- Perseus Mining reported its H2 2019 results in late February, with FY-2019 results being roughly in line with guidance provided earlier in the year.
- The company's costs came in just below the industry average, but Perseus's third mine is currently under construction, unlocking the potential for significant production growth by 2022 at lower costs.
- The company's FY-2020 guidance is projecting low single-digit production growth, with a slight drop on the cost side to just below $900/oz.
- Based on solid production growth ahead and a high likelihood of significantly improved margins by FY-2022, I would view any dips below the C$0.78 level as buying opportunities.
It was a tough start to the year for the African gold names despite higher gold (GLD) prices, with names like Orezone Gold (OTCQX:ORZCF), IAMGOLD (IAG), and Compass Gold (OTCPK:COGDF) all down double digits to start the year. Fortunately, Perseus Mining (OTCPK:PMNXF) has managed to evade this theme of underperformance thanks to decent operating results and a strong pipeline for growth ahead, outlined in its H2 2019 report. While the stock is down 6% year-to-date, it was the top performer in 2019 by more than 6000 basis points with a 167% return.
Given that the company met its ambitious guidance in FY-2019 and has outlined improved guidance for FY-2020, I believe that 30% corrections in the stock are likely to provide buying opportunities. This is especially true given that we could see the first gold pour from the company's Yaoure Project by December. Based on this, I would view drops to the C$0.78 level as a low-risk area to start a position in the stock.
Perseus Mining reported its H2 2019 results in late February and had initially set guidance at 120,000 to 140,000 ounces of gold production at all-in sustaining costs ranging from $850/oz to $1,000/oz. This implied a guidance mid-point of 130,000 ounces for production and a cost mid-point of $925/oz. The company's actual results came in more than 3% above guidance on the production side, with gold production of 135,000 ounces, and all-in sustaining costs came in roughly 1% above estimates at $942/oz.
While this was a slight miss on the cost side, it's important to note that the company was already guiding for a significant improvement from H2 2018, with all-in sustaining costs coming in at $999/oz for the period. It's also important to note that royalties increased for the company in the H2 2019 period due to Cote d'Ivoire's sliding scale royalty on the gold price. Therefore, while investors can choose to get hung up on the $12/oz miss vs. the guidance mid-point, I would argue that the company did an exceptional job getting costs more than 5% year-over-year ($942 vs. $999) despite a minor royalty headwind. Let's dig into the company's operations below:
(Source: Company Presentation)
Perseus's two operating mines are the Sissingue Gold Mine in Cote d'Ivoire and the Edikan Gold Mine in Ghana. The more significant contributor of the two is the Edikan Gold Mine, which has been a consistent 150,000-ounce plus per annum producer for the company since 2011. In H2 2019, the project had a solid year, with 92,338 ounces of production at all-in sustaining costs of $1,031/oz. Production at the mine was down roughly 10% year-over-year due to lower mill head grade, but the company managed to offset some of this decline in production with 6% lower all-in sustaining costs. These lower costs came as a benefit of the revised mining strategy put in place in January 2019 to maximize production of profitable ounces.
Perseus released an updated mineral resource & reserve statement for Edikan in February, which outlined current proven & probable reserves of 1.61 million ounces at an average grade of 1.10 grams per tonne gold. This mineral reserve statement uses a conservative gold price of $1,300/oz, and we should see a further increase after the company includes the Esuajah South Underground Mine in the study at the end of the March 2020 quarter.
When it comes to the mineral resource estimate, which is based on a more ambitious $1,800/oz gold price, the company has over 2.7 million ounces at a slightly lower grade of 1.01 grams per tonne gold. While I think it's too early to factor in a potential $1,800/oz gold price as a base case, the reserve estimate alone suggests another eight years of gold production at a minimum for Edikan. This is a positive sign as long-term production will be required from Edikan to sustain a 450,000-ounce plus annual production profile for Perseus once Yaoure comes online.
Moving over to the company's Sissingue mine in Cote d'Ivoire, it was an exceptional H2 2019, with gold production up 19% year-over-year from 35,800 ounces in the prior-year period, to 42,600 ounces. The company's gold recovery rate slipped slightly from 95% to 94% but remains quite high, and above the life of mine plan assumptions of 90%. On the cost side, all-in sustaining costs were up slightly year-over-year, from $717/oz to $750/oz. This was the result of higher processing costs due to more tonnes milled in the period, as well as increased royalties due to a higher gold price. Despite this increase, the mine remains extremely profitable at $750/oz, as these costs are more than 20% below the industry average of $950/oz.
If we look ahead to FY-2020, we can see that the company is guiding for 280,000 ounces at all-in sustaining costs of $888/oz at the mid-point, a significant improvement from the 266,429 ounces produced in FY-2019 at all-in sustaining costs of $930/oz. Assuming that Perseus can deliver on this guidance, this would represent a 5% increase in production year-over-year at 4% lower costs. This should allow for even more impressive margins in FY-2020, considering that the gold price is acting as a tailwind based on its performance to date.
The real catalyst for Perseus comes in Q1 2021, however, as the company's new Yaoure Project should be producing gold by then. While Sissingue and Edikan are both reliable mines, Yaoure is the real company maker, with projected production of over 200,000 ounces per year for the first five years at all-in sustaining costs of $734/oz. This should help to improve the company's margins, given that total production will increase by nearly 70% at all-in sustaining costs that are more than 15% lower than FY-2020 guidance.
The project is currently under construction and 40% complete, with things running on time and budget to date. As the photo above shows, the CIL Tank foundations are in place already, and the company's stretch target for first gold pour is in December of this year. Assuming the company achieves first gold pour in December, we could expect the stretch target for the company's first full quarter of commercial production to be Q2 2021. Based on this, the company should have no problem putting up its first year of 325,000 plus ounces of production.
As the chart below shows, Yaoure is expected to be transformative for the company from both a production and cost standpoint. Based on the project's low-cost profile, all-in sustaining costs are likely to dip below $800/oz in 2024, at the same time as consolidated annual gold production nearly doubles from current levels at just above 500,000 ounces. Given this massive production growth at a lower overall cost base, a smooth ramp-up for Yaoure by Q2 2021 would be very bullish for Perseus long term.
Perseus Mining had a solid year, which was roughly in line with guidance despite a royalty headwind, but the more exciting news is the fact that Yaoure remains on schedule and budget. While Perseus could certainly see a correction shake out weak hands after a strong FY-2019 performance of 167%, I believe any sharp pullbacks of 30% or more are likely to be buying opportunities. The company has proven that it can optimize its operations after a few years as a high-cost producer with negligible margins, and Yaoure should be a game-changer as it will bolster the company's margins even further. Based on robust production growth ahead and solid operational performance, I believe any dips below C$0.78 are likely to be low-risk buying opportunities to start a position in the stock.
This article was written by
Analyst’s Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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