Company Overview: Saracen Mineral Holdings Limited is engaged in gold mining and mineral exploration. The Company's segments include Saracen Gold Mines Pty Limited (SGM), which includes the exploration, production and administration relating to the Carosue Dam operations (CDO); Saracen Mineral Holdings Limited (SAR), which includes the corporate administration, and Saracen Metals Pty Limited (SME), which includes the exploration, development, production and administration relating to the Thunderbox operations (TBO). CDO tenement holdings and gold deposits are located in gold provinces, in northeast of Kalgoorlie, Western Australia. TBO is located in the Yandal Belt and the Agnew-Wiluna Belt in the North Eastern Goldfields of Western Australia. TBO includes the Thunderbox Project, including the Thunderbox and Mangilla gold deposits; the Bannockburn Project, including the Bannockburn and North Well gold deposits, and the Waterloo Project, including the Waterloo and Amorac nickel deposits.
 

SAR details

Saracen Mineral Holdings Limited (ASX: SAR) is a gold miner that has been performing well on financial and operational metrics; and going forward, its healthy cash position with rate and timing of mill capacity with high grade underground ore estimates can boost exploration and development. The group’s new targets on the Carosue corridor, ongoing exploration success at Karari and Whirling Dervish, and aim to get to a sustainable run rate of 400kozpa, can set the growth trajectory in FY19.

Strong Financial & Operational Performance with investments in developments: Saracen Mineral Holdings Limited (ASX: SAR) has delivered robust net profit growth of 166% to A$75.6m for FY 18. This is on the back of rise in gold sales to 317,675oz compared to 266,556oz in FY17 and sharp decline in AISC to A$1,139/oz compared to A$1,348/oz in FY17. However, the average gold price realised for the year was $1,606/oz, down 2% from $1,642/oz in 2017. The company has reported 21% growth in the revenue to A$511 million. During the full year 2018, the underlying NPAT, that excludes the A$10.6 million abnormal profit booked on the sale of King of the Hills, a non-cash write down of $0.9 million related to the disposal of the Wallbrook project and the expensing of $1.4 million of exploration costs previously capitalised, doubled to A$67.3 million. The company’s EBITDA has increased by 75% to A$198.7 million, due to strong production volumes, lower costs and a strong Australian-dollar gold price. During FY 18, the company’s gold production increased 16% to a record level of 316,453 ounces. For the year 2018, the gross profit from mining operations rose to $117.6 million from $51.6 million in 2017 after deducting $17.8 million for royalties and $94.3 million in depreciation and amortisation (2017: $14.6 million and $74.7 million respectively). The company has posted the net cash flow from operations for the year 2018 of $191.4 million versus $125.6 million in 2017. SAR’s capital expenditure on purchases of plant and equipment, mine development and exploration was of $130.2 million for the full year 2018 compared to $117.9 million in 2017. This was incurred primarily due to the development of the Thunderbox C Zone and Kailis open pits at TBO and the Karari, Deep South and Whirling Dervish underground mines at CDO.  At June 30, SAR held cash and equivalents of $118.3 million, up from A$45.2 million a year earlier, and had no debt.  This includes 4,300 ounces of gold in transit of approximately $6.9 million. The gold in transit was valued using a price of $1,600/oz. Additionally, SAR holds investments in Red 5 Limited, Nexus Minerals Limited and Matsa Resources Limited, which have a combined valuation of $11.7 million as at 30 June 2018. In addition, at 30 June 2018, the company had in place a total gold hedging program that comprises of 275,600oz compared to 235,343oz in 2017, forward sales contracts at an average price of $1,730/oz (2017: $1,573/oz) compared to the 30 June 2018 gold spot price of $1,691/oz. These ounces are scheduled to be delivered over the time frame from July 2018 to March 2021.
 

FY 18 Financial Performance (Source: Company Reports)

Debt Management: SAR maintains a long term senior corporate financing facility and this facility comprises of an initial $45 million loan facility, $5 million bank guarantee facility and a gold hedging facility. The facility is for a term of three years (to November 2019) and has features of an “evergreen” arrangement with an annual review date whereby the term can be extended. The Facility also has features of an accordion provision under which SAR can extend up to an additional $105 million capacity under the corporate loan on request to take the total loan to $150 million with the approval of the syndicate members. As at 30 June 2018, the facility had not been drawn down on.

Production growth expected from reserves’ enhancement by 20%: SAR expects to grow its mine life and production from organic sources. This is on 20 per cent growth in the company’s reserves to a record 2.5Moz as at 30 June 2018 from 2.1Moz at 30 June 2017 (despite depletion of 348,000oz). On the basis of the updated Reserve and Resource estimates, SAR had planned to grow production to a base case of 350,000oz a year, as part of its seven-year plan. SAR had produced 316,453oz last financial year, and for this financial year had increased the guidance for production, now expected to be in the range of 325,000-345,000oz. With this rise in reserves, SAR has become confident of achieving the objective of becoming a 400,000ozpa gold producer with long mine life. Moreover, the company’s Discovery cost is just A$25 per Reserve oz (vs FY17 A$35 per Reserve oz). Additionally, SAR’s total Mineral Resource is of 8.6Moz as at 30 June 2018 (9.0Moz at 30 June 2017), which is a decline of just 5% despite depletion of 348,000oz and a reduction of 501,000oz from sale of King of the Hills and Red October.


