Cost Concerns Dull Regis Resources

This story features REGIS RESOURCES LIMITED. For more info SHARE ANALYSIS: RRL

The potential for costs to creep back into production from sourcing satellite ore was a feature of Regis Resources' June quarter report, instigating a sell off in the shares.

-Higher strip ratios, diesel costs underscore increase in AISC in FY19
-Multiple gold sources now providing greater certainty of supply
-Main risk is timing at McPhillamys and mining parameters at Rosemont
 

By Eva Brocklehurst

The market responded negatively to the June quarter result from Regis Resources ((RRL)) despite record gold production, which came in at the high end of guidance.

Ord Minnett believes the sell-off could be partly stock specific and partly a broader sector sell-off, as momentum stocks miss consensus expectations. New information included All-In Sustaining Costs (AISC), FY19 guidance and an update on McPhillamys, all which arguably missed expectations.

The sound result was overshadowed by the outlook, Deutsche Bank asserts, as management has highlighted accessing satellite pits is leading to higher costs and the scale of cost increases goes beyond expectations.

FY19 guidance is for 340-370,000 ounces and AISC of $985-1055/oz, which is up 13% on FY18 at the mid point. Higher strip ratios and diesel costs, the latter is 15% of operating expenditure, underscore the increase.

One reason for Citi's Sell rating has been the potential for Duketon operating expenditure to increase as the operation matures and more ore is sourced from satellite deposits. Yet Macquarie expects a rapid reversion to the norm in subsequent years.

Supply Assured

Credit Suisse believes the company's willingness to forecast, and achieve on, a tight range indicates a level of confidence in the now-robust reserves, as well as the reliability of the three plants and mining capacity. Multiple ore sources are now available and this provides greater certainty of supply. The majority of the expenditure budget is earmarked for the development of Duketon's satellite operations.

Ord Minnett is content with the top end of guidance. Of more concern is a lack of progress at McPhillamys and Rosemount underground, two projects that need to be valued in order to obtain anywhere near the share price. The broker does not include the Rosemont underground until results from the mining study are known.

Macquarie upgrades to Outperform from Neutral, envisaging long-term earnings growth beyond FY19. While FY18 could be considered a high point for earnings the broker believes this is unlikely to be the case.

Expansion Options

There is a strong exploration pipeline and further organic growth prospects at Duketon and McPhillamys which could add material production from FY21. An underground development at Rosemont and potentially Garden Well could also provide extensions to mine life.

The broker expects McPhillamys will experience upside from the feasibility study via additions of higher grade ore from Discovery Ridge. Regis Resources has completed 65km of drilling over the June quarter, including the Rosemont underground and at Discovery Ridge.

A maiden underground resource is expected at Garden Well in FY19. Exploration is set to continue to deliver extensions and compelling results across the Duketon belt, Credit Suisse suggests, providing additional feed for the low-cost milling infrastructure. The opportunity for underground mining a Garden Well is also emerging rapidly.

Ord Minnett concurs that Regis Resources is in a strong position and can comfortably fund its growth options. The main risk is timing, and the broker is concerned that first gold from McPhillamys in FY20 may be optimistic. Rosemont drilling is proving up the high-grade tenor of the deposit but understanding mining parameters and grade dilution will be important for putting a value on underground options.

Citi suggests the plan to mine underground at Rosemont and Garden Well is gaining momentum. While operating expenditure is uncertain pre-production expenditure is likely to be modest.

The risk is whether the $250m of pre-feasibility capex planned for McPhillamys will creep higher. Nevertheless, the broker considers the company is a highly-committed brownfields driller and positive news flow should ensue from new targets over the next year.

FNArena's database shows one Buy (Macquarie), one Hold (Credit Suisse) and four Sell ratings. The consensus target is $4.28, suggesting -6.5% downside to the last share price. The dividend yield on FY18 and FY19 forecasts is 4.5% and 4.1% respectively.

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