Bottle 2018 and more could follow
Saracen Mineral Holdings (ASX:SAR) has announced a bumper full year result for 2018, to deliver one of the top results this reporting season. The year saw the company achieve key records – both operational and financial – and establish a clear pathway to producing 400,000 ounces a year. The balance sheet can support the growth aspirations with plenty of change. A dividend was not fourth-coming, as growth remains a key priority.
Profit attributable to shareholders for 2018, surged ahead by 166% on 2017, to a record A$75.6 million. The following chart shows annual profits (A$/’000):
Source: Saracen Mineral Holdings (ASX:SAR)
The 2018 profit attributable to shareholders was driven by an increase in revenue for the year of 21% to A$511 million. Behind the revenue result was an improved operational performance which we reviewed in FAT-AUS-883, with the gold price being a headwind for the year.
Underlying profit, that better reflects the ongoing operations, for 2018 surged ahead 100% on 2017, to A$67.3 million. Earnings before interest taxation depreciation amortisation surged ahead by 75% on the year earlier result, to a record A$198.7 million.
Operations delivered 316,453 ounces of gold for an annual record which represents a rise of 16% on the year earlier result. Moreover, all-in sustaining costs (AISC) delivered a per ounce cost of A$1,139 an ounce for 2018 which was 15.5% ahead of the 2017 outcome. The following chart shows annual gold production and forecasts out to 2024:
Source: Saracen Mineral Holdings (ASX:SAR)
Meanwhile, the average realised gold price shed 2.2% on the 2017 result, standing at A$1,606 an ounce. Guidance for 2019 was upgraded and is forecast to be in the range of 325,000 to 345,000 ounces of gold from the previous 300,000 ounces. AISC guidance for 2019 is forecast to be in the range of A$1,050 to A$1,100 an ounce of gold.
Net free cash flow from operations was a major beneficiary of the better financial result, following the delivery of a 52% increase on 2017, to a record A$191.4 million. The following chart shows net free cash flow from operations:
Source: Saracen Mineral Holdings (ASX:SAR)
From this platform, the company will advance its goal to produce 400,000 ounces of gold per annum. The result was driven by the better operational performance in 2018.
The balance sheet was the other beneficiary from the very strong financial performance for 2018. The balance sheet is in pristine shape. The company, at 30 June 2018, carried no debt and held the same position at 30 June 2017.
Despite an aggressive exploration and development spend of A$130.2 million, cash in the portfolio increased by A$66.1 million, from the year earlier outcome, to A$99.8 million. We have no concerns over the structure of the company’s balance sheet.
Turning to the daily chart, prices have been in corrective mode since May, and the low of that month at $1.98 has given way. A move below the 50 and 200 day moving averages has also weakened the technical setup. Support at the April low needs to hold at this point.
The company did not declare a 2018 dividend, but instead is using the strength of its balance sheet to conduct a very aggressive exploration and development programme. We are at this stage not concerned that the company is not paying dividends. The focus on growth is paying value dividends for shareholders. We do however believe that generating annual dividends is a discipline the company should be building into its “management mantra”.
Exploration and development spending continued to grow in 2018, with the capital bill coming to A$130.2 million, compared to the A$117.9 million spent over 2017. Capital expenditure rose by a further 10.4% on 2017. We are pleased with the trend increase as this aspect of spending is the life blood of a resource company. The following chart shows the success of the company in increasing its mineral reserves (columns, left hand axis), together with its exploration spend (black line, right hand axis) and forecasts to 2023:
Source: Saracen Mineral Holdings (ASX:SAR)
It is the growth in mineral reserves that provides the company with future production options, and the future capital dividend that it is currently focussed on paying to its shareholders.
The Thunderbox mine has been a real success story for the company, with the site already hosting a 980,000 ounces of gold mining reserve. The following figure shows a concept of the Thunderbox mine, exploration activity and the mineralisation and deposit:
Source: Saracen Mineral Holdings (ASX:SAR)
Recent drill results from at the surface and at depth have been very good and include 27 metres graded at 5.9 grams per tonne gold (g/t) and 74 metres grade at 16g/t gold, with deeper results of 41 metres graded at 4.2g/t gold. These are significant grades as to seam widths, grade, depth and location. The company is already planning follow-up drill programmes. As Members can see from the above figure, the mineralisation has yet to be closed off at depth.
Over at the Carosue Dam site, the company has been focussed on two prospects in Karari and Whirling Dervish. The following figure shows a concept of part of the Carosue Dam project site:
Source: Saracen Mineral Holdings (ASX:SAR)
Carosue Dam hosts a mineral reserve of 1.0 million ounces of gold and has the potential for further success. The latest drill results continue to reveal the projects upside potential with the likes of 16.2 metres graded at 16.2g/t gold at Karari and 34.3 metres graded at 5.8g/t gold at Dervish. Like Thunderbox, these are very significant results. Furthermore, as Members can see from the above figure that the deposits lay open at depth. Further exploration will, we believe open these zones up.
We have no doubt that the success of the company in the future will be to commit to further exploration and development activities. The reward to date has been excellent, and we believe it will continue to be so.
With reference to the monthly chart, prices have closed (on a monthly-basis) above the 78.6% Fibonacci retracement (red set of retracements) of $1.63. This activated the next longer term upside target at $2.15 (since breached, but now back under this level) being the 127.2% Fibonacci extension. An eventual longer term gravitation back above this price point could potentially be on the horizon.
We believe Saracen is well positioned to leverage into our still positive outlook for the gold price. Moreover, with the company having a clean balance sheet and with robust free cash flow, we believe it is well positioned to fund its major exploration programme. We expect upgrades to the known mineral resources in the future, and with these upgrades, potential for increased gold production.
Consequently, we continue to recommend Saracen Mineral Holdings (ASX:SAR) as a high conviction buy for Members with no exposure to the stock.
Disclosure: Saracen Mineral Holdings (ASX:SAR) is held within the Fat Prophets Concentrated Australian Shares managed account portfolio.
