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Saracen Primed For Expansion

Australia | Jul 23 2019

Brokers are modelling an expanded production outlook for Saracen Mineral but concede the stock is already trading ahead of valuations.

-Production aspirations of 400,000 ounces of gold per annum expected to be met
-Positive developments expected in the upcoming update
-Costs continue to trend lower


By Eva Brocklehurst

Saracen Mineral Holdings ((SAR)) finished FY19 production with a flourish, maintaining its aspiration of 400,000 ounces of gold per annum. Brokers are now modelling an expanded production outlook.

Cash/gold plus investments moved sideways over the June quarter, because of a heavy capital investment phase. Having spent $34m on exploration in the June half, the company has indicated it will provide an updated outlook in the next few weeks.

Canaccord Genuity expects increased reserves, particularly at Carosue Dam/Dervish will underpin a commitment to expanding the mill capacity to 3.2mtpa from 2.4mtpa. Expansion costs of $25m are assumed, implemented over a 12-month month period. Additional ore is likely to be sourced from open pits that have already defined modest reserves, with grades that range between 1.2-2g/t.

Production is forecast to increase in FY20 to 350-370,000 ounces at an all-in sustainable cost (AISC) of $1025-1075/oz. While the FY20 guidance is less aggressive than previously expected Macquarie anticipates the upcoming update on the long-term outlook will contain a number of positive developments.

The broker's call for a production rate of over 400,000 ounces per annum from FY21 is considered a constructive view of what the assets can deliver over that time frame. While incorporating both a premium to net asset value and a 10-new cash flow multiple, Macquarie's target still fall short of the current share price and, as a result, the rating is downgraded to Underperform.

Factoring in the lower-than-expected FY20 guidance reduces the broker's estimates for earnings per share by -14%. A reduced production outlook, versus prior forecasts, for FY21-23 results in an -8% cut to the target, to $3.50.

June quarter production was 88,100 ounces comprising of Thunderbox production at 42,300 ounces and Carosue Dam at 45,800 ounces. The latter was below Macquarie's expectations with mined grade of 2.8g/t the main variant.

However, with the Dervish underground still ramping up and commercial production imminent Canaccord Genuity believes it is hard to be overly critical of the lower output. At this point, the broker does not change assumptions for the Thunderbox, although highlights the potential for an alternative bulk/mining method to improve underground head grades.

Costs continue to trend down in line with the broker's expectations, underpinned by the lower strip ratio and higher grades, which also meant stockpiles doubled to around 68,000 ounces. The Bligh Resources acquisition is also expected to bolster the medium-term production outlook.

Canaccord Genuity envisages the company can sustain a 400,000 ounces per annum production profile from FY22 with a 9-year mine life of which at least seven should be supported by reserves. The broker has a Sell rating and $3.45 target, noting the stock is trading at a healthy premium to valuation.

Citi also has a Sell rating, with a target of $3.30. The broker finds the organic growth story attractive but agrees it does not support the current share price. The company is noted to be forecasting lower costs in FY20 and, Citi assumes, in FY21. The broker also flags the fact that hedging for just under half of the company's estimated production allows leverage to the gold price while locking in a solid margin.

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