Cejay Kim of Palisade Research - Mon, Dec 21, 2015

The Flight of Perseus Mining: Low Cost Gold With A Low Entry Point

Share Price: $0.33 CAD
Market Cap: $174.7M CAD
Shares Outstanding: 529,343,901
52-Week Range: $0.18 - $0.48 CAD

Perseus Mining's operating gold plant at it's Edikan mine in Ghana, West Africa

Despite a low gold price environment, Perseus Mining (TSX:PRU; PMNXF) has amassed over $130M CAD in cash reserves and bullion in its corporate treasury. With an annual production profile of about 200,000 ounces of gold, Perseus Mining currently has more cash on hand than industry heavyweight Yamana Gold (TSX:YRI; AUY), a company that produces more than 1.3M oz. Au each year and that jointly operates the largest gold mine in Canada.

From all indications, Perseus Mining is an extremely undervalued company. Perseus Mining has a market cap of less than $175M CAD, despite generating an eye-popping $92.2M CAD net profit in FY 2015 (July 1, 2014 - June 30, 2015). The company has an operating mine in Ghana, the Edikan Gold Project, which has been delivering roughly 200,000 oz. Au each year, and it controls a second low-cost project in Cote d'Ivoire that could be operational as soon as 2017. Perseus Mining boasts an overall resource of 6.6M oz. Au in the Measured and Indicated categories.

If you strip out the ~ $130M CAD that Perseus Mining holds in cash and bullion, the market is currently valuing the company's physical assets, its two minerals projects, its annual gold production, and its in-situ resources at just $40M to $50M CAD. That is a startlingly low valuation for a company that has proven to be one of the best managed and most efficient miners in West Africa.

Gold nugget picture

At this point, if you are not too familiar with West Africa, you may have some concerns about jurisdictional risk. There is no need to be worried. Ghana, where the Edikan Gold Project is located, is the world's tenth largest gold producer. Major producers including AngloGold Ashanti (AU), Gold Fields (GFI), and Newmont Mining (NEM) are all active in Ghana. The country's biggest mine, Tarkwa, is operated by Gold Fields; it boasts a mineral resource of 15.3M ounces of gold and mineral reserves topping 9.9M ounces of gold. Newmont Mining's Akyem Mine commenced commercial production in 2013 and is delivering close to 500,000 oz. Au per year. AngloGold Ashanti, meanwhile, owns two active mines in Ghana: Iduapriem and Obuasi.

Perseus Mining's cornerstone asset is the Edikan Gold Project, which commenced commercial production in 2011 and delivered a record output of 212,000 oz. Au in FY 2015. Operational performance at the mine has improved substantially over the past few quarters, as the company has undertaken a series of aggressive cost-cutting measures. In FY 2015, all-in sustaining costs or AISC at Edikan clocked in at just $877/oz., a huge decline from the year before. Admittedly, some of these cost reductions were achieved as a result of the unusually high head grades produced at the project in FY 2015, especially during the second half of the year; nonetheless, Perseus Mining has now beaten its cost guidance for several consecutive quarters. In the September 2015 quarter, the company achieved quarter-on-quarter reductions of 45% in unit mining costs and 15% for processing costs at Edikan.

Perseus Mining is projecting that AISC at the Edikan Gold Project for FY 2016 will land between $1,050 - $1,150/oz. With the continued cost-cutting measures that the company is implementing at Edikan, I suspect that this projection is overly conservative. Indeed, the company has already trimmed its originally issued guidance for FY 2016 of $1,100 - $1,200/oz.

FY 2013 FY 2014 FY 2015 FY 2016*
Au Production (oz.) 208,444 180,519 212,135 190,000 – 210,000
AISC ($USD) $1,150 $1,294 $877 $1,050 – $1,150
Revenues ($CAD) $294M $264M $334M N/A
Net Profit ($CAD) $42M $-32M $92M N/A
* Based on FY 2016 guidance released by Perseus Mining

Clearly, the record profits that Perseus Mining delivered in FY 2015 are not going to be replicated again in FY 2016. With the price of gold currently bouncing around $1075/oz., there is even a risk that Perseus Mining's costs could outpace revenues in FY 2016.

I am more optimistic - I believe that the company will be able to generate narrow profits over the next few quarters, before moving towards a sustained, high level of profitability. Perseus Mining has employed a savvy and effective hedging strategy that has insulated the company from some of the turmoil associated with a falling gold price environment. In 2015, for example, the company sold roughly 70,000 oz. of its gold production at a price of $1600/oz., far above the prevailing gold price.

