Ready to flex its muscles; Initiating coverage with Outperform
Royal Bank of Canada - Sydney Branch
April 11, 2016
Saracen Mineral Holdings
Ready to flex its muscles; Initiating coverage with
Cameron Klutke (AVP)
+61 3 8688 6551
[email protected]
Outperform
ASX: SAR; AUD 1.05
Price Target AUD 1.30 Scenario Analysis*
Connor O'Brien (Associate)
+61 3 8688 6519
[email protected]
Outperform
Our view: We expect SAR to double production while maintaining strong operating margins, providing investors an inexpensive but compelling investment opportunity. Looking forward, exploration is likely to yield additional resources and reserves as currently open-at-depth
Downside
Scenario
0.75
29%
*Implied Total Returns
Key Statistics
Current
Price
1.05
Price
Target
1.30
24%
Upside
Scenario
1.60
52%
mineralisation is tested. Valuation support, growth, potential upside, and a good management track record make SAR our preferred gold exposure domestically.
Key points:
Shares O/S (MM): 792.8
Dividend: 0.00
NAVPS: 1.03
ROE: 17.1%
Debt to Cap: 0%
RBC Estimates
Market Cap (MM): 832
Yield: 0.0%
P/NAVPS: 1.02x
Enterprise Val. (MM): 796
Production to double; growth funded through cash flow
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SAR currently operates Carosue Dam and has recently commissioned the Thunderbox project-its second production centre.
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We estimate the addition of Thunderbox will see production approximately double to c.300koz Au pa by FY17E while maintaining the company's current margins (>A$500/oz Au).
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We believe this step-up in production has potential to introduce SAR to a new group of investors, requiring multiple production sources and
>100koz Au pa output, which could by extension help broaden the company's primarily domestic register (>50%).
Low-hanging fruit (ore body extensions) to provide catalysts through 2016
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Current operations have shown evidence that high grades continue at depth beneath existing workings (with some indicating above-average grades), across the portfolio. This 'low-hanging fruit' should provide the underlying upside in the near term, as drilling is likely to add ounces to not only the resource but also the mine plan. As underground operations remain relatively shallow, the potential for value creation at depth remains real and significant.
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Much the same as we have observed from NST and OGC, focused spending on exploration through FY16E and FY17E should provide tangible near-term milestones as drill results are evaluated and incorporated into the mine plan.
Balance sheet strength to provide further opportunities
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The company has no debt and that, coupled with our forecast cash flow, should provide greater opportunities for continued growth, through M&A and/or ongoing exploration.
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Under our base case gold price and production forecasts, we believe SAR could accumulate an additional A$162m in cash by the conclusion of FY17E.
Valuation and price target
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Our 12-month price target of A$1.30/share is derived from a blend of cash flow (7x) and NAV (1.1x), recognising a slight premium against peers to reflect the exceptional growth and exploration upside within the company (sector average 7x and 1.0x respectively). We forecast SAR's FY17E P/CF of 3.7x, providing value against our global average of 5.5x (FY17E).
FY Jun 2015A 2016E 2017E 2018E EPS, Adj Diluted 0.01 0.06 0.18 0.21
P/AEPS NM 17.5x 5.8x 5.0x
CFPS, Adj Diluted 0.08 0.16 0.28 0.29
P/ACFPS 13.1x 6.6x 3.8x 3.6x
DPS 0.00 0.00 0.00 0.07
Div Yield 0.0% 0.0% 0.0% 6.7%
Production 167.5 179.6 285.6 314.8
All values in AUD unless otherwise noted.
Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see page 32.
Target/Upside/Downside Scenarios
Exhibit 1: Saracen Mineral Holdings Ltd
|
UPSIDE
TARGET
|
1.60
1.30
1.05
0.75
|
|
CURRENT
DOWNSIDE
|
|
|
|
|
|
|
|
|
|
|
|
D
|
J F M
|
20
A M J
|
14
J A S O N D
|
2015
J F M A M J J A S
|
O N D
|
2016
J F M
|
A
|
Apr 2017
|
121 Weeks 16DEC13 - 08APR16
Investment summary
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The main drivers, we believe, that will be underpinning the company's share price are 1) strong growth, with the implementation of Thunderbox taking group production to
1.30
0.80
0.50
0.40
0.30
0.20
c.300koz Au pa from FY17, 2) significant exploration upside at all current operations providing increased confidence that mine life can be significantly extended beyond current reserves and general market estimates, and 3) a consistent track record from the management team, which has beaten its production guidance over the last four financial years.
