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Saracen Flags Strong Gold Output Ahead

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Saracen Mineral Holdings ((SAR)) delivered on expectations in the September quarter with record gold production, lower costs and a confirmation of FY18 guidance.

The company has reinforced expectations, noting group reserves increased 40% in the quarter even after depletion to a record 2.1m ozs. Recent drilling points to further increases and extensions to mine life at Carosue Dam. Guidance for FY18 is for 300,000 ounces at an all-in sustainable cost (AISC) of $1150/oz. Citi considers the company well-placed to beat this estimate, annualising the current performance at 320,000 ozs.

September quarter gold production was 80,300 ozs at an AISC of $1008/oz. Both Carosue Dam and Thunderbox performed strongly and beat expectations. Carosue Dam produced 43,100 ozs at an AISC of $1082/oz and Thunderbox 37,200 ozs at $923/oz.

Citi has a positive view on the stock and expects growth in earnings and gold through FY18-20. The main area of concern is the actual share price, as a broker considers the stock fairly valued for a mid-sized ASX producer. Hence, a Neutral rating is retained with a $1.35 target. Macquarie sticks with its Outperform rating and $1.60 target, believing the company is well-placed to achieve targets.

Canaccord Genuity asserts the company has gone from strength to strength, noting record production and a consistent build up of cash. The broker also welcomes the divesting of King of the Hills and Red October to focus on the core assets. Cash will be supplemented over the current quarter by proceeds from these sales of around $6m.

A sharper focus on assets that are at the heart of the business should mean the company cements its position as a contender in the 300,000-plus oz per annum producer segment. The broker, not one of the eight monitored daily on the FNArena database, upgrades the stock to a Buy rating from Hold and raises its target to $1.50.

Carosue Dam &Thunderbox

The transition to a single underground miner at Carosue Dam (Byrnecut) is also a highlight, in the broker's opinion, as it enhances the economies of scale going forward. Macquarie also notes Byrnecut is committed to state-of-the-art equipment and technology and this represents an opportunity for efficiency gains. Mill throughput was 7% higher than the broker anticipated as an annualised run rate of nearly 2.6mtpa.

Mined grade at Carosue Dam was 6% higher than Macquarie expected at 3.2g/t while milled grade was -10% below expectations, at 2.2g/t, as the company chose to stockpile higher grade material as a buffer against any unforeseen slowing of production relating to changes in the underground mining contractor.

Drilling has begun at Whirling Dervish (Thunderbox) and, once completed, the three rigs will return to Karari (Carosue Dam) where gold mineralisation is being extended beyond the current reserve. A closing stockpile of 138,000t at 2.1g/t is expected to supplement ore feed before the Whirling Dervish underground mine comes online.

Given the improved outlook at Karari the company is completing a study on modifying the mining method to include backfilling, which would further extend mine life. Canaccord Genuity notes that, given similar geology to Karari, the upcoming results at Whirling Dervish could also signal upside.

Canaccord Genuity notes first ore was mined at Kailis (Thunderbox) in the quarter and the softer-than-expected ore should result in throughput increasing at the plant in subsequent quarters.

Costs at Thunderbox impressed Macquarie, which included pre-stripping costs for the C Zone pit. Ore mined was 36% above the broker's modelling and total movements were also 42% higher. Material movements increased 15% quarter on quarter, inclusive of the development at Kailis.

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