EQUITY RESEARCH

Royal Bank of Canada - Sydney Branch

Paul Hissey (Analyst)

+61 3 8688 6512

[email protected]

Connor O'Brien (Associate)

+61 3 8688 6519

[email protected]

July 20, 2016

Saracen Mineral Holdings Limited

4Q16 prod: In line capping a solid year

Our view: SAR continues as our preferred exposure in the gold space, given volume growth, relative value, support strong margins and exploration upside.

Key points:

Outperform

ASX: SAR; AUD 1.71

Price Target AUD 1.80

WHAT'S INSIDE

Rating/Risk Change Price Target Change

In-Depth Report Est. Change

Preview News Analysis

Scenario Analysis*

• 4Q16 Production: 63.2koz Au (RBCe 63.3koz Au)

  • 4Q16 AISC: 1,151/oz Au (RBCe A$1,132/oz Au)

• FY16 Production: 188.7koz Au (RBCe 188.7koz Au)

• FY16 Revenue: A$306.2m (RBCe A$311.4m)

• Cash: A$40.3m - no corporate debt (RBCe A$39.8m)

Downside

Scenario

1.10

36%

*Implied Total Returns

Key Statistics

Current

Price

1.71

Price

Target

1.80

5%

Upside

Scenario

2.00

17%

4Q16 marks the end of a transformation year for SAR

Following on from the establishment of a second operating asset, SAR has produced 188koz Au in FY16 and could increase this to 290koz Au in FY17 with Thunderbox contributing its share. We think the company will now move to consolidate its existing assets with further exploration

Shares O/S (MM): 800.8

Dividend: 0.00

NAVPS: 1.18

ROE: 20.6%

Debt to Cap: 0%

RBC Estimates

Market Cap (MM): 1,369

Yield: 0.0%

P/NAVPS: 1.45x

Enterprise Val. (MM): 1,352 Avg. Daily Volume: 11,743,050

spend. Proving up the c.4.5moz Au of measured and indicated resources not currently in reserve will likely underpin what is already shaping up to be an efficient and attractive set of assets.

Price outpaces our NAV but cash flow still has room

As with most of the domestic gold producers, share price has pushed passed NAV, generally as a result of modeling mine life by reserve base. However, SAR's P/CF still remains attractive relative to its peers at c.4.8x FY17 estimates. The company's ability to generate cash flow will support exploration spend and grow the cash balance into future periods.

Earnings impact and valuation

We have incorporated the result, which in isolation made only minor changed to our estimates. In addition, we have lifted our exploration spend outlook as we believe the company will use its cash flow strength to pursue resource and reserve upgrades. In addition, we slightly moderate FY18 production assumptions to now broadly forecast flat 300koz production. These changes have no impact in our 12 month NAV and P/CF based target price of A$1.80, which forms the basis of our Outperform rating.

FY Jun 2015A 2016E 2017E 2018E

EPS, Adj Diluted 0.01 0.08 0.24 0.25

Prev. 0.07 0.28

P/AEPS NM 21.4x 7.1x 6.8x

CFPS, Adj Diluted 0.08 0.17 0.35 0.32

Prev. 0.16 0.36 0.36

P/ACFPS 21.4x 10.1x 4.9x 5.3x

DPS 0.00 0.00 0.00 0.08

Prev. 0.09

Div Yield 0.0% 0.0% 0.0% 4.7%

Production 167.5 189.0 293.0 300.0

Prev. 188.7 314.8

All values in AUD unless otherwise noted.

Disseminated: July 20, 2016 00:15ET; Produced: July 20, 2016 00:15ET Priced as of prior trading day's market close, EST (unless otherwise noted).

For Required Non-U.S. Analyst and Conflicts Disclosures, see page 8.

Target/Upside/Downside Scenarios

Exhibit 1: Saracen Mineral Holdings Limited

71 Days 11APR16 - 19JUL16

Investment summary

• The main drivers that we expect to be underpinning the company's share price are: 1) strong growth, with the implementation of Thunderbox taking group production to

1.80

1.70

1.60

1.50

1.40

1.30

1.20

1.10

1.00

0.90

60m 40m 20m

A16

11 18 25

M16

2 9 16 23 30

J16

6 13 20 27

J16

4 11 18

UPSIDE 2.00

TARGET 1.80

CURRENT 1.71

DOWNSIDE 1.10

Jul 2017

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.

