Operations deliver a 2018 bonanza
Saracen Mineral Holdings (ASX:SAR) has finished off its 2018 operational year with a bottler of a full year result. Gold production hit a new record and came in ahead of guidance for the year. Operating costs were better than contained for the year, but the gold price did not play ball. Moreover, a cash build will help the company push toward 400,000 ounces of gold.
The company has enjoyed a kick in gold production from its Carosue Dam and Thunderbox operations for the year, as each site transited to stable production. The following chart shows annual gold production:
Source: Saracen Minerals (ASX:SAR)
Production for the year kicked up by 16% compared to 2017, to a record 316,453 ounces of gold and also ahead of 2018 guidance which was in the range 310,000 to 315,000 ounces of gold.
Both the Carosue Dam and Thunderbox mines turned in better performances for the year, with Thunderbox the standout.
The Thunderbox mine reported a 13.5% rise in gold production compared to 2017, to 145,152 ounces of gold. Thunderbox reported better performance metrics across all its key functions, from ore mined to gold grade and recoveries. The milled gold grade improved to 1.8 grams per tonne (g/t) for the reported year, up from 1.7g/t in 2017. Gold recoveries improved as well to 93.9% from 91.4% from a year earlier. These two metrics were well supported by the 15.2% lift in milling throughput. Thunderbox operated as expected for the year.
Carosue Dam reported a flat year, with gold production coming in at 171,301 ounces compared to 169,860 ounces of gold from a year earlier.
Guidance for 2019 has been upgraded and is forecast to be in the range of 325,000 to 345,000 ounces of gold from the previous 300,000 ounces.
The following chart shows the company’s production outlook over the years ahead:
Source: Saracen Minerals (ASX:SAR)
The company’s longer-term target is to hit production of 400,000 ounces of gold beyond 2024. The 2018 operational result has likely brought that target forward by a year or two.
Operating costs showed a positive turn for 2018 as well, following a significant improvement over the year and in line with 2018 guidance. All-in sustaining costs (AISC) improved by 15.5% compared to 2017, to A$1,139 an ounce. The following chart shows annual AISC:
Source: Saracen Minerals (ASX:SAR)
Guidance for 2018 was in the range of A$1,100 to A$1,150 an ounce of gold. Both the Thunderbox and Carosue Dam mines where behind the better result, with the standout being Carosue Dam.
What Carosue Dam lost in production momentum it more than gained on the operating cost front. This follows an 11.3% improvement in AISC compared to 2017, to A$1,253 an ounce. Improved operational efficiencies drove the better result. Thunderbox reported a modest 2.3% improvement compared to 2017, to A$1,192 an ounce of gold.
AISC guidance for 2019 is forecast to be in the range of A$1,050 to A$1,100 an ounce of gold.
Revenue for 2018 came in at A$510.1 million, representing a rise of 16.5% on the year earlier result. Driving the result was the much improved operational result as discussed, while the average gold price received acted as a headwind. The average gold price received fell by 2.2% from 2017, to A$1,606 an ounce.
Turning to the daily chart, prices have been traded sideways since May, but the low of that month at $1.98 has been respected which is positive. 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 did boost its hedge book, adding 60,000 ounces at A$1,774 an ounce and delivered 54,000 ounces at a price of A$1,610 an ounce. At 30 June 2018, the hedge book stood at 275,600 ounces of gold at an average delivery price of A$1,730 an ounce. With the Australian Dollar price for gold trading around A$1,663 an ounce, the average price position is “in-the-money” and would be delivered.We consider the book to be a prudent approach to managing risk in the gold price.
The company at 30 June 2018 held cash and bullion totalling A$118.5 million, consisting of A$99.8 million in cash and the remaining A$18.7 million in bullion 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.
The 2018 result provides the company with ample flexibility to develop both its Carosue Dam and Thunderbox mines and continue to explore. The following figure shows the Carosue Dam development and exploration potential:
Source: Saracen Minerals (ASX:SAR)
The company will be releasing an updated mineral resource and reserve for its Carosue Dam this coming August. We expect the resource and reserve will be upgraded, post mining extractions. The results of resource definition drilling of 19 metres graded at 6.2g/t gold and Karari and six metres graded at 34.3g/t gold at Whirling Dervish are the foundation for our confidence. Further drill results are due now and may only swell the likely outcome. What is exciting and as Members can see from the above figure, both Karari and Whirling Dervish are open at depth.
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. As a result, an activation of the next longer term upside target of $2.15 was triggered (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 the company is well positioned to leverage into any improvement in the gold price. Moreover, with a clean balance sheet and with a growing production profile warrants, we believe, supporting the stock. Add the ability to fund an ambitious exploration programme, and with the ground to deliver results only adds to the value. Exploration results to date have reinforced our view on the prospective nature of the company’s ground.
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.
