USB Global Research 4 April 2018 Perseus Mining Limited Can...

USB Global Research
4 April 2018
Perseus Mining Limited
Can Perseus earn a premium in West Africa?

The operational turnaround is well underway, can PRU now earn a premium?
We think Perseus has finally turned the corner and we upgrade the stock to a Buy. Operational consistency is being achieved at its Edikan gold mine and now, successful on time and on budget delivery of its second gold mine Sissingué sees the outlook derisking. The share price has already started to reflect this, re-rating from 0.5x P/NPV to 0.8x P/NPV, but we think it can go further. Perseus' country risk won't change, but with now 2 operating assets, the operational diversity should help to mitigate some of this risk/concern. Moreover, with Perseus offering growth through a 3rd development in Yaoure, we think the market could re-rate Perseus towards to 0.9x P/NPV and potentially capture a gold premium. It will take time, but Perseus is now ticking the right boxes and the re-rating is already underway.

Perseus has 2 active mines for +300kozpa for +5 years (reserves) and growth
Perseus' two operational mines Edikan (Ghana) and Sissingué (Côte d'Ivoire) lead to +300kozpa at
Buy – Operational discipline should could lead to a 1.0x P/NPV
In 2018 we continue to expect operational stability at Edikan and Sissingué. Ongoing operational discipline, which translates into a building cash position, is needed for the market to pay up for Perseus. We think this is a position that could be earned in 2018.

Valuation: A$0.61/sh (DCF, 12% discount rate)
We lift our target price by 67% reflecting a lowering of our discount to NPV. Our target price is set at 0.9x P/NPV, previously 0.6x for operational risk.

PIVOTAL QUESTIONS
Q: Can Perseus deliver operational stability from 2 mines in West Africa?
A positive track record is emerging. We see the reduction in unit costs at Edikan being led by improving operational excellence. This has been driven by core issues such as permitting, land access and power stability, all being resolved favourably. With the larger issues resolved, a focus on operational performance has emerged. We think the worst is behind Perseus. Moreover, with no permitting, land or power problems set to obstruct Sissingué based on what we know, we think the mine can deliver operational stability much sooner than Edikan did.

Q: Can Perseus fund Yaoure?
Further funding is needed. Perseus was net debt A$40m at the end of CY17 and over the next 2 years, we forecast free cash flow of A$130m. Capex for Yaoure is ~US$260m and there is a risk it could be higher. To fund the project, Peruses is likely to be open to both equity and debt financing solutions. The funding solution selected will depend on capital markets at the time. We think investors would reward Perseus for any delayed start that sees cash balances build before committing to the project, and this would likely make it easier to seek funding.

UBS VIEW
In 2018 we continue to expect operational stability at Edikan and Sissingué. Ongoing operational discipline that translates into a building cash position is needed for the market to pay up for Perseus. We think this is a position that could be earned in 2018.

EVIDENCE
Perseus has reduced the AISC at Edikan from >US$1,800/oz in late 2016 to US$1,100/oz in the December half 2017. This was achieved with increased throughput and higher grades, both of which were thanks to improved operational consistency and discipline. If these improvements can be replicated at Sissingué, a premium valuation could emerge.

WHAT'S PRICED IN?
At 0.8x P/NPV, the market continues to discount Perseus relative to the sector, which is averaging at 1.2x P/NPV. A re-rating is underway, but this likely just reflects just Edikan and Sissingué, and not Yaoure or the potential for exploration success at either Edikan or Sissingué. Country risk will always be an overhang, but Perseus now has some operational diversification.