Perseus Mining has been hedging approximately 25 - 35% of its gold production in recent years, a strategy that has cushioned the blow from low gold prices, while preserving most of the company's upside if gold prices were to suddenly spike. Moving forward, the company has hedged approximately one-third of its gold production over the next two years - a total of 149,000 oz. at a price of $1239/oz. Assuming that Perseus Mining has to sell its non-hedged gold output at $1075/oz. in FY 2016, its hedging strategy would boost the company's average realized price on its FY 2016 gold production to ~$1130/oz. That likely represents the difference between the company booking a loss or turning a profit.


I am extremely bullish on Perseus Mining's outlook over the next few years, even if the prognosis for the next 12 to 18 months is mediocre. The Edikan Gold Mine is going through a period of transition, as three new pits are slated to come online in the next year, replacing dwindling production from the Abnabna and Fobinso pits. Head grades on Edikan's gold production will remain lower until this transition is completed, resulting in temporarily higher all-in sustaining costs at the project.

Open pit gold mining operations

The good news is that once the Chirawewa, Esuajah, and Fetish pits move into full-scale production, costs at the Edikan Gold Project are slated to fall dramatically. Even factoring in FY 2016, AISC at Edikan are projected to average just $937/oz. over the next eight years.

The price of gold should rebound in the next couple of years, and when it does, the lower cost structure at Edikan will ensure that the project delivers hefty annual profits. In the meantime, Perseus Mining's strong balance sheet will ensure that it can successfully weather any further deterioration in the price of gold.

Another catalyst that I believe will propel Perseus Mining forward is the development of its Sissingue Gold Project in Cote d'Ivoire. The project features an extremely attractive cost profile and its initial capex is quite low. Perseus Mining envisions the Sissingue Project as an open pit operation that will produce in the range of 75,000 oz. Au per year over a 5.5-year mine life. While the production levels would be quite modest, the projections at Sissingue are for AISC to register at less than $650/oz. over the life of the mine (LOM).

The impact of adding Sissingue's production would be enormously positive for Perseus Mining's bottom line, reducing the company's overall AISC by approximately $75 to $125/oz. Perseus Mining would become one of the lowest cost producers in West Africa, while also boosting its annual production towards 300,000 ounces of gold.

The addition of Sissingue to the company's production pipeline would also have two other ancillary benefits - it would diversify Perseus Mining's operations across multiple jurisdictions and it would allow the company to achieve a greater degree of consistency in its financial performance.

The initial capex to develop the Sissingue Project is forecasted to be $106M USD. With its sterling balance sheet, Perseus Mining is certainly in a position to move forward at Sissingue; the company could fund a substantial portion of the capex out of its existing cash reserves, while turning to debt financing to cover the remainder of the costs.

A decision on whether to proceed with full-scale construction at Sissingue had been expected by the end of 2015; however, it appears that the recent selloff in gold has pushed the company's board of directors to wait a bit before giving the final thumbs up. Perseus Mining has already signed a Mining Convention with the Ivorian government and the company has hired an experienced project director, Mr. Adam Smits, to manage all aspects of the Sissingue Project's development. I remain confident that the project will be green lighted in the near future.

Perseus Mining brought the much larger Edikan Gold Mine into production on time and under budget back in 2011; the company should face few difficulties in accomplishing the same feat at Sissingue. If the project is approved in the first half of 2016, the Sissingue Mine should be operational by the latter half of 2017.

Gold processing plant at night

I have been impressed by management's foresight in aiming to proceed with development of the Sissingue project, despite the continuing slump in precious metals. Because most mining companies are backing away from projects, if Perseus Mining does in fact proceed at Sissingue, the company will be able to take advantage of having access to a large coterie of mining contractors and laborers to construct the mine at a lower price than would be possible in the years ahead. Preempting cost inflation and constructing a mine before gold prices rise could be a savvy strategic move.

Once the first gold is poured at the Sissingue Project, Perseus Mining will have control of two projects that will be in production for several years into the future. The company's annual gold production should rise above 300,000 ounces; just as importantly, cash flow generation from both projects should be excellent. Perseus Mining will find itself in a prime position to utilize its balance sheet strength and operational expertise to make new acquisitions and expand its footprint in West Africa.

Do not let some potential short-term choppiness in Perseus' financial performance stop you from considering this company. If the price of gold rises substantially at any point in the next few years, Perseus Mining will be in a position to deliver blowout financial results. The $92M CAD profit that the company posted in FY 2015 will seem like a blip on the radar.

Disclosure: The author of this article is long Perseus Mining

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