Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
Perseus Mining Limited (OTCPK:PMNXF) is a gold miner focused on under-explored gold belts in West Africa. The company achieved their goal of becoming a gold producer in 2011 and announced commercial production on Jan. 1, 2012.
Perseus owns and operates the Edikan Gold Mine in Ghana. The project has 5.7 million ounces of measured and indicated gold resources, including reserves of 2.9 million ounces and 2.4 million ounces in the inferred category.
You will see in this chart below that shares of Perseus have greatly underperformed the Gold Miners Index since the start of the year:
This dramatic drop in share price is mainly due to the drop in the price of gold, but is also compounded by the fact that Perseus operates in Ghana, considered to be a politically unstable region.
Investors seem to be throwing in the towel and want nothing to do with the company. However, this could also mean a bargain for new investors at current prices. Here, I will try to make case that shares of Perseus Mining offer investors significant upside potential.
Perseus Mining Company Information, Balance Sheet and Earnings
Perseus trades on the TSX under PRU.TO and on the US pinks under PMNXF. With 457 million shares outstanding and a share price of $.27, Perseus has a current market cap of $123 million.
Balance Sheet: Perseus had $27.3M cash on hand as of Sept. 30, as well as 147,000oz gold on hand.
Current liabilities amounted to $59.4 million at the end of the quarter. This number is made up of $50.5 million in payables, $3.38 million in derivative financial instruments, and $5.5 million in income tax payable. The company has no long-term debt and an undrawn $100 million line of credit.
Inventories at the end of the quarter were $49.698 million, which include $11.855 million in gold ore stockpiled at cost and $18.9 million in ore stockpiled "at net realisable value."
*It is very important to note that the company is hedging its gold production. As at 30 June 2013, the company's gold price hedging position included 170,000 ounces of gold deliverable in quarterly installments up to and including 31 December 2015 at a weighted average price of $1,408 an ounce.
This includes a total of 70,000oz of gold deliverable in quarterly installments during the 2015 calendar year at an average price of $1,600 an ounce. In the September 2013 quarter, 23,000 ounces of gold will be delivered at an average price of $1,255 an ounce under the hedge program.
This forward hedging is looking like a very, very wise move for the company as gold is trading under $1,250 an ounce and the company will be getting a large portion its gold at $1,600 an ounce until Dec. 31, 2015. If you are bearish on gold from now until then but like gold in the longer term, this benefits you. This could prove to be a great move for the company.
However, if you feel that gold will rebound and go higher than $1,500 - $1,600 an ounce in that timeframe, you would be against this hedging. If gold were to somehow break-out to $2,000 or higher in 2014/15, it would definitely be painful for shareholders as you do not get that upside. It is unlikely, but still possible.
In my opinion, since I am very bullish on gold in the medium to long term, I am glad that Perseus has only hedged its forward gold production until December of 2015 and not further. No one can predict where gold will go in the short term, but Perseus is protected from any further drops in price as they have their gold hedged at $1,600. The company simply needs to produce and keep costs down to record profits in this gold environment.
Quarterly Report and Drill Results
Perseus reported gold production of 45,830 ounces in the quarter at all-in cash costs of $1,342 an ounce and an average head grade of 1.05 g/t.
At $1,342, these cash costs are simply too high. However, Perseus has launched new "business improvement initiatives" which target efficiency and cost improvements. This follows a sector-wide trend in the mining sector as miners cut back production costs and exploration costs to improve operating cash flow and profitability.
Through these initiatives, average production of gold per year will be 230,000 ounces, but all-in site cash costs are expected to drop to $937 an ounce, from 2014 to 2024. The company expects to produce 200,000 ounces in 2014, but that number is expected to increase to 240,000 ounces per annum the following year.
Compared to the previous life-of-mine plan, which was based on the 2012 Ore Reserve, the updated plan results in the following:
• Tonnes of ore and waste moved - Down by 15%
• Life of mine strip ratio - Down by 16%
• Head grade - Unchanged
• Contained gold in Ore Reserve - Down by 6%
• Life of mine - Increased by 0.6 years to 2024
(Source: September Quarterly Report).
You will see in the above chart that Perseus was able to reduce its processing and G&A costs by 20 and 19 percent in the last quarter. The $0.45/t or 60% of $0.74/t increase in unit mining cost is attributable to reduction of material moved, according to the company's corporate presentation.
Based on the new cost-reduction initiatives, Perseus expects all-in sustaining costs to drop to $1,107 in 2014 and go even lower in the following years.
If Perseus can achieve this target of $1,107 all-in sustaining costs, the company should be very profitable, especially since they are hedging a large portion of their gold production. Since the company will be getting gold at a weighted average price of $1,408 an ounce up to Dec. 31, 2015, if they can reduce their all-in costs to the $1,100 range Perseus could record a profit margin per ounce of $300. With production of 200,000 ounces a year, profits of $60 million are very possible.
With current shares outstanding of 457 million and earnings in the range of $40-60 million, I believe Perseus could report earnings per share in the $.8 to $.15 range. With a current share price of just $.26, this would give Perseus a forward P/E ratio of just 1.7 to 2.6.
