Brokers Confident In Perseus Mining

This story features PERSEUS MINING LIMITED. For more info SHARE ANALYSIS: PRU

Softer-than-expected June quarter gold production at Perseus Mining's Edikan put a damper on the stock but brokers remain confident in the outlook.

-Sissingue recoveries from oxide feed higher than expected
-Guidance implies a softer outlook for Edikan
-Main issue for Perseus is not production but perceptions of reliability
 

By Eva Brocklehurst

Production at Perseus Mining's ((PRU)) main mine, Edikan, did not meet guidance in the June quarter, although a material improvement on the prior quarter was evident.

The company's first half guidance for FY19 of 130-150,000 ozs at costs of US$950-1150/oz is below expectations, and brokers were disappointed this was not split by operations, as it makes assessing the outlook difficult.

Meanwhile, Sissingue's maiden commercial quarter was very strong and well above the annualised sustainable production rate. This reflected both elevated grade and throughput while mining softer, near-surface oxide ore. Canaccord Genuity notes optimising ore feed is proving somewhat challenging at Edikan and recoveries were well down on previous quarters. In contrast, Sissingue beat expectations and recoveries from the oxide feed were significantly higher than modelled.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, revises production estimates down for FY19 and FY20 by -7 and -4%, respectively, and maintains a Buy rating and $0.75 target.

Sissingue

The company may be playing it safe, having not yet assessed the impact of fresh ore at Sissingue and the possible impact of the wet season. Still, Canaccord Genuity suggests the lack of confidence in providing full year guidance, or at least an asset-by-asset split, has unnerved investors, as signalled by the slump in the share price.

Credit Suisse also commented on the lack of visibility over the transition to harder ore at Sissingue, noting oxide ore is rarely without challenges, particularly during wet weather. As the oxide zone is depleted, and mining progresses to harder ore, costs should rise. This transition is likely from around July.

The plan is to recast the life of mine at Edikan to maximise remaining cash generation now that Sissingue is secured as a second generator of funds.

Guidance implies a softer outlook for Edikan but whether this is more conservative projections based on disappointing recoveries with the high-grade all or indicative of a change in strategy is yet to be revealed. Credit Suisse does acknowledge, however, that a review of Edikan is progressing.

The exploitation permit for Yaoure is now expected in the September quarter, while resource definition drilling continues to define life extension beyond the initially-indicated five years. Credit Suisse expects development is likely to be deferred until it is fundable from cash as a preference to issuing new equity.

Macquarie also notes, as Edikan has consolidated recent improvements in cash generation, this is a positive sign which improves the prospect of securing the debt funding for Yaoure.

Growth Plans

Credit Suisse suggests, based on the current mine plans for Edikan and Sissingue, the production profile needs a new operation to be contributing in around five years. With the lead time to production of 4-5 years for a new project the company needs to accelerate its developments, potentially through corporate activity.

The broker accepts financial resources likely put a limit on the area of operating expertise, i.e. Africa. However, as Africa is marked as a no-go region for many of the company's domestic peers, competition for, and pricing of, such assets makes them materially more attractive and affordable if the right one can be identified.

Citi suggests the main issue for the company is not production but perceptions of reliability. Steady, profitable operations at Edikan, even if production is reduced, should help close the valuation gap.

The broker suggests Edikan is an exercise in trading off the throughput of hard high-grade ore against gold recoveries. Even though recoveries of 78.5% and mill grades of 1.2g/t were below estimates, the company has developed a good understanding of Edikan and Citi is confident the mine can meet guidance.

CLSA, also not one of the eight, has a Buy rating and $0.60 target and also found the weak forecasts for FY19 overshadowed the strength in the June quarter. The broker notes, when including a large gold position held at the end of the year and the US$63m in debt the business appears to be net cash at around US$3.5m.

The database shows four Buy ratings. The consensus target is 60.3c, signalling 33.9% upside to the last share price.

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