Australia | Feb 18 2013
– Perseus to overcome mechanical problems
– Production to return to target rates
– Upside offered from knocked-down share price
By Greg Peel
The Perseus of mythology may have slain Gorgon Medusa, but namesake Perseus Mining has been unable to overcome the destructive powers of the Edikan Crusher. At least not until now.
With promising gold deposits and production in West Africa, Perseus Mining ((PRU)) had been one of the darlings of investors in prospective smaller gold producers. Yet over the past year investors have lost patience with Perseus as it has failed to live up to expectations. The root of the problem is mechanical, with the ore crusher at Persues’ Edikan mine in Ghana suffering from gremlins which the company has struggled to identify and remedy. December quarter production at Edikan was a particular disappointment.
Management now believes the problem has been finally identified and can be remedied with the purchase of some new parts and a three-day shutdown for the replacement process. Those new parts are due to arrive within days. As a result, management believes Edikan can quickly push back up to its nameplate milling rate capacity of 5.5mtpa and onto a previously targeted 8mtpa by mid-2013. The bad news is that the planned replacement shut-down has forced a reduction in FY13 production guidance, but this guidance reduction was well flagged on the release of the December production report and thus of no surprise to analysts.
Despite the crusher problems, Perseus’ first half result managed to beat most broker expectations albeit this was largely to do with movements in inventories and stockpiles. Operational performance was much as expected under the circumstances. Analysts believe that Perseus’ crusher problems and resultant weak production run is now well baked into the share price, hence remediation should provide share price upside on a catch-up basis from here. Notwithstanding gold price movements, Macquarie, for one, expects improving production in the second half will force the share-price-to-net-present-value discount gap between PRU and other goldminers to close in PRU’s favour.
Beyond Edikan, the PRU share price has also suffered as a result of disappointment surrounding the company’s Sissingue project in the Cote d’Ivoire. A definitive feasibility study (DFS) on Sissingue released in November suggested the commencement of construction by late 2012 and first production by late 2013, however construction has been delayed.
The issue highlights the sovereign risk factor inherent for Australian listed miners operating in far flung locales, particularly that of volatile West Africa. The Sissingue delay is due to a flagged revision of fiscal policies by the Cote d’Ivoire government in what BA-Merrill Lynch describes as an “uncertain political landscape”. The government is looking to increase royalty rates (sounds familiar) which Merrills suggests would be a better outcome for both producers and the state than some sort of super profits tax.
Management has been “encouraged” by the progress of discussions with the government on this front, and assuming legislation proceeds as expected, Citi believes Sissingue could see first production by end-2014. The mine offers 340koz gold production over the first two years of a six-year mine life, the analysts note.
All of the above means additional costs and time but on the basis of Perseus recent share price slide, brokers remain confident that as long as nothing new comes out of the woodwork, the PRU share price can only have upside from a base at which all the bad news is accounted for. Exploration potential, as always, adds further upside risk.
Four of the seven brokers in the FNArena database covering Perseus have updated their forecasts post result, with Merrills sticking to a Neutral rating for now but Macquarie, Citi and Credit Suisse all happy to stay on Buy or equivalent ratings. The remaining three brokers are yet to address their two Buy and one Hold ratings. On the strength of target price adjustments from the reporting brokers, the consensus PRU target has slipped to $2.73 from $2.88 maintenance-impacted guidance but the new target still suggests over 50% upside.
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