Regis Resources Expands Gold Ambitions

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

Brokers are increasingly confident in Regis Resources as it expands its gold resource base, amid firm cash generation and dividends.

-Now seeking higher grade depth extensions at Duketon
-Comfortably funded for growth ambitions
-Discovery Ridge could enhance the economics for McPhillamys
 

By Eva Brocklehurst

The September quarter report from Regis Resources ((RRL)) emphasised a multiplicity of sources of ore and greater certainty of supply. The company's Duketon processing plants are functioning reliably and management is confident about adding to robust reserves.

Regis Resources produced 90,900 ounces of gold in the quarter and costs were lower than many brokers expected, largely because of lower waste movement and stockpiling ore at Tooheys Well.

However, costs are going up, related to higher diesel prices and a higher strip ratio in order to access Tooheys Well and other satellite deposits. Meanwhile, lodgement of the definitive feasibility study and environmental impact statement for McPhillamys has slipped into the March quarter.

Ord Minnett finds the company at an interesting juncture, as the focus moves to satellite mining areas, underground mining at Rosemont and construction of a new project, McPhillamys, in NSW.

The value in the stock appears to be moving towards growth projects and this provides more risk, the broker suggests. Still, cash generation and a strong dividend pay-out remain in place. Ord Minnett believes the stock is fairly valued and maintains a Hold rating.

Credit Suisse upgrades to Outperform from Neutral, given improved valuation. The broker agrees the company is now embarking on a transition and the offer for Capricorn Metals, now withdrawn, also signals Regis Resources is looking beyond McPhillamys.The offer for Capricorn Metals centred on the attractive Karlawinda gold project in the Pilbara.

The broker suggests the company has shown discipline in withdrawing when it was apparent the controlling shareholder would not accept the offer. The modest scale of this potential acquisition and the mineralisation style, which played to the company's expertise, indicate that the board, and new managing director, are being consistent with previous strategies.

Duketon Satellites

The key operations at Duketon are ramping up exploration drilling, now seeking higher-grade depth extensions and moving to future underground ore sources to supplement base load feed.

The Rosemont underground is the first to be approved and likely to be followed by Garden Well and Moolart Well. Morgan Stanley remains cautious, nevertheless, as the intercepts at Rosemont are short and inconsistent, albeit grades are good. The broker believes there is high potential for small increases in the underground resource but larger scale is yet to be demonstrated.

Canaccord Genuity expects FY19 to be a strong year for free cash flow while the company is comfortably funded for its growth ambitions and there is high potential for extending the mine life. The broker, not one of the eight monitored daily on the FNArena database, upgrades to Buy from Hold with a target of $4.70.

Citi upgrades to Neutral from Sell because the stock has pulled back in recent months and the Australian dollar has fallen, which has lifted implied FY19 earnings, envisaging downside risks from the delays at McPhillamys but upside from growth of the Duketon underground projects.

The broker points out Rosemont mineralisation is open below 150m and Regis Resources clearly expects to grow its inventory both there and at Garden Well once production has started. In the broker's calculations, the boost to valuation will be around $0.07 per share, with another $0.03 per share for each additional year of life.

McPhillamys

Management expects the environmental impact statement and definitive feasibility study at McPhillamys will be completed by the end of 2018, indicating construction is possible in the second half of 2019 with potential commissioning a year later. Credit Suisse points out permits for New South Wales are materially more complex than the company has experienced in Western Australia with its Duketon operations.

Drilling has progressed, with the higher grade Discovery Ridge satellite deposit likely to improve returns. Citi pushes back first production to 2021 from 2020 but agrees the initial reserve and resource for Discovery Ridge, expected in the March quarter, could enhance the economics. Macquarie suspects the delays to permits will be used to bring the higher-grade Discovery Ridge material forward in the mine plan.

FNArena's database shows two Buy ratings, five Hold and one Sell (Morgan Stanley). The consensus target is $4.18, suggesting -2.2% downside to the last share price. This compares with $4.06 ahead of the report.

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