Perseus Pleases The Market By Under-Promising And Over-Delivering
By Our Man in Oz
If there were any doubts left about the potential for Perseus Mining to become one of the world’s leading gold producers they were washed away when the company smashed its gold-cost guidance figure for the March quarter by a surprise US$227 an ounce.
For investors hardened by mining companies making excuses about why cost forecasts have been exceeded, the Perseus result was a breath of fresh air. Instead of producing gold at a projected US$950 an ounce in the first three months of year from the company’s flagship Edikan mine in Ghana, the cash cost came in at US$723 per ounce. And that was just the second quarter of full production from the project. Even better results are expected in future quarters, as Edikan settles down to a long-run cash cost of around US$535 per ounce which, even after the latest gold price correction, leaves Perseus with a gross margin at above the magic US$1,000 per ounce mark.
The company’s management, naturally, is pleased with the March quarter result, especially as it implies that the bugs are being rapidly shaken out of a mine and processing plant which produced its first gold as recently as August 21st. Just eight months after the big day, Perseus chief executive Mark Calderwood was able to tell analysts at his post-report briefing that the mine and plant were settling down well, and that the first year production ramp up target of 227,000 ounces is in sight. Thereafter the plan is to boost production to 290,000 ounces a year.
Mark attributed the better-than-expected result in the first three months of 2012 to a strong performance by the company’s processing mill. The mill produced 38,796 ounces of gold during the period, with almost half of that coming in the month of March alone, when 19,026 ounces was produced. The March monthly output figure, which was at a cost of US$576 ounce, is a factor in the guidance Perseus has subsequently given. In the June quarter, the company says, output is likely to rise to between 50,000 and 55,000 ounces, at a cost of US$690 per ounce. Not that anyone should be surprised if those numbers are surpassed, given some of the comments made by Mark when asked about the grades in the Edikan mine.
He was asked if he was concerned about a small decline in gold grades in the pit for the June quarter. “If you look at the March numbers we averaged [a head grade] of 1.4 grams a tonne, and I’m not sure we can keep it below 1.4 gram per tonne”, he said. “We were targeting 1.4 grams per tonne, but I was in the pit two days ago and I’d say the grade is not changing dramatically. So, the 1.27 gram per tonne original guidance for the half year is probably too low. Therefore, I see the current guidance as quite comfortable, both in terms of ounces and cost per ounce.” In other words, Perseus is enjoying a grade bonus just when it needs it, in the early months of mining. It’s also accelerating the rate of mining, putting more tonnes through its mill.
On the market, Perseus has survived relatively unscathed in amongst the wider gold price-related correction. While most of its competitors are down by around 10 per cent on their prices of a month ago, Perseus is actually up. Sure, it’s been a bumpy ride – in the early weeks of May the shares peaked at A$2.68, then plunged to A$2.19 as the latest doubts about the solvency of Greece rattled markets, and then rebounded to around A$2.36, an eye-catching A12 cents a share ahead of where the price was a month earlier.
What the market likes is the way in which Perseus is under-promising and over-delivering, something taught to all novice managers, and then all-too-often forgotten. Edikan is now embarking on a series of rolling expansions as more equipment is brought to bear in the pits and the processing plant is cranked up to full production. And the performance of Edikan is also being seen as a guide to what the company is capable of doing at its next project, Tengrela in neighbouring Ivory Coast, which includes the Sissingue mine.
Mark gave little away about the start date for the second mine, though he remains confident that by the final quarter of next year commissioning of the mine and plant will be underway at Sissingue. Permitting and other government approvals are advanced, he said. The major item of equipment, a semi-autogenous (SAG) mill has been ordered, and the engineering design set for a 14-month building programme. “Obviously, we can’t control the government [for approvals], but in the meantime we are using any spare time to make sure the design is finished and tendering has started”, he said.
The Sissingue mine, with a capital development cost estimate of US$115 million, has a production target of 340,000 ounces of gold in its first two years of operation at an estimated cost of US$421 per ounce. “In this quarter we should be in a position to start sending out tenders for fabrication and construction”, said Mark. “We’re happily working away, using free time, there’s a bit of fat built into the dates. Having ordered the SAG mill, that’s a particularly long lead-time item, we’ll start looking at other long-lead items if the time lines come up before government permitting.”
In the year ahead the major catalysts for Perseus should be news flow from the production ramp-up at Edikan, government clearance to proceed with Sissingue, and exploration results. The first of those, production at Edikan, appears to be well under control, with Mark undoubtedly keen to win more praise from the investment community for his ability to over-deliver. Sissingue will be a work in progress until the government sign-off is obtained. Exploration news could be the wild card as work around Edikan steps up a gear, and given that six rigs are currently active at Sissingue aiming to add years to what currently looks like being a relatively short-life mine.
Goldman Sachs, which has a 12-month price target on the shares of A$2.80, has told clients that Perseus is set to post pre-tax and depreciation earnings of A$197 million in the next financial year, the first full year of Edikan production, and that that should rise to A$274 million in 2014. The March quarter production result, said Goldman, “was better than our forecasts, which leads to earnings upgrades through the forecast period. We have subsequently lifted our discount cash flow (DCF) and price-earnings (PE) based 12-month price taget to A$2.80, from A$2.70”.
Source >> www.minesite.com