Small Caps | Aug 03 2017
Brokers believe investor patience will eventually be rewarded by Alacer Gold, which is intent on bringing its Copler sulphide project to first gold in the September quarter of 2018.
-Uncertainty in Turkey manifests in material discount to peers
-Sulphide project could be the re-rating trigger which means much of the discount is closed
-Production potential at Cakmaktepe not to be overlooked
By Eva Brocklehurst
Brokers believe investor patience will eventually be rewarded by Alacer Gold ((AQG)), which is intent on bringing its Copler sulphide project to first gold in the September quarter of 2018. Production risks at Copler oxide weighed heavily on the stock in the first half of 2017, although this has been mitigated by the start of scheduled production from the higher grade and critical West Pit. Currency is moving favourably for the company and US$18m has been locked into savings as a result.
Credit Suisse believes Alacer's long-life, low-cost Copler asset in Turkey should complement any gold portfolio. Yet, with a significant capital development underway, overlaid by political uncertainty in Turkey, this manifests in a material discount to peers.
A realisation of the Copler sulphide production and cash flow, could be the re-rating trigger that means much of the discount is closed. The broker calculates that currently, Alacer's advanced exploration comes for free, while global peers are struggling for projects to replace depleting reserves and declining production.
Moreover, the discount is seen exacerbated by perceptions about the country risk in Turkey. This is not being experienced on site, other than through extended permit time frames, and is more than compensated, in the broker's opinion, by the tax incentive scheme, which delivers a 5% cash tax rate. If the company can execute on the sulphide project, Credit Suisse believes the equity value will ultimately reflect this, or a corporate suitor will emerge.
UBS suspects investors are in no hurry to reprice the stock. There is around 12 months to first gold at the sulphide project and nameplate production is not expected until later in 2019. Concerns over the speed of the ramp-up and the final capital cost are likely to persist, the broker believes, as some of the company's peers have suffered from delays and over-runs and this has led to a cautious investment community in terms of the mid-cap mining sector.
In addition, investors have multiple choices domestically and other gold exposures currently offer greater leverage to gold price movements. Nevertheless, the broker asserts that the sulphide project's long life, around 20 years, and low-cost position should not be overlooked.
Cakmaktepe
Credit Suisse flags the production potential at Cakmaktepe Central, suggesting the possibility of an upgrade to 2018 production estimates and cash. This satellite prospect is 7km from the Copler plant but the company's equity in most of this area is 50%, lower than its 80% stake in Copler. The broker believes this could provide higher grade ore sources with a low strip ratio and short time to production, extending oxide mine life and providing cover during the commissioning and ramp up of the sulphide.
Gediktepe
Gediktepe is another diversified gold and base metal deposit. A pre-feasibility study has been completed and a 12-month engineering and permit process is underway, expected to be completed in June 2018. Credit Suisse pushes this project out to 2020 in its model, which remains contingent on a satisfactory definitive feasibility study in mid 2018.
Copler
Still, the main value driver for brokers is the Copler sulphide project, where the capital budget has been reduced by -US$18m because of currency movements. The company is flagging a further US$50m in potential savings, if the Turkish lira remains at current levels.
The company is fully funded to deliver first gold from the sulphide plant in the second half of 2018 and construction is expected to ramp up in the September and December quarters. Milestones for the September quarter include completion of civil works and autoclave certification. Dry commissioning is expected to begin early next year.
The company has ended the quarter with US$202m in hand and US$130m drawn on its debt facility. Deutsche Bank assumes the company's debt peaks at US$310m but does not factor in the likely savings related to the hedging of the Turkish lira. UBS also notes the potential for further reduction in capital expenditure and continues to incorporate a peak in net debt of just under US$290m in 2018.
Copler produced 31,000 ounces in the June quarter, a flat outcome on the prior quarter. Weaker output led to a miss on revenue in the quarter and net profit was below some estimates. However, the company is guiding to a step-up in output in the second half and maintains 2017 guidance of 160-180,000 ounces.
All-in Sustaining Costs (AISC) of US$909/oz in the first half are substantially higher than the second half forecasts, as increased production reduces haulage distance and lower material movements have an impact. Credit Suisse estimates full year cost guidance of US$700-750/oz is possible, but needs a second half AISC of US$650/oz or below.
There are five Buy ratings on FNArena's database, including Ord Minnett, yet to update on the June quarter report. The consensus target is $3.88, signalling 80.0% upside to the last share price. Targets range from $2.80 (Macquarie) to $5.30 (Credit Suisse).
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