Company Overview: Perseus Mining Limited is engaged in mining operations and sale of gold, mineral exploration and gold project evaluation and development in the Republics of Ghana, Cote d'Ivoire and Burkina Faso, in West Africa. The Company's segments include Australia, Ghana and Cote d'Ivoire. The Australia segment is engaged in investing activities and corporate management. The Ghana segment is engaged in mining, mineral exploration, evaluation and development activities. The Cote d'Ivoire segment is engaged in mineral exploration, evaluation and development activities. The Company holds over 90% of Edikan Gold Mine (EGM), approximately 90% of Grumesa Gold Project, over 90% of Yaoure Gold Project and approximately 86% of Sissingue Gold Mine. It has commenced exploration at various near-mine prospects, including Bokitsi, Mampong, Pokukrom and the Agyakusu prospecting license. It has also commenced exploration at other prospects in Cote d'Ivoire, including the Mbengue, Mahale and Napie licenses.


PRU Details
 
Diversified asset base: Perseus Mining Limited (ASX: PRU) has built a diversified asset base over the years in West Africa. Their first operating mine, Edikan Gold Mine had produced 1,000,000th ounce of gold in early March 2017 and has 4.9 Moz in M&I Mineral Resources including 1.9 Moz in proved and probable ore reserves (P&P), as at 30 June 2017.  The updated proved and probable ore reserves for Edikan are forecasted to be 53.0Mt grading 1.1g/t gold, covering 1,943k ounces of gold including 19.1Mt of ore grading 1.1g/t gold and containing 685k ounces of gold in the proved category while a further 33.8Mt of ore grading 1.2g/t gold containing 1,259k ounces of gold has been classified under probable ore reserves. Given their solid March 2017 and June 2017 Quarters, the group is confident on a better Life of Mine production, cost and cash flow forecasts. Particularly, the group forecasted after tax operating cash flows from 1 July 2017 at US$1,200/oz gold for the rest of their mine life. As per their Sissingué Gold Mine, the group forecasts their first gold in early 2018 while commissioning is said to start in October 2017. They expect the development cost to be ~US$115m while it has been completed over 72% by end August 2017.  As at 30 June 2017, the group reported a 0.8 Moz in M&I Mineral Resources including 0.4 Moz in P&P Ore Reserves. The global Measured and Indicated Mineral Resource for the Bélé project is forecasted as 1.9Mt grading 2.0g/t gold, comprising 130k ounces of gold. Further, an additional 0.4Mt of material grading 1.8g/t gold, comprising a further 25k ounces of gold is classified under Inferred Mineral Resources. PRU now expects an average annual gold production of ~70,000 ounces at ~US$628 per ounce over the full life of mine while post tax, ungeared Internal Rate of Return is over 30% at US$1,200/ounce gold.

The group’s Yaouré Gold Project could possibly be a large scale, long life (10 years+), and a relatively low-cost gold mining operation. The group has drilled 72,063m as part of Definitive Feasibility Study, which would be finished in calendar year 2017. Initial construction work is forecasted to start in June 2018 Half Year (post Sissingué development). This mine’s financing, negotiation of Mining Convention, and execution plan would finish by second half of 2018. The group expects a possible eighteen-month full scale construction period with first production from Yaouré likely in early 2020. 


Diversified asset base in West Africa (Source: Company reports)
 
Capital position: The group reported cash and bullion of US$33M as at 30 June 2017 and expects an after-tax cash flow from Edikan and Sissingué operations of ~US$225M (before debt service) at a gold price of US$1,200/ounce in two years to June 2019. The group intends to repay US$15 million short-term working capital debt facility by March 2018. Over US$40 million of Sissingué project debt facility is available to fund the rest of the cost of development. The group expects a cash flow and debt service capacity underpinned by hedge book of 153,022 ounces of gold forward sales at a weighted average price of US$1,272/ounce as at 30 June 2017. LOMPs for Edikan and Sissingué is expected to deliver a combined after-tax cash flows of over US$545 million with a Net Present Value of over A$0.55/share at US$1,200/ounce gold. As per their preliminary results from Yaouré DFS have led to the valuation of the project at an additional A$0.25/share. The group’s undervalued position relative to its peers in terms of earnings multiples is now expected to improve with improving operating performance.


