Simberi is turning out to be a larger and better gold mine for St Barbara ((SBM)) but this is highly dependent on proposed changes to the PNG mining act being watered down.
The company has updated the pre-feasibility study which reveals an 80% increase to life-of-mine production over a longer 13-year life. All-in sustainable cost (AISC) estimates of US$920/oz are also better than the prior estimate.
This is a more attractive set of numbers compared with the 2016 study, Citi acknowledges, although finds it hard to assess where the cost reductions will come from. The broker suspects St Barbara will need to re-finance and draw down another $100m to fund the project.
St Barbara has chosen to use existing infrastructure, producing a concentrate in order to avoid the higher expenditure and operating risk of downstream refining. The concentrate is low in arsenic, which may make it attractive to smelters in order to improve gold payability in copper concentrates, in Citi’s view.
Simberi sulphide will progress to a feasibility study which will include further refinements to capital expenditure and operating estimates, expected to be completed by the end of 2020. Environmental and social impact permits remain necessary before the company can progress, expected also by December.
Credit Suisse’s calculations generate a value for Simberi of $455m or $0.65 per share on a 100% basis and $341m or $0.49 a share on a risk-adjusted basis. Failure to secure acceptable mining terms would reduce the value by two thirds.
Citi asserts the chances of the timelines slipping and risks to delivery are likely to weigh on sentiment and valuation, noting the final investment decision is not expected until the March quarter 2021.
Construction will take two years, which means St Barbara should be able to maintain its current production at around 400,000 ounces per annum in the medium term, even if Cochrane Hill at Moose River is delayed.
For the first time, Citi incorporates the Simberi sulphide into its valuation, with a 50% risk weighting, for a value of $0.41 per share. Morgan Stanley anticipates the eventual construction will diversify the company’s gold production to three low-cost, long-life sites. No value is included for the Simberi sulphide so there is upside to that broker’s numbers.
PNG Mining Act
Clarity is still required on whether the special mining lease terms will enable grandfathering to 2028 and also whether proposed changes, which Credit Suisse describes as “punitive”, to the mining act are forthcoming.
St Barbara is unequivocal about the proposed changes in the draft rendering Simberi sulphide uneconomic. The proposals include a new levy on the disposal of tailing & waste and a fourfold increase to royalties.
Timing on these issues rests with the PNG government which indicates the timetable for the project could be at risk as well as the economic viability. The pre-feasibility estimates assume fiscal terms remain as per the current special mining lease.
Citi anticipates the project will be grandfathered but notes the company still needs a timely decision from the PNG government on any changes before making its final investment decision.
There is a risk that St Barbara ends up with an “ore gap” as the oxide production finishes ahead of the sulphides commencing. While there are additional oxides available from sulphide reserves, Citi points out these do not make sense on a stand-alone basis. The current mine plan for oxides extends to FY22.
FNArena’s database has three Buy ratings and two Hold for St Barbara. The consensus target is $3.27, suggesting 30.3% upside to the last share price.
