What the Brokers Say
WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.
Swala Energy Ltd (SWE: ASX)
Exposure to the prolific East African Rift System
Investment Highlights:
Early mover, partnered with quality operators. SWE is an oil and gas exploration company with a particular focus on Sub-Saharan Africa. SWE’s portfolio of assets consists of a 50 per cent interest in one onshore block in Kenya (12B), in which Tullow are partner and operator and an indirect 32.5 per cent interest in two onshore licenses in Tanzania (Pangani and Kilosa-Kilombero), partnered with ASX-listed Otto Energy (OEL: ASX).
Importantly, the Permits were secured well before the recent unprecedented level of industry activity. There are no available licenses along the tertiary rift in Kenya and Tanzania, with the only way for majors to enter the play being transactionally via M&A or farm in.
Leverage to the East African Rift System (EARS).
East African Rift System (EARS) is attracting significant industry attention and investment, with an estimated total of greater than two billion barrels of oil discovered since 2006 by UK-listed Tullow Oil plc (TLW: LSE) at Lake Albert in Uganda exemplifying the potential of the region.
More recently 3 wells drilled for 3 discoveries in Kenya by Tullow have raised expectations that Kenya could potentially host billions of barrels of untapped reserves.
Unprecedented level of investment and exploration to provide news flow.
With an increase in industry interest and investment, the next phase of exploration in Kenya and Tanzania, consisting of 13 wells to be drilled in CY13, is predicted to lead to a significant increase in activity and discovery rates which could result in a sea change in valuation for companies with exposure to the EARS.
Early stage exploration indicators look promising.
All three of SWE’s permits exhibit early stage exploration indicators which have us excited about the company’s prospects.
Basins have been delineated on all three permits via aeromag; sedimentary basin depths have been identified to exist at an optimal level for oil source generation and potential hydrocarbon seepage have been identified coincidental with fault boundaries on each block.
Highly experienced and proven management with frontier exploration experience.
SWE’s board and management will consist of technical personnel with significant experience in onshore EARS. Members of SWE’s management have a proven track record having had success with Black Marlin Energy, which listed on the TSX in March 2010 and was taken over by Afren PLC in May 2010 for C$106.5 million.
Catalysts for CY13 include:
– Seismic survey at Tanzania commences June;
– Prospective resource at Tanzanian assets Q3CY13;
– Seismic Block 12B Kenya Q4CY13;
– 11-13 regional wells to be drilled, ongoing and
– Awarding of new licenses, ongoing
SWE has all the key attributes that we look for in a quality oil and gas exploration company which include a play type which has been relative de-risked, significant “blue sky” potential, high calibre management with a proven track record of delivery, an aggressive work program and tier one JV partners.
With an EV of approx. $10 million SWE is extremely leveraged to success and therein lies the opportunity for investors.
Recommendation
We initiate on SWE with a SPEC BUY recommendation and a price target of 40 cents per share .
Northern Star Resources (ASX: NST)
Northern Star Resources (ASX: NST) is producing gold from its flagship Paulsens underground mine in the Ashburton-Pilbara region of Western Australia. In the March quarter NST produced 24,633 ounces 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 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 ($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 2.5 cents per share, and has since declared an interim dividend of 1 cent 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 1.5 cents 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 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 around 200km southeast of Paulsens, as a stand-alone project.
Ashburton, which produced 340,000 ounces 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 ounce 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.
The recent drop was overdone
With the recent drop in the gold price, it is justified that NST has come off, but we feel that the drop was overdone.
At the current spot price, NST is still running at an operating margin of around 34 per cent ($489 per ounce).
Based on our analysis, NST’s earnings this year have already surpassed last year’s by 30 per cent, with a quarter in hand.
Despite this, NST still trades at a price-earnings (P/E) multiple of less than 10, putting the company firmly in undervalued territory.
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.