Exploration Properties Have Big Potential
Perseus also has a very promising exploration project in Côte d'Ivoire, West Africa, known as The Sissingué Gold Project.
The company recently released the following drill results:
- 66m at 3.1g/t Au from 30m ending in mineralisation, including 18m at 7.2g/t Au from 50m.
- 14m at 6.2g/t Au from 82m ending in mineralisation, including 4m at 10.7g/t Au from 88m.
- Sissingue has also recorded very high-grade drill results in the past, including 6 metres of 476 g/t AU, and 22m at 72.1 g/t.
- Sissingue has a mineral reserve of 660,000 ounces, with 925,000 in the measured and indicated category and 290,000 in inferred. However, significant upside potential remains and drilling will continue.
Sissingue offers investors high-grade, "blue-sky" potential.
Perseus also has licenses to Mahae, Mbengue and Napie, which were part of Cote D'Ivoire tenements granted to Perseus in Dec. 2012.
These projects also have big upside potential and early drilling results were very positive. For example, high-grade intercepts of 28m at 8.1g/t gold were received from the K1 Prospect, and follow up drilling returned 6m of 6.0 g/t and 2m of 16.9 g/t.
These projects are both early stage but possess the kind of upside potential that are game-changing.
Insiders are Buying
When multiple insiders purchase shares it can be seen as a vote of confidence in the company. While this isn't the only thing to consider when buying shares of a company, it is certainly a good sign to see multiple insiders buying shares.
Insiders have been accumulating shares of Perseus:
- Sean T. Harvey, non-executive director, purchased 500,000 shares at .312 a share on Nov. 21.
- Kevin Thompson, exploration manager, purchased 135,000 shares at .32 a share on Nov. 21.
- Colin John Carson, executive director, purchased 200,000 shares on Nov. 21.
- Reginald Norman Gillard, non-executive chairman, purchased 100,250 shares on Nov. 24.
- Martijn Paul Bosboom, general counsel and company secretary, purchased 40,000 shares on Nov. 28.
Full insider transactions can be found at CanadianInsider.com.
Who are Perseus' Competitors?
Perseus Mining faces competition from a number of gold miners in West Africa. These miners include:
Endeavor Mining (OTCQX:EDVMF)) - This gold miner has three producing mines, including one in Ghana.
Teranga Gold (OTC:TGCDF) - Teranga has one producing mine in Senegal, West Africa.
Semafo (OTCPK:SEMFF) - Semafo currently operates three gold mines: the Mana Mine in Burkina Faso, the Samira Hill Mine in Niger and the Kiniero Mine in Guinea.
B2Gold (BTG) - B2Gold recently acquired Volta Resources and owns an 81 percent interest in the Kiaka gold project in Burkina Faso, plus 100 percent interest in two more exploration properties.
Asanko Gold (AKG) - Asanko has a multi-million ounce gold deposit in Ghana with steady state production of 200K ounces a year targeted by Q4 2015.
Country Risk - How Bad is It?
Perseus Mining does not come without its risks, of course.
A new Corruption Risk Index (CRI) report was released by Maplecroft. This report evaluates 197 countries on the "reported prevalence and persistence of corruption in the public and private sectors, as well as the efficiency of governments in tackling the issue."
Ghana was highlighted as "extreme risk." However, Ghana was not named as one of the top 10 worst places to mine.
Below are the results from the Frasier Institute's Survey of Mining Companies in 2012-13, a survey which was sent to approximately 4,100 exploration, development, and other mining-related companies worldwide. The survey represents responses from 742 of those companies.
Ghana actually fared very well in the survey.
- 32 percent of respondents said Ghana "encourages investment."
- 49 percent said "not a deterrent to investment."
- 17 percent said "mild deterrent to investment."
Surprisingly, these results are similar to some states in the USA and areas of Canada. For example, in British Columbia, 33 percent of respondents answered "encourages investment" while 36 percent answered "not a deterrent."
These survey results are also much, much better than a country like Zambia, Zimbabwe, Tanzania or Madagascar.
While Ghana certainly still isn't Australia, USA or Canada, I believe the country risk for Ghana is actually less severe than many investors think.
Bottom Line? Worth a Speculative Bet
The bottom line for Perseus is that they need to continue to lower cash costs to get all-in sustaining costs under $1,100 an ounce. Once they prove they can do this, I believe shares will start to rebound.
The company is located in Ghana, which is known as a politically unstable region. However, I believe this risk has already been priced in the shares, and I also believe that the risk has been overstated.
Gold continues to show price weakness but Perseus has a large amount of its production hedged into 2015 at higher gold prices. If Perseus can execute their cost reduction strategy, then 2014 could be a break-out year.
Perseus remains one of the, if not the most undervalued gold miners out there, and I urge investors to consider entering the stock at current prices.
With gold prices dropping and miners still struggling, it seems like nobody wants gold miners right now, especially a miner in Africa. However, this could be the ultimate contrarian indicator.