Undervalued position relative to peers (Source: Company reports)
 
Weak bottom line but improving cash flows:The group incurred a foreign exchange loss of $11.7 million in fiscal year of 2017 against a gain of $9.2 million in the prior corresponding period. PRU also reported a loss of $27.5 million post the acquisition of Amara Mining in April 2016 at the back of one-off expense of $24.5 million to settle outstanding claims made by Bayswater Construction and Mining (BCM). Their net assets were reported to be $715.3 million as at June 2017, below the $769.3 million figure of the prior corresponding period (pcp). The net assets fell 7.0% from pcp on the back of the legal settlement and foreign exchange fluctuations which led to decline in asset balances. However, their operating cash flows enhanced in the second half of FY2017 driven by solid revenues and lower unit costs. Operating cash flows reached $18.2 million during June 2017 as compared to negative $17.4 million in the first six months, even though they made a legal settlement with BCM in the second half of the year.
 
Controlling costs:Perseus Mining is controlling their all-in site unit cost by 2% to US$1,324/oz against US$1,351/oz in the earlier period as the group is striving to manage their capital expenditure and has delivered a higher gold production leading to a better gold recovery and head grade of processed ore. Their unit mining costs rose in mine geology and grade control costs. Unit processing costs also enhanced on the back of increase in cost of maintenance for consumables related to the timing of scheduled maintenance shutdowns, the higher labor costs and further freight costs. But the group is expecting a lower AISC in the next two years, which would drive their margins in the coming periods. Both the sites (Edikan and Sissingué) are forecasted to deliver a reduction in Group all-in site costs to US$950-1,100/ounce in 2018, as compared US$1,324/ounce in 2017.


Forecasting growth based on current asset base (Source: Company reports)
 
Positive outlook: Perseus Mining expects a rise of gold production to 250,000 - 285,000 ounces in the 12 months to June 2018 as compared to 176,218 ounces in 2017, boosted by better output at Edikan, coupled with starting of production at Sissingué, which is scheduled to produce its first gold in the March 2018 quarter. Sissingué development is on schedule and on budget while project development is funded via US$40 million project debt finance facility. The Definitive Feasibility Study for their third prospective gold mine, the Yaouré Gold Project in Côte d’Ivoire, is ongoing and on schedule for conclusion in the December 2017 quarter.
 
Stock performance: The shares ofPerseus Mining delivered returns of over 26.3% in the past three months and had fallen 36% in last one year (as of October 03, 2017); and we believe that the current bullish momentum in the stock would continue in the coming months given the developments. For instance, PRU stock was seen to surge up over 5.5% on October 04, 2017 given the sentiments and gold price movement. Recently, the group announced about strengthening their management team by appointing Sally-Anne Layman as non-executive director and Mr Merlin Thomas to the executive role of General Manager. The group has delivered 56,652 ounces at an average price of US$1,242/oz with forward sales contracts at a weighted average price of US$1,244/oz. Further, the forward gold sale contracts for 153,022 ounces of gold at a weighted average price of US$1,272/oz as at 30 June 2017, have been reported with 67,000 ounces hedged at a weighted average price of US$1,301/oz. The group’s hedging activities would enable them to withstand the volatility in the gold prices. Further, PRU’s second gold mine at Sissingué would start producing gold soon and this will add-up to production from existing assets, giving impetus to strong cash flows. PRU’s efforts relating to cost control in the coming years would also drive their margins further. We give a “Buy” recommendation on the stock at the current price of $0.380.


PRU Daily Chart (Source: Thomson Reuters)

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