Saracen Group Ore Reserves (Source: Company Reports)

Exploration Activities: During FY18, SAR has continued to focus on organic growth opportunities that can be emerging from existing resources and operating mines. The company has aimed at a significant investment in underground drilling as a key priority in order to deliver further growth in the Ore Reserves and subsequent mine life. SAR has drilled a total of 118,413m of underground diamond core at Carosue Dam, which was spread across the Karari, Whirling Dervish and Deep South operations. The company had commenced underground drilling at Whirling Dervish in the first half of FY2018. This large underground diamond drill program comprises of 43,223m which was initially focused on the close spaced infill drilling across the upper levels proximal to the portal location. In the second half of the year 2018, a number of deeper resource extension and exploration holes were drilled. The drilling reflects valuable local scale data and has also showed that the mineralised system remains open. SAR has accelerated the drilling at Karari  in the second half of FY18, after the completion of a new diamond drill platform at the 1940 Level. This drill platform will offer the next vantage point in the north side of the mine which will continue to boost the growth and extension of the resource from this location. The drilling of the southern extensions is scheduled to commence early in FY19, as the 1916 Level drill platform is completed. Moreover, the company has focused surface drilling across the Thunderbox region, and has undertaken resource definition programs at Thunderbox D Zone, Kailis and Otto Bore. These programs were largely resource infill in nature, which will confirm the geological interpretation and validating inherited historical datasets. These programs are expected to be highly successful and will warrant additional follow up drilling during FY19. Regionally, the company has conducted a number of high-resolution gravity surveys across key prospective areas. These included the Bannockburn district and the Carosue Dam mine corridor. The results from these surveys have significantly improved the local scale targeting through increased resolution of the interpreted geology. The drilling of these key targets have started and scheduled to continue through into FY19. SAR has also advanced the Butcher Well JV project with AngloGold Ashanti Australia during FY18, and now AngloGold will be completing a number of programs across the Butcher Well and Lake Carey projects. These projects included a new discovery at Old Camp, which is expected to continue to be a focus of ongoing work for FY19.

SAR’s Production & Operational Outlook for FY19 and Beyond: For Carosue Dam Operations (CDO), in FY19,  the company will principally source gold production from the Karari, Deep South and Whirling Dervish underground mines and the balance will be coming from third party ore purchase agreements and various ore stockpiles. For FY19, the production at CDO is expected to be in the range of 190,000 to 200,000ozs. SAR’s business plan for CDO over the next 2 years includes the delivery to be  aligned in order to meet or exceed the 7 year production outlook. The company plans to increase the production from Karari underground mine to 1.5Mtpa and start  using cemented paste fill at Karari towards the end of FY19, which will increase the overall resource extraction to above 90%. SAR continues to grow the Karari resource along strike and at depth. Further, the company maintains the steady state production from the Deep South underground mine (450,000tpa) while exploring the resource at depth and considering future options for this operation. After the successful resource drilling of the Whirling Dervish resource, the company plans to start full mine development and ramp up to steady state production at Whirling Dervish (700,000tpa). SAR is continuing to grow the Whirling Dervish resource along strike and at depth. The company maintains a disciplined approach to project execution and will start when the company need to, aim for projects to be self-funded and ensure that the site remains cash flow positive at all times. The company has started a major exploration program throughout the “Corridor of Riches” and near mine extensions, to grow the current gold reserve base and is continuing to work on the strategy of base load feed from Carosue Dam Underground Mines (Karari and Whirling Dervish) with bolt on ‘growth options’ to increase production. SAR is optimising the production through the Carosue Dam processing plant in order to increase overall gold production, that includes the investigating grade optimisation opportunities and overall production throughput options. SAR continues the trajectory of reduced All In Sustaining Costs, and to generate sustaining cash flows. Moreover, for Thunderbox Operations (TBO), in FY2019, the gold production will be majorly sourced from the C Zone of the Thunderbox open pit and Kailis Stage 2 open pit. The company will source some production from the developing Thunderbox underground mine and various stockpiles. For FY 19, the production is projected to be in the range of  135,000 to 145,000oz.

Key Personnel Changes: Tony Kiernan is appointed as the Non- Executive Chairman of the company, who has replaced Geoff Clifford who has retired as Chairman.


Improvement in margins in FY18 (Source: Data from Company Reports and Thomson Reuters)

Stock Performance and Analysis: SAR stock has fallen 23.03% in three months as on September 18, 2018 and is trading at a P/E of 18.8x. The stock has quick and current ratios at 2.1 and 3.1 against industry medians of 1.02 and 1.66, respectively. The group also maintained the earnings retention at 1x over last 5 years while industry median has been 0.67x. The group’s return on equity has been improving (22.4% as at FY18 against around 10% for FY17 and FY16) while industry median has been around 11%. SAR has positioned itself as a mid-tier Western Australian gold miner with strong production, cash flow and growth potential. Further, the company has witnessed strong performance in FY 18 and the company plans to increase the Reserves beyond 2.5Moz (FY18 +20%) and production to 400,000ozpa. Currently, the stock is at the level with resistance at A$2.25 and has respected the support level at A$1.72. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 1.785 (up 1.994% on September 19, 2018).
 
 
SAR Daily Chart (Source: Thomson Reuters)

 
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