Australia | Jul 17 2013
This story features PERSEUS MINING LIMITED.
For more info SHARE ANALYSIS: PRU
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS
-Costs outstrip expectations
-Mine plan update awaited
-Performance stability needed
By Eva Brocklehurst
Gold stocks that were strong performers have joined the lists of those struggling to find the right balance in production and development in a quickly changing landscape. Perseus Mining ((PRU)), with interests in West Africa, is a case in point. The company has delivered production guidance for FY14 that is significantly below expectations and the much vaunted Sissingue project is now on ice.
Perseus is a single mine company, with Edikan operating in Ghana. This is a large long-life asset with expansion potential. Commissioning difficulties were encountered in the early days, which led to initial downgrades to highly anticipated production levels. After this year's March quarter production numbers were published the brokers noted all-in cash costs were on the high side, at US$1,132/oz. A period of disrupted production, poor recovery and constrained throughput were blamed. Come the June quarter and nothing has changed. Cash costs were even higher, at US$1,405/oz against guidance of US$1,100/oz. Minor plant maintenance issues continue, and brokers believe this highlights a lack of stability that continues to plague production at Edikan.
Analysts are floundering to keep up with the changing tide of gold and broker recommendations are wide ranging. On the FNArena database there are three Buy ratings, three Hold and one Sell. The consensus target price of 88c suggests 77.5% upside to the last share price. The consensus target has slipped from $1.34 a week ago to where it is today. The target prices range from 50c all the way to $1.20. CIMB holds the $1.20 position but is yet to update on the latest report.
Back in April, when FNArena last looked at the stock, Macquarie had noted the company was still generating cash at the then gold price. After a further dive in the precious metal in subsequent months, and costs in the June quarter to the upside of expectations, this is no longer the case. Macquarie downgraded its recommendation to Neutral for Outperform and its target price to $1.00 from $1.60 noting that, while there is valuation upside in the stock, the continued high costs at Edikan and uncertainty in the gold price "places a heightened degree of risk on the company's profitability".
BA-Merrill Lynch wants to see results from Sissingue before being confident enough to take the rating up from Neutral. Citi has downgraded the stock to Sell, disappointed by the slump in earnings expectations at the end of FY13. At the other end of the spectrum, Credit Suisse has maintained an Outperform rating, noting the stock is still trading at a discount to the net present value (NPV) of Edikan alone.
The company's FY14 production guidance of 190-210,000 ounces was significantly below Citi's estimates of 284,000 ozs and this was compounded by the higher-than-expected costs. Production was slightly ahead of Merrills' expectations but the weaker guidance for the next year or so makes the broker cautious. Life of mine plans are expected to be updated this quarter and the broker awaits the update with interest. Perseus plans to treat stockpile ore in preference to opening up new pits in FY14. Mining will now shift to the AF Gap and Fobinso pits over the next 18 months.
A decision on the development of Sissingue has been put off to January 2014. The company cited debt draw and the gold price as the obstacles. Project commencement could now be in the first quarter of 2016, one year later than previously planned. Meanwhile, the company will continue to discuss fiscal terms and undertakings with the Cote d'Ivoire government. Merrills has removed Sissingue from base case forecasts and, along with lower production forecasts, earnings estimates for FY13/FY14 and FY15 have been reduced by 20%, 80% and 70% respectively. Macquarie suspects that the current gold price environment brings into question the company's ability to fund development of Sissingue. This uncertainty was the largest driver of the broker's target price downgrade.
What makes Credit Suisse more positive, besides the heavily discounted share price, is that the company's cost focus has become stricter. Back in April the broker noted the earnings and valuation looked optimistic. Edikan is not dissimilar to its peers in that significant cost escalation has occurred over the past two years. On Credit Suisse's assumptions, the new operating reality delivers, post December 2014, a throughput rate of 7.5mtpa for around 238,000 ounces of annualised production.
JP Morgan thinks that cash conservation will be difficult to achieve. Grades are falling, and throughput may be increasing, but cost cuts will need to exceed mining-associated savings for Edikan to be cash profitable. The resource base has increased by around 1.1m ozs net of depletion and the revised life of mine plan will incorporate recent drilling. The increased resource is positive but the broker now expects a lower resource to reserve conversion because of higher grade cut-off assumptions. This is necessitated by the increase in operating costs against the original design and feasibility studies done back in mid 2011. This may not end up a negative. Existing operations breaking even on an all-in basis and more profitable mine with a shorter life may yield a favourable NPV outcome at the spot price of gold.
All agree, the market is unlikely to ascribe much upside in an improvement in operating conditions prior to the company demonstrating more stability in throughput and cost performance.
See also, Perseus: The Golden Spoils Of Edikan on April 23 2013
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