Regis Resources Set To Shine Brighter

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

Gold miner Regis Resources is expanding its potential and brokers evaluate the stock in the wake of the September quarter production numbers.

-Gloster, Erlistoun satellites to add to production in the next few months
-McPhillamys envisaged offering good prospects, subject to water availability
-Healthy dividend yield but stock sensitive to interest rate sentiment
 

By Eva Brocklehurst

Western Australian gold miner, Regis Resources ((RRL)) is expanding its potential, with several projects ready to come on stream in the next few months. The company produced 74,612 ozs in the September quarter from the Duketon field operations. Group cash costs were $850/oz and all in sustaining costs (AISC) were $946/oz.

Production is expected to rise over the coming quarters as high-grade satellite deposits at Gloster and Erlistoun enter the schedule. Credit Suisse expects higher costs will eventuate because of Gloster waste stripping but grade will also rise. Gloster enters production in the December quarter while Erlistoun commences in late March 2017.

Tooheys Well, south of Garden Well, looks to Macquarie as if it could become a significant satellite deposit. In its models the broker incorporates mining at that site commencing in FY19, ahead of and potentially deferring development of Baneygo. The company has released a 574,000 ozs maiden resource at Tooheys Well and in the near term, is targeting a slightly smaller but substantially higher grade inventory. At a 1g/t cut-off the resource contains 379,000 ozs at 1.77g/t. The deposit is open along strike with indications it extends to both the north and south.

Moolart Well is set to improve on the back of higher grade ore from Gloster while Garden Well's performance is expected to be boosted by Tooheys Well and Erlistoun. Garden Well disappointed Credit Suisse in the September quarter as the ore grade came in below expectations, although some material assumed to be waste contained commercial grade gold. Production growth expectations are based on the higher grade of new satellite pits replacing lower grade ore in the existing blend, and the outlook suggests Regis Resources has been successful in its regional exploration effort.

Credit Suisse observes the number of advanced and early stage prospects now in the queue to be developed signal the future of the Duketon field has potential beyond the indicated reserves and resources. The field has historically been optimised at around 1g/t but the broker believes it possible that the higher grade satellites may continue to sweeten the blended grade, sustaining higher average production for longer.

The mines, despite another hiccough at Garden Well in the September quarter, are seen delivering reliably. McPhillamys is an interesting option in Credit Suisse's view. A fresh 26km six-month drilling program has started to elevate the resource to reserve status. Subject to water availability, the combination of elevated Australian dollar gold prices, depressed Australian dollar costs and potentially lower capital expenditure could underpin a more robust long-life operation and improve the broker's valuation of the asset.

Production missed Deutsche Bank's forecasts in the quarter, largely because of lower grades at Rosemont and Garden Well. The broker believes Regis Resources has done a good job in reducing the impact of Garden Well on group performance. Mining of a pit cutback has again led to reconciliation issues, as while overall recovery is in line with the resource model, the gold sits within additional tonnage at lower grades, which affects milled grade and cash margins.

The company's 3-year guidance signals to Deutsche Bank a 15% lift in output to 340-370,000 ozs in FY19, supported by Tooheys Well being brought into production. The company has stated that the resource would upgrade to 6.7mt at 1.77g/t if a 1g/t cut off was used but the broker doubts this is a sustainable grade and suspects 1.4g/t is more likely. Moreover, Regis Resources needs to find more high-grade ounces to maintain the FY19 run rate.

UBS expects the large in-fill drilling program will lead to expanded resource and reserve statements by the end of the year, noting in FY16 reserves increased by 22% net of depletion. The broker finds the stock's premium valuation easy to justify as there is a net cash balance, domestic production growth is low-cost and there is a healthy dividend yield.

Still, the broker finds better value elsewhere in the sector and a Sell rating is retained. UBS is favourably inclined towards gold and looks for prices to lift to US$1,400/oz in 2017, while acknowledging the pendulum is swinging towards rate rises and subsequently weighing on gold equity sentiment.

Citi observes Regis' dividend yield is one of the highest in the sector but believes the next 12 months are likely to be a challenge while integrating Erlistoun and Gloster. Still, the broker is confident the company will be successful. The share price has fallen 12% in the past month, triggered by the fall in US dollar gold prices, and Citi upgrades the stock to Neutral from Sell.

FNArena's database has four Hold and four Sell ratings. The consensus target is $3.20, suggesting 1.0% downside to the last share price. Targets range from $2.00 (Morgan Stanley) to $3.90 (Ord Minnett). The dividend yield on consensus FY17 and FY18 forecasts is 4.5% and 5.9% respectively.
 

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