Australia | Apr 27 2017
Nickel production is increasingly dominating the outlook for Independence Group as development enters the final stages at Nova and production winds down at Long.
-Jaguar output sharply down in March quarter but no long-term issues
-Tropicana shifts focus to Long Island study
-Nova commercial production expected by end FY17
By Eva Brocklehurst
Nickel production is increasingly dominating the outlook for Independence Group ((IGO)) as development enters the final stages at Nova and production winds down at Long. March quarter production, overall, was soft, brokers observe. Gold ounces from Tropicana were down -10% versus Macquarie's forecasts on lower average milled grades. while zinc and copper production at Jaguar was down -35% and -44% respectively.
Deutsche Bank notes there are no balance-sheet concerns and the nickel price premium that was ascribed by the market previously has disappeared, with the stock now appearing cheaper than it has done for some time.
The main contributor to the quarterly weakness was Jaguar and Deutsche Bank observes this was the worst production quarter at the mine in four years. The result stemmed from reduced ore being milled and lower head grades and the company attributed this to ventilation problems underground, which restricted access to higher grade stopes.
While Jaguar will no longer meet FY17 zinc output guidance it does not pose any longer-term concerns, in Deutsche Bank's opinion. Nevertheless, this contributes to Macquarie's -6% reduction to FY17 earnings estimates and FY18 earnings estimates fall on lower output at Jaguar and higher depreciation at Long.
Macquarie shortens Long mine life assumptions by a year to reflect the increased risk the mine may close next year if capital commitments are not made, which drives an -11% reduction to FY20 estimates.
Argonaut envisages Long reverting to an exploration asset with a focus on both near-mine mineralisation and regional prospectivity. Long's current reserves are expected to be depleted by the March quarter 2018, after which the broker believes the asset will enter care and maintenance.
Tropicana (30% IGO)
Deutsche Bank observes the Tropicana mine plan has clearly shifted towards establishing the waste stripping that is required for the Long Island study. and mining rates are expected to increase towards 90mtpa throughout this year. The Long Island study is expected to be released in late July or early August and the broker already assumes a 50% increase to reserves in its valuation.
UBS had expected the study to be ready a little earlier and believes it will target increased material movement that should help to unlock additional resources and reserves and thereby extend mine life.
Nevertheless, with recent concerns around staffing, the broker expects the market to be cautious about the ramp up in activity, although factors in increased volumes to its estimates. The broker takes a Neutral stance, believing the ramp up to nameplate at Nova and increased material movements at Tropicana mean investors will sit on the sidelines for the short term.
Citi is more assertive, welcoming the chance to buy the stock after a recent pull back in the share price and upgrades to Buy from Neutral. The broker expects Nova to reach commercial production in the June quarter and ramp up to nameplate through the September quarter, which should be a catalyst for the share price. The broker notes nickel will dominate the portfolio once the Nova-Bollinger project is in full production.
Highest production and lowest costs at Tropicana are due to coincide with the end of major development capital expenditure and the mining of high-grade stopes at Nova in 2019, in Argonaut's estimates. Tropicana is expected to produce in excess of 550,000 ounces of gold in 2019 before a campaign is a mounted to access the deeper ore under the Long Island project.
Argonaut forecasts group operating earnings (EBITDA) to expand significantly, increasing to $522m in FY19 from $167m in FY17, and strong cash flow should put the company in a position to pursue growth opportunities and increase dividends. Argonaut, not one of the eight brokers monitored daily on the FNArena database, maintains a Buy recommendation with a $4.00 target.
The underground mining contractor has improved its performance, taking on crew, after falling behind in late 2016. Development rates have increased by 43% as a number of improvements have been implemented.
Macquarie takes a cautious approach to forecasts but believes the main catalyst is the ramp-up at Nova, which is expected to generate $150m per annum in cash flow at spot prices and $230m per annum on Macquarie's forecasts once in full production.
The broker expects net debt to peak at $170m in the June quarter ahead of the ramp-up. Deutsche Bank notes plant commissioning is progressing and mining rates have increased but lost development is affecting the mine plan and expects the company will downgrade FY18 guidance with the June report. Commercial production is now expected to be declared at the end of FY17.
There are five Buy recommendations on the database and one Hold (UBS). The consensus target is $4.06, suggesting 28.9% upside to the last share price.
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