Is Perseus Mining Being Treated Unfairly?

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Gold miner Perseus Mining disappointed the market and its share price was savaged, but several brokers believe this is an over-reaction.

-Perseus Mining announced production downgrades at Edikan, delay of first production at Sissingue and reduction in resource
-Yet, company is debt free and a self-funded future producer of around 500,000 ozs per annum
-Confidence in independent consultant estimates undermined
 

By Eva Brocklehurst

The share price of Perseus Mining ((PRU)) has been trounced lately, as the market airs its disappointment with the latest guidance. The company has reduced its first half guidance for gold production and increased cost estimates for its one producing mine, Edikan, Ghana. First production at Sissingue, Cote d'Ivoire, is delayed, in tandem with a reduction in the resource.

Gold guidance for the first half is reduced to 70-80,000 ounces from 80-100,000 ounces, after an extended shut-down to the mill and lower-than-expected grades. Costs are expected to increase to US$1550-1650/oz from the previous estimate of US$1285-1595/oz. Production is still expected to lift in the second half, to 125-145,000 ozs.

Morgan Stanley believes the stock is being persecuted unfairly. It may be frustrating to learn of another delay, but the sharp reaction in the equity price appears overdone, argue the analysts. The company is debt free and a self-funded future producer of around 500,000 ounces per annum, yet its market capitalisation is now just $350m.

Perseus will report a loss for the first half but is believed to be in control of the way forward, as the broker notes it will use less project finance than the US$60m previously planned. A slowing time line should comfortably fund the Sissingue development.

Guidance for Edikan for the December half is reduced by 15,000 ozs. While the lost production is considered a downgrade, the broker understands the mill is operating well after the shut-down and output is expected to rise 80% in the June half. The Sissingue resource is reduced by 20% and the start date pushed out four months, with first gold now due in late February 2018.

While a negative reaction to some extent was to be expected, removal of 35% of the market cap is unwarranted, Morgan Stanley asserts. The broker lowers forecasts for earnings per share by 2-3c over FY17-19, after capturing recent operational data and guidance.

While one of the broker's three catalysts which drove its September upgrade to Overweight is now beyond a 12- month horizon – the start up at Sissingue – all three still exist, so the current share price is considered a fresh entry point. Morgan Stanley likes the concept of cash flow from Edikan and Sissingue financing Yaoure, to take the company to 500,000 ozs per annum.

Others Are Disappointed Too

The downgrade at Edikan disappointed Citi, which notes similar revisions occurred in FY15/16. The broker has added a High Risk to its Neutral rating until it is satisfied that Edikan can meet guidance and generate cash.

Citi reduces its valuation of Sissingue by 20%. A new inferred resource at nearby Bele has restored 260,000 ozs, which could offset the loss somewhat. At Yaoure the company has experienced difficulties with access and this could delay completion of the definitive feasibility study that was scheduled for mid 2017.

Another downgrade from the company's only cash generating asset, Edikan, has been attributed largely to negative reconciliation and Credit Suisse observes, while plant failures can be addressed, missing grades cannot. The broker had assumed lessons were learned and management was now on the top of the geology, but now CS is not so sure.

Moreover, the market has been accustomed to accept consultant estimates as a positive external endorsement of management estimates because of perceived independence. The downgrade to Sissingue, when the broker was expecting a potential upgrade, undermines confidence in the accuracy of the independent consultant's estimates.

The 2010 resources estimate that was cross checked in 2015 appears to have over-estimated grade by overlooking smearing from RC drill results. The broker believes this is a wake-up call for the industry which has trusted consultant numbers over those generated in house.

Nevertheless, Credit Suisse retains a Outperform rating on valuation as the stock is trading at a material discount to its peers. The broker believes operating stability and diversifying to a second mine is needed for that discount to close, but this appears even more elusive after the latest announcement.

UBS was also hopeful that the company had turned a corner this year but this latest downgrade negates that view. While the company is still expected to reduce costs and increase production in 2017, confidence is reduced again. Moreover, gold prices are falling and sentiment is weak and the broker finds it hard to justify exposure to low margin, West African growth.

There are two Buy ratings on FNArena's database and two Hold ratings. The consensus target is $0.63, suggesting 80.0% upside to the last share price. This compares with $0.75 ahead of the update. Targets range from $0.42 (Citi) to $0.85 (Credit Suisse).

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