With gold mining shares having bounced up significantly in the last week or so, this latest free gold mining stock report from Fat Prophets we have for you this week could be timely. This features an Australian listed junior gold mining stock Saracen Mineral Holdings. If you’re looking at gold mining shares in Australia, then Fat Prophets is a recommended service for helping to spot the diamonds in the rough amongst the multitudes listed on the ASX and elsewhere. And with a new office recently open here in Auckland, NZ, they’re keen to help out we fellow kiwis ( Founder Angus Geddes is NZ born and so is the head of their new NZ office Greg Smith). Enjoy the freebie…
The hunt for Red October
With the gold price and gold stocks on the move in recent days, it is perhaps not surprising to see Saracen Mineral Holdings follow in tow. Especially, as the gold junior has delivered some encouraging developments on the production front.
Prior to the latest bounce the shares have endured a tough few months amidst broader market volatility. With the gold price turning upwards and Saracen’s operational prospects improving, we now believe the time is right to change our rating to buy.
From a charting perspective, following an all-time high of 97.5 cents in December, SAR has declined over the five subsequent months, before reaching a low of 42.5 cents in May. More positively prices have managed to lift back above horizontal support, at 51 cents.
From longer-term standpoint, the weekly chart demonstrates the extent of the consolidation that has traced out following the all-time highs. While additional base building is likely, over the coming months, downside risks, in our opinion, are initially limited to the 2011 lows, and below here, the 2010 lows.
Our decision to take profits last time
When we last covered Saracen we advised our Members to take profits at 86 cents. That decision was not based on any lack of confidence in the company’s long term prospects, but more an exercise in prudence given a rapid share price increase up to that point.
Certainly the increase in Saracen’s share price was not without good reason. Particularly given the mining of higher grade ore from beneath the company’s Red October open pit was fast approaching.
We continue to see some encouraging developments on the production front at Saracen. The company released its quarterly activity report at the end of April which shows figures are heading in the right direction on a host of fronts.
Gold production for the quarter to 31 March was robust, coming in 27,474 ounces for the quarter. The fact that 10,968 ounces of that related to March points towards further output momentum in our view. Year to date production totalled 86,565 ounces.
Gold sales for the quarter totalled $44.6 million, and with cash costs of $1,049 an ounce Saracen delivered an unaudited mine operating profit of $8.2 million.
Essentially, mill head grade and plant throughput are going up with cash costs coming down. This good news comes after operations fell short of previous guidance due largely to plant related issues.
We can see from the diagram that Saracen has a number of ‘districts’ all of which have enjoyed exploration success. As a junior, Saracen has an aggressive exploration budget with the current being in the range A$25-A$35 million. This is clearly a positive as the addition of higher grade ore for use in blending with current lower grade feed will be hugely beneficial to the cash cost profile of production.
At the company’s Southern operations management are looking at a plant expansion at Carouse Dam, and open pit mine expansions at Whirling Dervish and Wallbrook. Developments here will boost overall gold production and generate improved economies of scale.
At the company’s Northern Operations it is encouraging to see that underground development at the company’s Red October project is ahead of schedule. Management expect the deposit to start generating revenue this quarter.
Overall, operating costs have been high, in January they were A$1,193 per ounces which came down to A$930 per ounces in February and held up further in March. An improvement in head grade saw cash costs for the quarter come in at A$1,049 an ounce.
The operational improvements we have seen are as a result of a comprehensive grade control program which has given engineers a better understanding of the mineralised structures. When analysts see good reconciliation between mine modelling and head grade delivered to the mill – this is an enormous boost to confidence in the operation and moreover the operator. Many open pit gold mines inAustraliasuffer from a lack of reconciliation between exploration and in-pit estimates and actual head grades delivered to the mill. This is often despite very good grade control sampling and geological control.
We expect that operating costs could fall to approximately $860 per ounce if current production rates are maintained. This is a step change to the company’s previous cost profile and warrants some confidence that the mill operation issues are now resolved and are even being optimised.
Our modelling suggests a valuation of 80 cents should target production achieve 250,000 ounces per annum in 2015 as forecast by the company and operating costs continue to stabilise. There is clearly much work here to achieve this from the current forecast production of circa 120,000 ounces. The 250,000 ounce target also involves a significant amount of underground production which is currently still embryonic.
Adding to our confidence with respect to Saracen is the company’s financial position. Cash holdings at the end of the quarter total $37.2 million, and lease financing aside the company is debt free. Cash balances should also rise later this year on the back of revenues from Red October, and also given that the costs associated with Red October underground development and exploration expenditure is set to peak this quarter.
Overall we continue to view Saracen as a solid exposure in the junior gold sector. And with costs trending down and production trending up, the company is well positioned. Particularly, should the sector as whole see a re-rating in line with renewed gold price strength. We recommended SAR as a buy around 56 cents.
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