Small Caps | Sep 06 2016
Small gold producer Medusa Mining is improving its operations at the Co-O gold mine in the Philippines and brokers welcome the better production outlook.
-Valuation gap to peers reflecting single asset status and sovereign risk
-Growth in production, margins and mine life expected at Co-O in medium term
-Near-term production constrained because of infrastructure upgrades
By Eva Brocklehurst
Small gold miner Medusa Mining ((MML)) has put the problems with its operations well behind and taken a turn for the better over the last two years, with brokers observing production is now more reliable. There is less dilution of ore and mine infrastructure is being improved.
The company operates the high-grade Co-O gold mine in Mindanao, Philippines, which is expected to produce 105-115, 000 ozs in FY17 at an all-in cost of US$1,000-1,100/oz. Macquarie observes the company generated US$127.8m in revenue from gold in FY16, within forecasts, while net profit of US$43.8m, also in line, is considered remarkably strong for a small gold producer.
The FY16 results lacked the painful asset write down of FY15 and Citi expects growth in earnings per share of 32% in FY17 on higher gold production. The broker rates the stock as Neutral/High Risk with a 70c target, given Co-O is a labour-intensive, narrow-vein mine and the risk of regular serious safety incidents is high.
Canaccord Genuity initiates coverage on Medusa Mining with a Speculative Buy rating and $1.35 target, contending its recommendation is supported by an improving outlook. The broker considers the stock one of the most undervalued under coverage, with the relative valuation gap in part reflecting the single asset status and sovereign risk. Mine infrastructure upgrades are expected and there is a highly prospective tenement portfolio. The balance sheet has also been strengthened.
Co-O is expected to deliver growth in production, margins and mine life in the medium term. The main catalysts for FY17 include a high intensity underground drilling program, continued net cash build up and completion of the service shaft in the June quarter, which should instantly boost production.
Macquarie suspects production will be constrained until the E15 service shaft is completed and the company is unlikely to make much headway until then. As a result, the broker reduces earnings forecasts for FY17 and, subsequently, valuation. Macquarie has a Neutral rating and 60c target.
What about the political climate in the Philippines and the review of all mining activity in the country? Canaccord Genuity acknowledges the current uncertainties but believes the impact on Medusa Mining will be minimal, given the company has adopted stringent environmental standards and a small surface footprint.
The broker notes the surface infrastructure at Co-O is capable of supporting a 150,000 ozs per annum profile. Growth projects beyond Co-O include Bananghilig and Guinhalinan. Both projects are near Co-O and on granted mineral production sharing agreements. A feasibility study is ongoing for a 200,000 ozs per annum open pit project at Bananghilig.
Canaccord Genuity factors in a nominal $10m in resource upside for Bananghilig. On current modelling for Co-O the broker factors in a life-of-mine inventory that is significantly above the current reserve and has not placed additional value on exploration.
Medusa Mining has been reinvesting cash into its mine development and does not pay a dividend. On the broker's estimates, the company would be in a position to consider dividend payments in FY18.
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