop is also likely to have been affected by the completion of open pit mining activities and the run-down of stockpiles in the September quarter.
BA-ML and Deutsche Bank also revisited the stock after the production report and retained their recommendations. On the FNArena database BA-ML has a Sell recommendation while Deutsche considers Alacer a Buy. The disparity can be put down to BA-ML's focus on the potential for costs to rise while Deutsche sees solid production continuing. There are five Buy ratings, two Hold and one Sell on the database. The target pricing is a wide $4.55 (BA-ML) to $8.25 (Credit Suisse). This may be reflected in the comment from Macquarie (on FNArena's database in December) that there is a growing discrepancy between the share price and the value of the company's assets and this may result in a divestment of Australian assets, partial or otherwise.
UBS has lowered volume forecasts for 2013 by 3% and now estimates attributable production of 412,00 ozs at cash costs of US$648/oz. UBS retains a Buy rating based on valuation but accepts that clarity is required on a number of issues, including Copler expansion plans and capex, 2013 production and the ongoing review of Australian assets. UBS believes there is a higher probability that Alacer will ultimately divest its 49% stake in the Frog's Leg mine (Australia) to its JV partner. Hence valuation has been trimmed by 2% and UBS' price target, based on net present value, was lowered to $6.80.
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