Company Overview: Saracen Mineral Holdings Limited is engaged in gold mining and mineral exploration. The Company's segments include Saracen Gold Mines Pty Limited (SGM), which includes the exploration, production and administration relating to the Carosue Dam operations (CDO); Saracen Mineral Holdings Limited (SAR), which includes the corporate administration, and Saracen Metals Pty Limited (SME), which includes the exploration, development, production and administration relating to the Thunderbox operations (TBO). CDO tenement holdings and gold deposits are located in gold provinces, in northeast of Kalgoorlie, Western Australia. TBO is located in the Yandal Belt and the Agnew-Wiluna Belt in the North Eastern Goldfields of Western Australia. TBO includes the Thunderbox Project, including the Thunderbox and Mangilla gold deposits; the Bannockburn Project, including the Bannockburn and North Well gold deposits, and the Waterloo Project, including the Waterloo and Amorac nickel deposits.


SAR Details 

Organic growth has been a key focus for Saracen in FY17 and the group has planned significant exploration funding aimed at extending the mine life at two operations near Kalgoorlie (Carosue and Thunderbox) and is also potentially pushing the annual production in excess of 300kozpa. The group can get a good boost from a successful completion of the Thunderbox Open-Pit that will help in increasing the long-term production profile. Further, Saracen is exploring fill options and potential change to a transverse stoping method that can enhance mining recovery over 85% at Carosue Dam. The Company remains debt free and has a corporate facility for up to A$150M (undrawn). Moreover, Saracen aims to grow its margins with all in sustaining costs targeted to decline to A$950/oz in FY20.

Production trending towards full year target: Production for the December quarter was 77,522 ounces at an all-in sustaining cost (AISC) of A$1 176/oz, which was above the quarterly run-rate required to meet Saracen’s 300,000oz production target for FY18. The strong production rate, combined with its focused development plan led to robust margins and free cashflow. The group thus seems to be on track with regards to the forecasted production rate which will be maintained at ~300,000oz at an ASIC of A$1,150/oz. The group also highlighted about an underground drill platform planned for Thunderbox with an expected start in the June 2018 quarter for resource definition work for the proposed underground mine. It is worth noting that Carosue Dam produced 40.4 koz Au while Thunderbox produced 37.2 koz Au during the December quarter.
 

Production Trend at the end of December 2017 (Source: Company Reports)
 
Productive Drilling Results: Saracen has significant organic growth opportunities immediately adjacent to the Carosue Dam mill. At Whirling Dervish (Carosue Dam), its first underground drilling demonstrated continuous high -grade trends which extended well below the current Reserve and the results included 14.2m @ 2.4g/t, 34.0m @ 4.2g/t, 7.0m @ 3.2g/t and 7.0m @ 5.3g/t. Gravity work continued to highlight that there are prospects of the relatively untested 12 km strike of Carosue Dam corridor. At Karari, deeper drilling up to ~900 m below surface is also planned from a new expedited underground drill platform that targets a 10-year mine life. Further, the first hole had returned an exceptional extensional result, 50m north of the current Ore Reserve entailing 13.8m @ 9.1g/t. For Thunderbox, grade control drilling highlights at Kailis included 22.0m @ 8.8g/t, 21m @ 38.4g/t, 15m @ 37.7g/t, 9.0m @ 12.7g/t, 9.0m @ 2.2g/t and 22m @ 20.0g/t, 21m @ 38.4g/t 15m @ 26.4g/t and 7m @ 45.5g/t. Looking at the drilling progress, Saracen seems to be well positioned to continue mining at Carosue Dam for at least the next 10 years. Group’s geological investigations at Karari flowing on to Whirling Dervish have revealed new potential with regards to prospects of the Carosue Dam corridor.
 

Karari / Whirling Dervish Plan (Source: Company Reports)
 
Other recent updates: During the December quarter, Carosue Dam successfully mobilised the underground mining contractor Byrnecut at both the Karari and at Deep South mines. SAR also submitted maiden responses to the CDP (Carbon Disclosure Project) global disclosure system. It scored “B” and “C” grade in Water and Climate Change which was released in December 2017. It is working on further improving the disclosures for the upcoming 2018 CDP submissions. There were no significant operational incidents reported. 23% reduction in LTIFR (Loss time Injury Frequency Rate) was reported in FY 17. Its clear focus is on critical risk controls and safe behaviours.

Project Nucleus: The group is tracking well on its Project Nucleus that focusses on key assets adjacent to Karari and Thunderbox. The project started with an emphasis on combination of two things entailing, divesting non-core assets and putting the investment into key assets. This project is on full swing as the group aims to have core assets next to existing mills to grow in terms of volume and margin.

Financial Position: As on 31 December 2017, Saracen’s total cash, bullion and investments were $82.9 million, and the group indicated the receipt of A$5M of cash proceeds for the sale of King of the Hills. There was no corporate debt drawn at the end of the quarter. During the quarter ending December 2017, a total of 50,000oz of hedging was added at A$1,728/oz and 43,800 oz of hedging was delivered at A$1,555/oz. The Gold sales of 74,320 oz underpinned the revenues which accounted for $118.9 million allowing Saracen to grow its cash and equivalents to about $83 million at the end of December 2017. Group’s FY17 net profit increased by 10% as at end of June 2017 to $28.39 million from FY16 figure of $25.9 million. The result was boosted by sales revenue growth of 53%.
 

Cash, Bullion and Investment Trend (Source: Company Reports)
 
Nexus Drilling Update: Saracen through its subsidiary Saracen Gold Mines Pty Ltd had entered into a Farm-in and Joint Venture Agreement with Nexus Minerals with regards to the Pinnacles JV Gold Project. The investment by Nexus is consistent with the company’s strategy of investing in advanced gold exploration assets. Nexus Minerals is a tenement package at the Pinnacles Gold Project which is largely underexplored, and under this move, Nexus announced the receipt of the final 1m sample result from the completed 4,108m Reserve Circulation drill program at the Pinnacles Gold Project. The 1m assay results confirmed the mineralised intersections which returned from the 4m composite sampling program and provided the company the confidence to return immediately to the two prospects and complete a follow-up of 3,000m of RC drill program.
 

Saracen a Mid-Tier Player (Source: Company Reports)
 
Stock Performance: By looking at the overall picture, 2017 was a strong year and group’s three-years’ total shareholder returns amounted to about 500%. While cost is of a slight concern, the growth has been stupendous and on-track production and drilling results seem to pave path for more momentum. The group’s asset to liability ratio has also improved a bit over years. Saracen has also enhanced its solvency position and strengthened its ability to borrow and repay money. The increasing global demand for commodities could lead to a potential increase in demand for exploration activities which can offer significant growth opportunities to mining companies such as Saracen. We have a positive view on SAR despite the current strength in share price (37.33% rise in one year as at January 30, 2018 while a plunge of 14% was recorded in last one month owing to commodity price movements). Though the group’s price to earnings ratio looks high, however, Saracen’s return on equity is better than industry mean. The group is expected to benefit from the future gold price movements and mines’ potential looks high and management team has a good track record. We recommend a “Buy” on the stock at the current market price of $1.49


SAR Daily Chart (Source: Thomson Reuters)

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