Saracen Mineral ((SAR)) continues to improve its gold recovery, with record throughput in the September quarter, and the strong performance was spread across its operations.
Gold production was 88,940 ounces in the September quarter with sales of 86,623 ounces. Production benefited from the slightly higher grades and improved processing rates at Thunderbox as well as higher grades at Karari. FY19 production guidance is for 325-345,000 ounces at an all-in sustainable cost of $1050-1100/oz.
Planned exploration expenditure for FY19 is $60m, which Citi observes is critical because the company needs additional reserves to reach its production target without shortening overall mine life, which stands at seven years.
The company’s goal is 400,000 ounces per annum, driven by the planned expenditure on exploration in FY19 and an ongoing commitment to optimising its projects.
Carosue Dam
At Carosue Dam the operation benefited from higher grades at Karari and Deeper South. Saracen will conduct a mill expansion study, with a result expected at the end of FY19.
Macquarie now factors in an expansion of the mill to 3mtpa over FY20, lifting production to a peak of 435,000 ounces in FY21. As a result earnings estimates are lifted 9% and 22% respectively.
Bailieu Holst increases earnings forecasts to $105.2m for FY19 and increases its valuation, after adjusting for the cash and bullion balances. This puts the target at $1.95. Currently, the broker considers the stock fairly valued and retains a Hold rating.
Cash at the end of the quarter was $111.2m, up 11%, after $39m in exploration expenditure. Growth expenditure of $80m over FY19 includes a paste plant at Karari, stage 2 of the Kailis open pit and underground development at Whirling Dervish and Thunderbox.
Ongoing exploration success at Karari and Whirling Dervish already underpins Macquarie’s forecasts. Exploration results have highlighted the Whirling Dervish deposit which, in the broker’s view, is becoming increasingly similar to Karari at depth. Amid an improved outlook, Macquarie lifts its target to $2.50 from $2.10 and maintains an Outperform rating.
Citi takes a different tack, as the share price has advanced with the recovery in the US dollar gold price. Hence, a Sell rating is retained based on valuation with a target of $1.95.
The broker acknowledges Saracen will beat FY19 guidance if the performance sustained over the September quarter continues, although the retention of guidance suggests December-June will experience lower production and higher costs.
The company has published an updated reserve and resource statement, which indicates a 20% lift in reserves to 2.5m ounces, despite 348,000 ounces of depletion. Saracen has indicated it is researching offshore opportunities although retains a focus on Australia. Citi would be surprised if the company ventured far from Western Australia at this point in time.
