Outlook Improves Substantially For Regis Resources

This story features REGIS RESOURCES LIMITED. For more info SHARE ANALYSIS: RRL

The company is included in ASX200, ASX300 and ALL-ORDS

-Strong resource upgrade potential
-Mine life extensions likely
-Underpinned by AUD gold price
-Stock now considered fair value
 

By Eva Brocklehurst

The outlook for Regis Resources ((RRL)) has improved markedly, brokers believe, on the back of exploration success and a renewed commitment to follow up on discoveries to extend mine life. The latest results from the three Duketon processing centres imply a sustainable 300,000 ozs per year at an all-in cost of around $1,000/oz.

While one quarter may not make a year, UBS is confident the company can deliver on guidance and that the business is bouncing back from a poor FY15. Now production has stabilised, the broker's focus turns to the exploration potential. There are several high-grade targets which could add near-term ore feed to any one of the processing plants.

The stock is seen offering a point of differentiation in a period when exploration activity has declined. UBS expects a few early gains in terms of resource upgrades at Baneygo and a maiden result at Tooheys Well.

UBS believes investors will reassess and subsequently re-engage with the company and retains a Buy rating. The broker adjusts its methodology to a combination of net present value (NPV) and an enterprise value/earnings multiple in a 70:30 proportion, from a pure NPV model, to reflect investor attention on near-term earnings with the upswing in the gold price as well as exploration success.

Quarterly production is aligning with the new mine plan and Morgans expects the company will reach or exceed the upper end of its FY16 guidance range. Upside potential could come from an increase in the gold price, expansion of mine life at Moolart Well and continued outperformance from Rosemont. In line with the broker's recommendation structure, the rating is moved down to Hold from Add.

Credit Suisse considers it possible to outline a 10-year mine life from the current discoveries, with a high chance of this being converted to production. The most exciting development is the low-cost Gloster deposit, which in the broker's opinion overcomes prior concerns over the short life at Moolart Well.

Gloster is 26km north west of Moolart Well. The acquisition of Gloster has removed a key risk form the core, reliable, cash-generating asset, in the broker's view. There is a high probability of converting to reserves and doubling the current 2.5 year mine life, potentially lifting production if the grade is above the remaining Moolart Well grade.

Brokers find the rapid growth of the Baneygo system also impressive. The resource is 12km south of the Rosemont gold mine, with four deposits. The discovery could be either feed for Rosemont or Garden Well, but what excites Credit Suisse is the implications or prospectivity on extensions to the north.

Credit Suisse also believes McPhillamys is gaining attention, with stability in operations and free cash flow established. This has previously been discounted by the market but with future confirmation of a solution to water supply and additional drilling confirming the resource modelling, the project could progress quickly. Credit Suisse expects the company will comfortably replace its FY16 production depletion with new reserves, and resource additions could be significantly greater.

In terms of the September quarter results, the performance from Garden Well reassured brokers, with the operation now stable and providing an opportunity to optimise mill performance. Credit Suisse notes the recent rally in the share price, as earlier fears about an impending reserve write-down appear misplaced.

The broker downgrades to Underperform from Neutral, while accepting a largely Australian dollar cost base against an elevated Australian dollar gold price should deliver healthy margins in 2016, adding to the stock's attraction.

Citi also downgrades, to Neutral from Buy, as the production numbers are seen restoring confidence in the stock and the share price has gained 33% in the past month. The broker expects, going forward, drivers of the share price will be exploration results, resource updates and the gold price.

Canaccord Genuity also ascertains the stock is now at fair value. A delineation of additional mineable resources is considered the next key driver of value. The broker's new price target of $1.95 includes increases in nominal exploration value and some adjustment to the profile at Rosemont and Garden Well. The broker, not one of the eight monitored daily on the FNArena database, moves to a Hold rating from Buy.

Gold output in the September quarter was 21% above Deutsche Bank's forecasts while costs were 16% below. As Garden Well improves the broker's attention turns to exploration and the addition of satellite pits to extend mine life. Deutsche Bank was also impressed by results from Baneygo. The broker suspects this prospect is likely to to be developed as a satellite pit to either Rosemont or Garden Well. Deutsche Bank downgrades to Sell from Hold based on valuation.

One aspect of the results Deutsche Bank points to is cash flow. The quarterly operating performance suggests this should have been better. Still, the broker notes payments related to higher material movements in June fell into July's reconciliation so capex appeared high at $18.9m while only $7.5m related to the September quarter. Sustaining capex annualises in line with guidance, the broker suggests.

Grades were stronger in the quarter which offset weaker recoveries in Morgan Stanley's view. Free cash flow generation equates to an annualised yield of around 9.0% which is slightly below the average of Morgan Stanley's mid-cap peer coverage. Assuming the difference between net cash and revenue-minus-costs is expansion capital, the broker judges the first quarter outcome has already accounted for a substantial portion of the $15-20m capex guidance range.

Rosemont has consistently outperformed Macquarie's expectations and the broker upgrades production forecasts for the mine by 20%. A development scenario for Gloster is included in the broker's models now, as well as the addition of satellite feed from Baneygo/Erlistoun from late FY17. Despite significant upgrades to forecasts and valuation the recent run-up in the share price also limits Macquarie's target price and a Neutral rating is retained.

The FNArena database shows two Buy ratings, three Hold and three Sell. The consensus target is $1.88, suggesting 1.8% downside to the last share price. Targets range from $1.30 (Morgan Stanley) to $2.30 (Macquarie, UBS). The dividend yield on FY16 forecasts is 4.8% and on FY17 it is 6.3%.
 

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