Faith In Perseus Reliant On Mine Plan

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This story features PERSEUS MINING LIMITED.
For more info SHARE ANALYSIS: PRU
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

-Emerges from FY13 debt free
-Focus on Edikan's performance
-Confidence needs restoring
 

By Eva Brocklehurst

Perseus Mining ((PRU)) may have its difficulties, which gold miner doesn't? What stands out for brokers is that the company is debt free and, if things go according to plan, may be able to fund a second mine from cash, cash flow and just a little debt. Perhaps.

With the Sissingue project in Cote d'Ivoire now on ice, the focus is squarely on maintaining reliable production at Edikan in Ghana. In light of the current gold price, the company decided to delay development of Sissingue and a decision will be made in January 2014. Macquarie thinks the project will start in September 2014, once Edikan's cash flows have improved. Edikan's revised mine plan will be put forward this month, and brokers are looking for a path to improving cash generation from the mine.

The FY13 financial results were slightly improved on expectations, largely from a foreign exchange and tax point of view. Revenue was up 103% and net profit was up 1%. The company has $45m of cash and bullion at hand and no debt. The revolving credit limit was reduced to nil, reflecting the decision to defer Sissingue. For Citi, things can only get better. The prior 12 months have been challenging and disappointing. Edikan's mill has had crusher reliability problems and throughput has been below expectations. The broker supports the decision to leave Sissingue on hold but, with Edikan's progress still unclear, the rating remains as Sell.

On the FNArena database Citi has the lone Sell rating. There are three Buy and three Hold. The consensus target price is 86c, suggesting 15.8% upside to the last share price. The target has moved up from 78c ahead of the results.

Macquarie contends the stock remains volatile. Movements in the gold price will make or break it. With all-in costs of US$1,100-1,200/oz forecast in the September quarter, margins are pretty slim at present. Since the commencement of mining at Edikan the mill has not delivered consistently, to either its initial 5.5mtpa nameplate throughput or the revised 7.9mtpa. With the crusher issues seemingly resolved and a new on-site management team in place Macquarie believes Perseus is now positioned to deliver operationally. It's vital the mine delivers to nameplate capacity in order to regain investor confidence. Production guidance for the December half at 99-109,000 ozs was unchanged.

Previously stated reserve statements at lower gold price forecasts act as a proxy for potential outcomes from Edikan's optimised plan, in Macquarie's view. The broker observes that, since 2009, whenever Perseus has increased reserves it has come via larger pit shells with the embedded increase in strip ratio. The grade has not significantly shifted. It is this strip ratio which has the largest negative impact on the broker's net present valuation for Edikan.

Moreover, one of the greatest variables that is available to Perseus in influencing strip ratio is the timing of pit development. To date, the company has only provided detail for the 18 months ended 31 December 2014. Macquarie will be checking the revised mine plans beyond 2014, which must be based on the best mix of grade, strip ratio and site access. There are currently four distinct mining areas within the current Edikan reserve statement and a further four deposits within the current resource.

The mine plan will have to balance and sustain all the options on the current reserve and resource base, in Credit Suisse's view. The issue of grade also needs to be de-mystified. At the March quarter result the broker noted the reserve grade of 1.1g/t was being depleted by production at a head grade of 1.5g/t, which continued into the June quarter. The inevitable reduction in head grade with time will presumably put downward pressure on recoveries. The full mine plan release needs to clarify this operating aspect at Edikan.

Credit Suisse notes the revised gold price/margin outlook may significantly impact planning and the approach to future pit development. The broker's near-term gold price forecasts now appear conservative, whereas as little as two months ago they were close to spot prices. The first half FY13 fall in the gold price, now followed by a 20% rally, hurt gold equities but appeared to jolt management to focus on costs. Despite all measures being undertaken, stripping out one-off adjustments, the broker thinks the second half would have been loss making at an underlying earnings level. On Credit Suisse's commodity price assumptions, a near-break even result in FY14 is forecast.

See also, Perseus' Achilles Heel Revealed on July 17 2013
 

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