“The best quarter ever” to quote management
Following on from a bottler of a first half operational result, Saracen Minerals (ASX:SAR) has reported, and too quote management, “the best quarter ever.” We would agree with that summation. In releasing its March quarter 2018 activities to 31 March 2018, the company has broken production records and lowered costs. Moreover, 2018 guidance received a handy upgrade.
The company continues to enjoy a kick in gold production from its Carosue Dam and Thunderbox operations, as each site transits to stable production. The following chart shows quarterly gold production:
Source: Saracen Minerals (ASX:SAR)
Gold production for the March quarter rose by an impressive 52% compared to the same quarter in 2017, to a quarterly record of 98,886 ounces. The company reported that both Carosue Dam and Thunderbox operated as expected, with Thunderbox the real standout.
The Thunderbox mine produced a record 54,557 ounces of gold, which represents an increase of 109% on the same quarter in 2017. The Thunderbox open cut has now successfully ramped up with the mine delivering above expectations. The following chart shows quarterly gold production from Thunderbox:
Source: Saracen Minerals (ASX:SAR)
The Carosue Dam mine produced 44,329 ounces of gold, which represents an increase of 13.6% on the same quarter in 2017. The successful ramp-up of the Karari underground drove the better result.
Gold production guidance for 2018 was upgraded on the back of the better March quarter result and is forecast to be in the range of 310,000 to 315,000 ounces of gold from the previous 300,000 ounces.
The company has set an ambitious seven-year growth plan, with the company now pushing toward a base case of 350,000 ounces of gold in seven years with upside potential to 400,000 ounces of gold.
The following chart shows the forecast growth profile and its constituents:
Source: Saracen Minerals (ASX:SAR)
We are of the view that this growth profile is readily achievable with the continued blue-sky potential at both the Thunderbox and Carosue Dam operations being revealed; warrants supporting the company.
The delivery of a significantly better operational result for the March quarter brought with it an improved all-in sustaining cash costs (AISCC), which have broadly been trending lower. The following figure shows quarterly AISCC:
Source: Saracen Minerals (ASX:SAR)
AISCC for the March quarter improved to A$1,181 an ounce, which represents a 22% improvement on the same result from a year earlier. The company cited the delivery of more gold over the quarter as the primary driver of the AISCC result. The standout operation was Carosue Dam with the reporting of a 26% improvement compared to the March quarter 2017, to A$1,193 an ounce. Lower mining costs per ounce on better gold production on a higher milling grade of 2.5 grams per tonne (g/t) gold from 2.3g/t gold from a year earlier.
The company reported an average realised gold price received for the quarter of A$1,584 an ounce, which was 1.7% lower when compared to the same figure from a year earlier. The following chart shows quarterly revenue:
Source: Saracen Minerals (ASX:SAR)
Despite the lower average realised gold price, revenue surged by 108% on the March quarter 2017, to A$128.8 million. Operations delivered the ingredients to drive the surge, while hedging sales delivered 59,300 ounces of gold at a price of A$1,550 an ounce to act as a partial offset.
On hedging, the company added 82,700 ounces into its hedge book at a price of A$1,771 an ounce during the quarter. Net of the movements during the quarter the hedge book stood at 269,743 ounces of gold with an average delivery price of A$1,696 an ounce. The gold price in Australian Dollars is currently trading around A$1,734 an ounce, which puts the average price “out-of-the-market”. We are not concerned with the position, despite our positive view on the gold price going forward.
We retain a positive outlook on the gold price for the year-end 31 December 2018 and expect the price to be in the range of US$1,550 to US$1,600 an ounce.
Expectations of higher inflation in the latter part of 2018 and going into 2019 will be a key tailwind for the gold price. An accommodating US Dollar on the gradualist approach by the US Federal Reserve and rising competitive currency will also push the gold price. Furthermore, the “safe haven” characteristic in gold cannot be ignored given the state of global events.
With gold production trending higher, the company is not resting on its laurels, given the prospective nature of the near-mine regions at both Carosue Dam and Thunderbox. Recent exploration activities at Carosue Dam site delivered high grade extensions to the Karari deposit. The following figure shows a concept of the Karari underground infrastructure and mineralisation:
Source: Saracen Minerals (ASX:SAR)
Some of the better results from recent drilling at Karari include 44.7 metres graded at 4.4g/t gold and 7.3 metres graded at 8.3g/t gold. These are significant intersections as to grade, seam width and certainly location, with the deposit yet to be closed off along strike and at depth with the company becoming more confident of the mineralisation.
Adding to the Carosue Dam value is Whirling Dervish, where extension drilling intersected 10.4 metres graded at 5.9g/t gold, 9.4 metres graded at 7.2g/t gold and 12.9 metres graded at 4.9g/t gold. As per the Karari results these are significant.
Further drilling at Carosue Dam will, we believe, continue to add to the value of this mine in life and gold production. Moreover, the company is in a financial position to deliver.
We look forward to reviewing further results as these come to hand. This ongoing exploration success adds to our strong support for the company.
Turning to the daily chart, prices have regained renewed upward momentum this year. Support at $1.45 was only briefly dis-respected in January, while resistance at the August 2016 high of $1.86 was eclipsed in April. Furthermore, from a medium-term momentum perspective, this remains in favour of the bull-camp as backed by the bullish moving average crossover present since July 2017. This occurs when the 50-day moving average (red line) crosses above the 200-day moving average (green line).
The company at 31 March 2018, held cash and bullion totalling A$101.5 million, consisting of A$83.2 million in cash and the remaining A$18.3 million in bullion ready for sale and investments. We believe the company has the cash resources and the revenue from gold sales to support its ambitious exploration programme. The company remains debt free.
With reference to the monthly chart, structural support was respected at the $0.85 region last year as marked by the horizontal solid-blue line. This is a positive development, which also resulted in a ‘bullish doji’ candlestick pattern to form. In effect, this translated to a stern upward trajectory in the share price. Furthermore, prices have closed (on a monthly-basis) above the 78.6% Fibonacci retracement (red set of retracements) of $1.63. As a result, an activation of the next longer term upside target of $2.15 was triggered being the 127.2% Fibonacci extension. An eventual longer term gravitation towards this price point could potentially be on the horizon.
We believe the company is well positioned to leverage into our positive outlook for the gold price. Moreover, with a clean balance sheet and with robust free cash flow to fund its major exploration programme and the results to date; upgrades to the known resources should be expected in the future.
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 portfolio.
