St Barbara Emerges As A Key Gold Pick
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Gold miner St Barbara ((SBM)) has come a long way over the past few years, such that broker interest has been reinvigorated. Citi reinstates coverage with a Buy rating.
The company was in a parlous situation after the debt-funded acquisition of Allied Gold in 2012 and, Citi observes, it was a mix of good management and good fortune that rescued St Barbara from near bankruptcy. Dial forward to 2017 and the company is now net-cash and looking to fund further growth. This also raises the potential for future dividends and acquisitions.
Macquarie notes the company retired the last of its debt during the March quarter, as strong operating cash flows allowed both repayments and an increase in cash at the bank. On the broker's gold forecasts, and at the current spot price for gold of US$1,255/oz, Macquarie expects the company to generate cash flow yields of 21% and 23% over FY17 and FY18 respectively.
Gold production is now heading for a beat on FY17 guidance of 350-370,000 ounces. St Barbara has one of the gold industry's lowest costs, Citi notes, at an all-in sustainable cost (AISC) of around $896/oz, which leads to strong cash flow. The broker estimates the free cash flow yield should be 17% and 14% in FY17 and FY18 respectively.
Canaccord Genuity suspects a guidance upgrade could be on the cards after the strong March quarter production numbers. Group production was 95,300 ounces, with record output at Simberi.
Citi expects a maiden dividend in FY18 at 20% of net profit. Even after dividends, the broker forecasts FY18 and FY19 cash balances of $300m and $522m respectively. If the estimated timing of the dividend is premature, Citi does not expect the board to wait too much longer before returning surplus cash.
Gwalia, Western Australia
Gwalia is entering a period of higher grades and, potentially, higher production. Grades currently being achieved at Gwalia are estimated to be above the reserve grade of 8.3g/t. Citi expects a steady fall in Gwalia gold grades to below current reserve grades by FY21, trending towards 6.3g/t.
Gwalia produced 64,916 ounces in the March quarter at a much higher grade of 11.2g/t than the 9.1g/t that Macquarie was expecting. The company has recently announced approval of the Gwalia Deeps extension project which will take 2-3 years to complete at an estimated cost of $100m.
This extension will allow mining to 2,000m in depth and extend the life to at least 2024. Macquarie notes the Gwalia extension is well understood but believes any extensions beyond the immediate plan are long dated.
Simberi should remain tax-exempt for its current life of mine, Citi notes, which is expected to be 2-3 years. Grades at 1.2g/t continue to improve.
Macquarie believes the key to the mine's performance has been increased material movements, up 25% over the last 12 months. The broker increases mining and milling assumptions for Simberi, resulting in 13% and 9% uplift to earnings in FY17 and FY18 in respectively.
However, higher throughput will result in a shorter assumed mine life and this has a negative impact on FY19 estimates, the broker cautions.
Simberi is nearing the end of its oxide life and there are questions over the viability of processing the sulphide portion of the deposit. A recent review found that the $135m sulphide processing expansion was not currently viable.
The company conducted a sale process late last year without any success. Citi believes a second sale process is unlikely, which means the base case is for depletion of the oxide reserves and closure of the mine.
Management has signalled it will look at acquisitions and, given declining production and excess cash, the broker considers this prospect very likely. Moreover, with the company probably down to a single mine – Gwalia – in three years, it could be a potential corporate target.
The company's exploration projects are not expected to yield a mine in this time frame. Also, while the company has the capacity for an acquisition, with multiple cashed-up competing gold miners a value-accretive target may prove elusive and Citi suggests shareholders may prefer the safer option of a sale of the company with a takeover premium.
Outside of the improving operations and the expected build up in cash, Macquarie finds it hard to envisage any growth catalysts. The main challenge for management, the broker suggests, is managing growth expectations.
Canaccord Genuity also continues to envisage little valuation upside at current levels. The broker, not one of the eight monitored daily on the FNArena database, has a Hold rating and $2.55 target.
There are four Buy ratings on the database. The consensus target is $2.91, suggesting 11.0% upside to the last share price. Targets range from $2.60 (Credit Suisse) to $3.10 (Deutsche Bank).
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