Potential Catalysts

• Mine life extensions - the high-grade mineralisation, which remains open at all current operations, indicates a high probability for continued extensions at depth. We believe

SAR.AX Rel. AUSTRALIAN ALL ORDINAIRES

MA 40 weeks

that throughout 2016 (with limited amount of drilling) SAR

Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target

Target price/base case

Our 12-month price target of A$1.80/share is derived from a 75:25 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$2.00/share.

Downside scenario

Our downside scenario is based on a flat AUD/USD of

0.76 (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$1.10/share.

could provide ongoing high results at depth; therefore, we would be convinced to add further mine life into the deposits.

• 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 think c.10-20koz Au may be included into FY16 production due to the early commissioning of the project, which was not previously forecast.

4Q16 production in line, Thunderbox now up and running, time to explore

SAR's 4Q production report marks the conclusion of what we believe has been a transformational year for the company. The delivery of its second producing asset (Thunderbox) provides a significant uplift in production output for the year ahead, where a full 12 month's contribution will see the company deliver c.290koz Au. We continue to prefer exposure to SAR as a domestic gold producer which has not necessarily seen the same re-rating as its peer group, despite comparable costs and best in class volume growth.

FY17 a year to consolidate, focus on exploration

With the ramp up of Thunderbox, and increasing operating cash flow, we believe SAR is likely to increase exploration spend within its tenement package in an effort to not only build on its existing mineral inventory, but optimize the sequencing of its existing assets to maximize value. Accordingly, we have made material increases to our exploration budget assumptions ahead of likely detailed guidance to be provided in August (either with the financial results or at the annual Diggers and Dealers conference). As it stands, the company's valuation is broadly underpinned by c.1.5moz Au in reserves (approximately 5 years based on FY17E production estimates), however there remains a further c.4.5moz Au of measured and indicated resource not in reserve, and a further 2moz of inferred beyond that within SAR's mineral inventory. An increase in exploration spend could yield further conversion, thereby extending mine life and of course valuation.

NAV stretched - but P/CF a more appropriate guide

As with many stocks in our domestic coverage, SAR's NAV is well below where the stock is trading, however, this is not unique to SAR and is a function of our inability to model mine life beyond the reserve base (c.5 years). Taking into account our observations on resources and reserves above, P/CF suggests greater upside at c.4.8x FY17 estimates. We believe there is a significant likelihood that the company is able to extend mine life, with investors not currently pricing in any cash flow beyond the conservative 5 year mine life. On our assumptions, each additional year of production at a c.300koz run rate and A$1100/oz AISC could yield c.A20-30c to the bottom line of our SOTP valuation. In addition, our estimates suggest that over the next two years, even with our increased assumptions of exploration spend), SAR could increase its cash position from c.A$35m now (June 2016) to A$375m (June 2018).

Earnings impact and valuation changes

We have incorporated the quarterly production result, including cost and cash results. In addition, we have lifted our exploration spend assumptions as the most likely use of the uplift in operating cash flow (FY16 A$109m moving to A$283m in FY17E) to now assume c.A$30m for the year ahead. Softer FY18 estimates are derived from a slight downward revision in our production and corresponding uplift in AISC.

Exhibit 2: Changes arising from the quarterly result

Source: RBC Capital Markets Research estimates, Company reports

Cost reconciliation

AISC for the quarter showed strong margins against SAR's realized price of A$1649/oz. Given the lower output from Carosue Dam, costs would ordinarily have been higher (on a pro- forma basis), however, the operation was able to offset the softer output with lower actual costs, to deliver net cash costs lower than we expected.

As Thunderbox continues to ramp up, our cost estimates appear to have been too conservative by comparison to that delivered by the company.

Exhibit 3: Cash cost reconciliation for the 4th quarter

1800

Carosue Dam

1800

Thunderbox

A$/oz Au

A$/oz Au

1,092

-25

-151

916

377

1,293

Source: Company reports, RBC Capital Markets Research