0.10
80m 60m 40m 20m
SAR AU Rel. AUSTRALIAN ALL ORDINAIRES
MA 40 weeks
Potential Catalysts
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target
Target price/base case
Our 12-month forward looking price target of A$1.30/share is derived from a 50:50 blend of debt-adjusted cash flow (7.0x) and sum-of-the-parts NAV (1.1x).
Upside scenario
Since we believe extensions to the known ore bodies at depth is a real potential for the projects, we run the scenario on adding two years of additional mine life to group production. From this, we derive a valuation of A$1.60/share.
Downside scenario
Our downside scenario is based on a flat AUD/USD of
-
(RBC Capital Markets estimate long-term of 0.70) and gold price of c.US$1,150/oz (which is below our long-term assumption of US$1,300/oz). We also remove one year of mine life from our base-case scenario. From this, we derive a valuation of A$0.75/share.
probability for continued extensions at depth. We believe
throughout 2016 (with limited amount of drilling) that SAR could provide ongoing high results at depth; therefore, we would be convinced to add further mine life into the deposits.
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Another beat to guidance? - with the Thunderbox development tracking ahead of schedule, we believe the company may again beat guidance expectations for FY16 (150-160koz Au). We believe c.10-20koz Au may be included into FY16 production due to the early commissioning of the project, which was not previously forecast.
Key questions
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What near-term catalysts could affect the share price for SAR?
Our view
We believe commodity price and sentiment toward commodity direction are likely to have the most significant impact on SAR's share price; however, besides this, we believe further testing for mineralised extensions at the company's numerous operations at Carosue Dam should provide catalysts and news flow leading to increased mine life and, therefore, valuation.
Although commissioning has started, ramp-up to full run rate from Thunderbox throughout CY16 is also likely to encourage shareholders as the company delivers on its growth ambitions.
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SAR has recently poured first gold at Thunderbox; what will Thunderbox contribute to the group production and costs?
SAR produced c.167koz Au for FY15 from Carosue Dam. The inclusion of Thunderbox will take group production (on our estimates) to c.180koz, c.286koz, and c.315koz for FY16E-FY18E respectively-making SAR a genuine mid-tier producer. We view this fully funded growth profile as a key positive for SAR over many of its peers warranting a premium valuation.
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The company has no bank debt; is M&A a potential?
We view the potential for M&A for SAR as real. The company has no debt and is currently generating strong cash flow from its Carosue Dam operation. The inclusion of Thunderbox should provide a boost to the cash flow as production is almost set to double, while capital intensity remains low and margins static.
Unlike many of its larger peers, SAR has the ability and financial capacity to acquire smaller, unloved assets that produce in the range of c.50-150koz Au pa and still provide a meaningful boost to its production base.
SAR's operations are set in Western Australia, and we believe the company would likely look for further opportunities within the regions it operates. For example, the recent acquisition of King of the Hills (from St Barbara Mining), provides additional high-grade/low-cost material for the Thunderbox plant, mainly through the Kailis deposit. This asset was purchased for A$3m, yet we forecast c.A$20m in value-demonstrating real value creation through the purchase.
With a solid production path, strong operating margins, and potential to increase mine life at its operations, SAR could also be a potential take-over target as/when it continues to delineate and schedule production into the future. We forecast an increase in cash flow and earnings as Thunderbox is fully commissioned, which is not fully reflected in the share price, while the quantity of ounces that SAR is set to produce provides sufficient size (c.300koz Au pa) for many corporates.
Table of contents
Strong foundations set for Thunderbox as Carosue Dam continues to perform 5
Investment thesis: exploration upside, growth, and management track record 6
Gold price - Rebasing expectations here, we remain supportive long term 11
Saracen Mineral Holdings - Background 12
Carosue Dam - Exploration upside aplenty as ore sources continue to grow 14
Karari 16
Red October 17
Deep South 18
Whirling Dervish 19
Thunderbox - The near-term growth strategy; commissioning underway 20
Greenfields exploration and optionality - The blue sky 22
Financials 23
Valuation and price target 25
Sensitivity - Mine life extensions to provide the upside 28
Production and financial forecasts 29
Appendix I - RBC Capital Markets estimate target multiples 30
Appendix II - Board and management 31