Is Perseus Heading For Re-Rating?
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Perseus Mining ((PRU)) generally impressed brokers with its handling of gold production in the September quarter, despite weaker-than-expected volumes. A trend of improving grade and higher mill utilisation suggests guidance should be achievable.
Edikan (Ghana) is now reliably producing and Sissingue (Côte d'Ivoire) is on schedule and on budget. UBS suggests Edikan has turned the corner and a re-rating may have already begun. A further re-rating of the stock would require delivery on guidance and maintaining lower costs. If this is forthcoming, the broker would be motivated to reconsider the valuation discount.
There were lingering throughput issues with the Edikan plant, but the company is confident in meeting first half guidance of 110-125,000 ounces at an all-in sustainable cost (AISC) of US$950-1150/oz. September quarter results were weaker than brokers anticipated, driven by lower-than-expected milling rate of 6.3mtpa versus the expected 7.3mtpa.
A definitive feasibility study for Yaoure (Côte d'Ivoire) is on track for release in the December quarter. Credit Suisse asserts Yaoure development, while long dated, may be deferred until fundable from cash and debt, as the company is loath to issue new equity. Moreover, the performance of both Edikan and Sissingue will affect Yaoure's funding capacity and the timing of development.
The broker suggests management has learned from bad experiences at Edikan that compensation costs can rise over the life of the mine if not fully defined and agreed up front. Despite applying discounts – 15% to Edikan, 30% to Sissingue and 50% to Yaoure – Credit Suisse still generates a compelling valuation.
Edikan produced 51,300 ounces at AISC of US$1116/oz over the September quarter, consistent with the prior quarter's performance. This was -14% below what Citi expected and -17% below Macquarie's forecasts, negatively affected by the reconciliation mill trial that reduced grade and throughput over 12 days.
Milling was adversely affected by a period of harder ore that led to unplanned maintenance, as liners and pumps wore out sooner than expected. The company appears to have been successful in managing the harder ore, with resource grade reconciliation now running at 100%.
Credit Suisse found the increased processing costs that featured at Edikan, driven by reduced tonnage for processing and increased maintenance costs, disappointing. Edikan has always been a challenging operation but the broker is assured the problems are under control, noting grade reconciliation is strong and the plant is performing well.
Good progress is being made at Sissingue, the company's second mine to come into production. Sissingue's development is 77% complete and commissioning is set to begin in November with crushing later in the month. First production is scheduled for the March quarter. Exploration upside is expected to extend the five-year life and improve already robust returns.
Citi notes the company needs US$32m to complete Sissingue and expects to draw down another US$30m of debt. Management is adamant that no capital raising will be required and expects to repay the debt by the end of 2020.
FNArena's database shows three Buy ratings and two Hold. The consensus target is $0.50, suggesting 51.6% upside to the last share price. Targets range from 40c (Macquarie, UBS) to 78c (Credit Suisse).
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