What the Brokers Say
WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.
Sirius Resources (ASX: SIR)
Extension of gold anomaly at Polar Bear. First pass reconnaissance aircore drilling has extended the large zone of gold anomalism at the first of SIR’s gold targets on its Polar Bear project (SIR 100 per cent). Polar Bear is located near the gold mining districts of St Ives, Higginsville and Norseman, which collectively host approx. 25 million ounces of gold.
The gold anomaly has been extended several hundred metres in a NE direction and now has a strike extent of approx. 1.6 kilometres and max. width of approx. 800 metres with good sample gold grades of up to 3.64 grams per tonne gold.
The gold anomaly is still open NE, NW and SW. While the results are encouraging, we view Polar Bear as early stage, and note that further work and follow-up diamond drilling is required to confirm the extent of mineralisation.
Over the next few months, drilling will focus on Polar Bear; the Nova and Bollinger horizons within the Eye; the as yet undrilled Eyelet intrusion; and recently defined Conductor 7.
Nickel prospect Yardilla unsuccessful. Two diamond drillholes testing the Yardilla electromagnetic (EM) target have intersected graphite and pyrrhotite (iron sulphide) at target depth.
Exploration accounted for in our valuation. We’ve assigned a reasonable valuation of $150 million (or 55 cents per share) for all other exploration (Polar Bear, other prospects within the “Eye” etc.), with the majority of our valuation coming from SIR’s flagship asset Nova and Bollinger (SIR 70 per cent).
Should Polar Bear and/or SIR’s other exploration targets progress to a maiden resource and prove to be economically feasible, then there is upside risk to our valuation.
Upcoming news flow. A scoping study is scheduled to be released in SepQ13, followed by a BFS which is likely to be completed 1HCY14. A mining lease application has been submitted and likely to be finalised in early CY14.
Northern Star Resources (ASX: NST)
Northern Star Resources is producing gold from its flagship Paulsens underground mine in the Ashburton-Pilbara region of Western Australia. In the March quarter NST produced 24,633oz and remains on-track to reach its FY 2013 target of 100,000 to 115,000 ounces of gold, given its financial YTD output of approx. 75,000 ounces of gold.
Background: Paulsens acquisition
NST acquired the Paulsens mine for $40 million in July 2010 – a price that was repaid from the mine’s cashflow in less than seven months. Upon acquisition, the mine had a life of under a year. The company has since increased the mine life to over 5 years, while increasing production and processing capacity. Paulsens JORC-compliant resources have grown 485 per cent in two and a half years, from 129,000 ounces to 550,000 ounces, even after allowing for 200,000 ounces mine depletion (grade has also increased 14 per cent to 5.7 grams per tonne gold).
Reducing costs and generating cash
At the start of 2011, NST moved Paulsens from a contractor-run to an ‘owner-operated’ model through its own mining services division. As a result, mining costs fell 36 per cent from $98.8 per tonne mined in Q1 2011 to $63.5 per tonne mined in Q4 2012. This cost reduction, along with an increase in the tonnes mined and processed, has resulted in substantially increased cash flow. The company expects to generate $65 to $85 million in surplus cash this calendar year – not bad for a company with an enterprise value (EV) of $243 million.
Due to these cost-cutting measures and low overheads, Paulsens had cash costs (C1) of $601 per ounce in Q1 2013 and total costs of just $935 per ounce (including royalties, sustaining CAPEX, mine exploration and corporate costs). Even at the current spot price (A$1424 per ounce) these low costs result in margins of $489 per ounce, or approx. 34 per cent.
Earnings growth and yield support
In line with its strategy of creating a business first, miner second, NST has made capital return to shareholders its priority. In September 2012, the company paid a maiden fully-franked dividend of 2.5c per share, and has since declared an interim dividend of 1c per share. At a share price of 72.5 cents, these dividends equate to a fully-franked yield of 4.82 per cent or 6.9 per cent, including 1.5c in franking credits.
With strong free cashflow and a substantial cash balance of $58 million, NST has scope to increase dividend payments; an outcome we view as likely.
Will the good times continue?
Paulsens has sufficient JORC-compliant reserves (204,000 ounces of gold) to support a +2 year mine life and JORC-compliant resources to support a +5 year mine life. Recent drilling has substantially increased the Paulsens resource, while step-out drilling has identified numerous targets to follow up outside the current mining area. We expect the resource upgrades and mine life extensions at Paulsens to continue.
And now for the blue sky...
In addition to Paulsens, there is the potential to develop the Ashburton, located approx. 200 kilometres southeast of Paulsens, as a stand-alone project. Ashburton, which produced 340,000 ounces of gold at 3.3g/t gold between 1998 and 2004, hosts a 1.7 million ounce gold resource. Studies are well underway for a stand-alone 100,000 ounces per annum gold operation.
In our opinion, the current share price assigns little value to the Ashburton project, but considering management’s track record of finding underpriced assets and developing them into cash generating mines, we feel it should be ascribed more value.
Given the potential for further earnings growth, mine life extensions and higher dividend payouts, we believe NST has a very positive outlook for the rest of the year.
Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.