Company Overview -Perseus Mining Limited (ASX:PRU), one of the world’s most successful gold explorers,is engaged in mining operations and the sale of gold, mineral exploration and gold project evaluation & development in the Republics of Ghana and Cote d'Ivoire, in West Africa. PRU’s projects include the Sissingue Gold Project (SGP), in the north of Cote d'Ivoire and within an 885 square kilometers area consisting of the Sissingue exploration permit area and the Tengrela South exploration permit area (collectively referred to as the Tengrela Gold Project); and the Edikan Gold Mine (EGM), located on the Ayanfuri and Nanankaw mining leases in the Republic of Ghana, in West Africa. Said mining leases along with the adjacent exploration license areas of Grumesa, Kwatechi, Dunkwa, Nsuaem and Nkotumso, spread over 650 square kilometres. The Company owns a 90% interest in the EGM.
Analysis - FY14 earnings result showcase a A$32m reported loss which appears to be primarily driven by Foreign Exchange - $21m from unfavorable FX differences and $6.1m from one-off redundancy costs and doubtful debts. However, the Company has received a $14.8m in cash VAT refund and a $4.2m treasury note which offsets tax and royalties. PRU witnessed revenues of A$264 million (A$294m in 2013); operating costs of A$225m; FX loss of A$22m which gave rose to a weaker EBITDA of A$6m; and Depreciation and Amortization of A$41m. PRU’s gold production for the year was 180,519oz, although ~15% less than FY13 but corresponding to PRU’s decision to offset pre-stripping in favour of processing stockpiles. Gold sales were 183,325oz (FY13 205,109oz). As at 30^th Jun 2014, the Company held forward gold sale contracts totalling 125,000oz of gold deliverable up to and including 31^st Dec 2015 at a weighted average price of US$1,468/oz. This includes a total of 70,000 ounces of gold deliverable in quarterly instalments during the 2015 calendar year at a price of US$1,600/oz.


Mining Production Performance (Source – Company Reports)

The management did report sudden increased mining costs in the June quarter 2014 and hand-picked the AMS mining contract for future cost control. Other mishaps - fire at the Edikan processing plant and power outrages, contributed to further increase in costs earlier in this year. Some delays and uncertainty on the development of the Sissingue project in Cote d’Ivoire have also been noted.

PRU saw sales of A$293.73m during the year ended June 2013, 101.8% up versus 2012. Sales of Mineral Exploration saw an increase of 103.1% in 2013. However, PRU did not see similar trend in its other segments. With respect to sales of A$293.73m reported in 2013, the cost of goods sold totalled A$231.34m (i.e., the gross profit was 21.2% of sales), which is lower than that achieved in 2012. In 2013, earnings before extraordinary items were A$38.37m, or 13.1% of sales, i.e., a lower profit margin in comparison to the that achieved in 2012. 

PRU’s balance sheet is strong with net cash of $37m. At 30^th Jun 2014, PRU had net assets of $466.6 million (30^th Jun 2013: $481.8 million) and an excess of current assets over current liabilities of $69.3 million (30^th Jun 2013: $34.5 million).  PRU’s outlook sees FY15 production guidance of 210-230koz at AISC of US$1,100-1,200/oz (vs revised CGe 228koz at US$1,185/oz). Earnings and cashflow are expected to improve significantly in FY15 in view of higher grades and hedge delivery prices (FY15 90koz at US$1,411/oz). 

In this little staggered scenario, Edikan outplays by being a quick cash flow generative asset in a changing gold price environment. Further, efforts towards improving grade profile will improve the cash generation.


Location of the Mampong deposit (Source – Company Reports)

PRU has illustrated encouraging results from its in-progress infill drilling (already half-way through  5,560m) at the Mampong deposit at Edikan. The deposit is located 700m-2,100m southwest of the operating Abnabna pit at its Edikan gold mine in Ghana; and entails an Inferred Resource of 257koz at 0.9g/t. PRU aims to define and upgrade the southern portion of the Resource to an Indicated Resource. This is a zone of immense opportunity with prospects of discovering high grade mineralisation pockets that could convert southern Mampong to a priority mining target, as identified & reported by PRU.

In view of the Company’s Near mine exploration programmes including the above mentioned Mampong work, further success has been seen for other deposits. For instance, immediate success has been witnessed at the Bokitsi deposit; drilling is completed at Pokokrum where small deposits have been located which warrants further drilling; and interesting soil anomaly has been observed at Agyakusu which needs follow up drilling as does Chirawewa deposit once old pit de-watered. Subsequent to the infill drilling programme at Bokitsi South, the Company has increased the Bokitsi M&I Resource grade to 3g/t from 2.6g/t. This is further supported by the view of extending the ore body to the south and at depth. PRU’s Chirewawa deposit appears to be on the fringe owing to its low grade and elevated strip ratio.

The Company’s close competitors are Kingsgate Consolidated Limited, Focus Minerals Limited, Norton Gold Fields Ltd, Beadell Resources Limited, and so forth.We appreciate the recent fair value exchange rate trend for the Company vis-à-vis its competitors (including Kingsgate Consolidated Limited).

It is however important for PRU to continuously monitor and mitigate risks such - Geopolitical risk with higher levels of political risk associated with PRU’s assets in Côte d’Ivoire; Permitting risk wherein PRU is yet to finalise its Mining Convention; Geological risk wherein characteristics of an ore deposit may vary from initial expectation;   Completion risk with respect to project delivery timelines etc.; Operating risk in view of mining or technical issues; and Commodity price & exchange rate risk.

PRU’s FY15 guidance includes production of 210-230koz at an “All-In Site Cash Cost” of US$1,100- US$1,200/oz. The same is though acheievable but subject to the absence of any material operational disruptions which impacted FY14 performance.


Production Performance - Gold Recovery (Source – Company Reports)

We expect some positive developments for the Sissingue project in Ivory Coast in terms of its re-working. This entails PRU’s future discussions with the Ivorian Government for fiscal terms and mining approvals. There is a good possibility that PRU may update its Ore Reserve estimate as part of a revised LOM plan for Edikan during the DecQ.


Daily Chart (Source – Thomson Reuters)
 
Further, enhancements with respect to plant run time, excluding down time for the fire and power outages, and head grade improvement from 0.95g/t in MarQ to 1.02g/t in the JunQ indicate a healthier future. Also, PRU may be able to increase production by 10% if the reserve grade of 1.1g/t is achieved.  


West African Projects (Source – Company Reports)

Further, the released revised resource statement for Edikan operation in Ghana with prosperous infill drilling upgrading average grade in the Bokitsi North and South deposits; cash-positive stockpiles and large resource base; grant from the Ivorian government until March 2016 to develop the Sissingue project; future plan for FY2015 to minimize capital investment and to maximise cash inflow; no debt scenario; and an efficient and focused board & management team, showcases PRU as a long-term investment attractive target driven by well-developed quality business.We thus put a BUY recommendation on the stock at the current price of $0.325.

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