Small Caps | Oct 31 2017
Brokers are concerned about what it will take for Beadell Resources to reach its gold production target in 2017.
-December quarter expected to be strong but a miss could be critical to working capital
-Variability in production grades holding the company back
-Potential for incremental extensions to existing resources/reserves
By Eva Brocklehurst
Gold miner Beadell Resources ((BDR)) improved its production in the September quarter by 21% versus the typically weak wet-season June quarter, but this was still well short of expectations.
A weak September quarter has forced a downgrade to 2017 guidance to the low end of the company's 140-150,000 ozs range and reduced the cash balance. The cash balance is now at what Citi describes as an "uncomfortable" level. Even with a positive December quarter the broker suspects a miss to guidance is likely.
Given higher costs, ongoing expenditure on exploration and plant, as well as debt repayments, Citi considers it fortunate the company plans for a strong December quarter, and any miss in this regard may mean Beadell is in need of further working capital.
In contrast, Canaccord Genuity believes exploration is an undervalued aspect of the company's portfolio and, as cash flow is set to accelerate, it should be well funded and able to maintain an aggressive drilling program.
UBS suspects the variability in production is what is holding the company back. The broker was hoping the September quarter would sort this somewhat but another delay to higher grade ore is just adding to unit costs.
As there is a significant choice locally for investors, the broker believes the company will need to do more to reduce this variability in production in order to offer value that can offset the currency risk that is unlikely to change over the coming years.
A more stable production profile is also needed because the market can re-new its focus on the growing exploration opportunities. If variability cannot be reduced meaningfully, UBS suggests the strategy should focus more on gaining diversity in operations. The risk, the broker insists, centres on grades performing as expected.
Production Expectations
The September quarter was down 39% on the prior corresponding quarter, with 28,800 ounces produced at US$1264/oz for all-in sustainable costs (AISC). Head grade was 1.05g/t versus UBS estimates of 1.5g/t. The broker was expecting the company would have access the higher grade sections in the quarter.
Beadell is now guiding to a December quarter head grade of 2.2g/t to drive December quarter production of 60,000 ounces. The company last achieved such head grades in early 2014 and the previous production record was 60,800 ounces in the December quarter of 2013.
Higher grade should drop the costs down. Beadell is also guiding to AISC of US$700/oz in the December quarter with re-stated cost guidance for 2017 at US$1000-1100/oz versus US$830-930/oz previously.
Macquarie agrees that it requires a significant jump in production to meet guidance and the near-term risk has increased, downgrading to Neutral from Outperform.
Mill Upgrade Critical
Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, is not perturbed. The broker maintains a Buy rating and $0.35 target, and remains confident that the company should finish the year on a high note. A major catalyst in the next 12 months is the successful completion of the mill upgrade at Tucano (Brazil).
With access to higher-grade oxide material and a stronger production outlook in the interim, the broker believes the stock should re-rate ahead of the plant upgrade. During the quarter, Canaccord Genuity points out, the company completed 20,416m of grade control and resource development drilling.
This program returned high-grades from five separate areas across the holding and there is potential for incremental extensions to existing resources/reserves. First-pass regional results, such as Mutum, are exciting greenfield opportunities, in the broker's opinion, that should provide an improvement to the medium-term production profile.
Falling short on production could make funding the upgrade to the mill challenging, Citi asserts. Recent drilling at Urso,Torres and Mutum intersected high-grade but at limited widths that may lack mining scale. Meanwhile, Neo East Lode and Tap AB3 have added mineralisation inside the pit outlines and could add to future upgrades to reserves.
The database shows three Hold ratings. The consensus target is $0.21, suggesting 13.5% upside to the last share price.
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