Australia | Apr 23 2013
-Scale potential excites at Edikan
-Perseus generates cash
-Well placed for outperformance
-Sissingue decision expected soon
By Eva Brocklehurst
Gold miner and explorer Perseus Mining ((PRU)) is a little different to other Australian gold companies in that it is a leader in the development of West African gold assets. The company's flagship Edikan mine is in Ghana and, when fully ramped, could produce around 330-350,000 ounces per annum over a 15-year mine life. Plant problems beset Edikan earlier in the year but now these are resolved and the plan is to ramp up to 8mtpa by the end of June.
The company's second project is Sissingue, in Cote d'Ivoire, which is waiting on an amendment to the Mining Code from the new Ivorian President, due by the end of June. This may set out fiscal terms for developing mining projects in that country. The capex decision on Sissingue will be forthcoming once fiscal arrangements have been implemented.
It's the asset base and exploration potential that Citi finds interesting. Sure, the company is exposed to macro developments, such as the gold price and exchange rates and the usual quantum of risks that come with gold mines, but the scale of Edikan makes it unique in the Australian gold sector and this promises a potential target for corporate activity.
Sissingue remains uncertain but Citi is confident a reasonable fiscal framework will be tabled and the project will proceed. Credit Suisse notes Sissingue is positioned to commence development when the agreements are finalised. If this occurs by June, as expected, a stability agreement defining the life-of-mine fiscal terms should be settled soon after and the board will be in a postilion to assess commitment of capital. Otherwise, the broker believes production guidance looks achievable and capex required to reduce any bottlenecks at Edikan appears to be only small. Perseus should outperform peers in the medium term, according to CIMB. Again, despite a reduction in revenue and earnings forecasts because of the gold price decline, this broker is of the view that the operation at Edikan will provide the extra fillip for outperformance.
JP Morgan found the March quarter production numbers mixed. Improving operating metrics were hampered by higher costs, lower recoveries and a downgrade to Sissingue grades. Moreover, improved throughput at the Edikan mill may produce a bottleneck to achieving the 8mtpa target set for end of June. Still, Perseus is, in this broker's view as well, one of the better placed producers that can withstand the recent falls in the gold price. Supporting this is the long mine life, partial hedging and strong balance sheet. Quarterly production was 57,200 ounces, despite the problems with the primary crusher at Edikan. Perseus has maintained FY13 production guidance at 210-230,000 ounces.
Macquarie notes Perseus is still generating cash at current gold prices. Cash costs in the March quarter of US$951/oz were in line with the broker's forecasts. Total site costs were reported at US$1,132/oz. Once the additional costs are factored in the company is seen able to generate cash from operations at gold prices over US$1,250/oz. So, what's it to be? For those investors with an investment horizon of six to twelve months, Macquarie envisages significant upside to current levels. Operational improvements at Edikan should help cash margins and provide positive momentum.
Credit Suisse forecasts cash costs around US$763/oz, US$100 less than that reported. The broker notes "all in" cash costs were US$1,132/oz in the quarter, including the stockpile writedown. This may be "alarmingly high" but Credit Suisse finds it encouraging in a period of disrupted production, poor recovery and constrained throughput. The big issue of grade sustainability creates most uncertainty. On the downside for Credit Suisse is the cost inflation that came from the remediation work and non-cash adjustments to the stockpile writedown. Achieving lower costs is yet to be demonstrated. Moreover, the recent fall in the gold price and sustained high currency make earnings and value look optimistic. Also, a review of Edikan in the September quarter is the key data needed to revisit operating assumptions. Grade sustainability, strip ratio and forecast recovery are items that need to be clarified for the broker. Also, there may be some risk that Sissingue will continue to be held up.
The company released a conservative but robust resource for Sissingue of 18.98m tonnes at 1.5g/t gold for 925,000 onces. The grade fell significantly from the 1.9g/t cited at the last resource update in 2010. Credit Suisse has a low level of confidence about the Sissingue valuation. This is because of a reliance on estimates of capital expense, operating expense and production which have escalated from the "very stale" September 2010 technical report.
Citi rates Perseus a Buy, believing it offers compelling value at current levels, along with five others on the FNArena database. BA-Merrill Lynch is the one Hold rating. The broker is inclined to wait until clarity is provided on the Sissingue development before re-rating. There are no Sell ratings. The price target ranges from $1.90 (JP Morgan) to $3.50 (UBS), although UBS has not updated the stock to account for the production report as yet. The consensus target, at $2.42, indicates 75.5% upside to the last share price.
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