Perseus transformation underway ANNUAL production of 70,000...

Perseus transformation underway
ANNUAL production of 70,000 ounces of gold from a mine in outback Western Australia, let alone West Africa, does not exactly get the blood racing, writes Barry FitzGerald.

So when Perseus Mining declared April 1 as the first day of commercial production at its new Sissingué gold mine in Côte d'Ivoire, it could have quickly passed as a ho-hum event.

But Sissingué is anything but that for Perseus. It is transformational on a number of levels.
It means Perseus is no longer wholly reliant on its 200,000oz a year Edikan mine in Ghana, giving it jurisdictional diversity in a part of the world where that is a good thing to have.

It also means a second source of cash flow to help defray the US$263 million development cost of a planned third West African mine, the 215,000oz a year Yaouré mine, also in Côte d'Ivoire.
Together, Sissingué and the Yaouré development puts Perseus on a pathway to 500,000oz annual production capability by 2020-21, giving it a superior growth profile than most of its more highly rated ASX peers.

That's kind of important as most of its peers are now under the pump to demonstrate future growth options, be it through acquisitions or discoveries. The era of investors being relaxed about growth while balance sheets were repaired and costs were brought down is over.

Perseus more than most meets the new growth mantra because it already has the resource/reserve position across three projects, with embedded upside, to push to 500,000oz and beyond in the near term.

Having said that, Perseus has yet to capture the sort of share market rating its peers enjoy. The West African location of Perseus' growth story means that the full premium-to-value that Australian-focussed gold producers currently command will be difficult to capture.

Still, a re-rating of sorts is already under way. It got started at the back end of calendar 2017, with Perseus shares rising from a low of A31c in December to 48c this week, carrying its market value to beyond $560 million (fully diluted).

The initial shove for the re-rating was the December half confirmation last that Perseus had (finally) sorted out Edikan. Edikan has been the source of much heartburn since it got going in 2011. But in the December half, it gave its best indication yet that things had been sorted. Output for the period was up 42% to 108,000oz, and costs fell 21% to US$1007 an ounce.

It was only back in late 2016 that Edikan was incurring eye-popping costs of $1800/oz.
Sissingué's development looks to have benefitted from the lessons learned by Perseus at Edikan as it its development came in ahead of schedule and under budget. It also become cash flow positive by March 31.

The commercial declaration on production at Sissingué enabled Perseus to confirm production guidance for the current June half year of 140,000-160,000oz, and 250,000-285,000oz for the full year. That implies an initial contribution from Sissingué for the 2018FY of 10,000 to 30,000oz.
While on the smallish side of things, Sissingué is set to be a handy source of cashflow for Perseus as it puts away what it can from its two mine portfolio to help fund the development of its third mine, Yaouré.

Sissingué's forecast costs of US$628/oz leave Edikan, with its $1000/oz costs, in the shade, but only over its forecast annual production of 70,000oz. As a result, Perseus still needs to overcome its high-cost status compared with its more fancied Aussie peers, let alone the discount applied for operating in West Africa.

The fix is already in - the 2016 acquisition of the 3.4Moz Yaouré gold project through the merger with the London-listed Amara Mining.

A definitive feasibility study released in October last year confirmed Yaouré as a robust development proposition, one capable of a 32-month payback at a gold price of $1250/oz.

All-in sustaining costs on annual gold production of 215,000 in the first five years of an initial 8.5-year mine life were estimated at $734/oz, with the potential to extend mine life from in-pit drilling and exploration of a 500sq.km package of exploration ground.

The apparent success at Sissingué is shaping up as an important in-country de-risking event for the development of Yaouré, subject to the completion of a mining convention.

The project's metrics means Yaouré would comfortably eclipse Edikan as Perseus' most valuable asset. That is certainly reflected in analyst valuations of Perseus. Securing finance for the development looms as the next derisking event.

Now that cashflow is coming in from both Edikan and Sissingué to work Perseus in to a net cash position well before the end of the calendar, the debt component to financing Yaouré looks very doable, assuming gold prices hold together.

It all makes for Perseus being able to start to close the valuation gap on its ASX peers. That is reflected in the A75c price target on the stock by Canaccord. UBS recent lifted its price target from 33c to 55c while Macquarie is line with the current market price with a 48c price target.