Confidence In Regis Resources Undermined

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This story features REGIS RESOURCES LIMITED.
For more info SHARE ANALYSIS: RRL
The company is included in ASX200, ASX300 and ALL-ORDS

-May need to access debt, equity
-Grade issues likely to persist
-Confidence undermined considerably
 

By Eva Brocklehurst

Gold miner Regis Resources ((RRL)) threw a spanner in the works for analysts with its latest production guidance. Just when they were hoping for a solution on flooding and grade issues at Garden Well, grade is now looming as a problem at Rosemont. Announced FY15 production guidance fell short of expectations and cost guidance exceeded – not a good combination.

Hence, brokers responded with a swag of downgrades and broker ratings are now uniform on the FNArena database. All seven are on Hold. The consensus target price is $1.93, suggesting 28.0% upside to the last share price, and has fallen from $2.68 ahead of the guidance announcement. Targets range from $1.80 to $2.10.

BA-Merrill Lynch notes Regis Resources expects to draw down on an extra $30m to fund tax payments and deferred contract costs by the end of June 2014. This will move the company into a net debt position of $50m from being net cash of $13m in April. While Merrills believes the debt market will be responsive to the company's needs, an equity raising cannot be ruled out. Equity, historically, is not Regis Resources' preferred option. Merrills has been concerned with the negative grade issues for some time but believes the stock holds long-term value and the broker looks ahead for a better entry price.

FY15 guidance is set for 305-355,000 ounces at a cash cost of $835-915/oz. For UBS this compares with its prior forecast of $387,000 ozs at $635/oz. Weakness centres on lower tonnage and grade from Garden Well and poor grade reconciliation in the oxide material at Rosemont. The lower tonnage at Garden Well is because of the demobilisation of an excavator fleet and a higher proportion of harder ore. The target grade of 1.25g/t at Moolart Well was also below the broker's forecast. UBS downgrades from Buy to Neutral. The announcement removes the company as a default Australian gold producer in the broker's portfolio and, while Regis Resource has been a well held stock institutionally, UBS thinks investors may be cautious now. Management will need to restore confidence and differentiate the company, again, as true, low-cost Australian gold producer in the broker's opinion. The McPhillamys project now assumes added importance for UBS, as the company needs to diversify its production away from just the Duketon mines.

Production guidance fell well short of Deutsche Bank's forecasts with poor grades at Rosemont now reminiscent of the problems first reported at Garden Well. Deutsche Bank has reduced long-term grades at both assets to capture the inherent risk in the current mine plans. The broker sees similarities between Rosemont and the "perennially disappointing" Garden Well reserve models. There will be 11,000m of infill drilling completed by the end of June at Rosemont but Deutsche Bank notes the lessons from Garden Well, which signal the extent of the misinterpretation will not be known until the areas are actually mined. The company's focus appears to have moved from maximising throughput at Garden Well to a less aggressive milling rate, in order to take pressure off the underperforming mining operation. The revised strategy has affected the grade but the broker thinks the adjustments lead to a more achievable target in the longer term. Deutsche Bank now assumes 5mtpa at 1.07g/t resource grade, based on a 0.5g/t cut-off grade and has downgraded the stock to Hold from Buy.

In Macquarie's opinion the key driver at Rosemont is grade, which the broker now models at the lower end of guidance at 1.3g/t in FY15, rising to 1.5g/t in FY16 and beyond. Macquarie has also scaled back grade forecasts for Garden Well to 1.06g/t and suspects the issues regarding grade will persist. The broker expects operations will recover from the recent flooding but market expectations have been significantly reset. Macquarie thinks the substantial fall in the share price could mark an inflection point but there are still technical difficulties to work through, so the risk remains on the downside.

JP Morgan has downgraded the stock to Neutral from Overweight to account for the grade reconciliation issues that have damaged investor confidence. The fact that grade issues similar to Garden Well have been encountered early in the operations at Rosemont significantly undermines credibility and the broker thinks this will be difficult to rebuild. Credit Suisse echoes this view, also noting that, while the balance sheet is OK, drawdowns on debt facilities are likely, as flooding remediation costs are paid and lower production is realised. Credit Suisse's rating is downgraded to Neutral from Outperform.
 

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