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
 
Expecting to reap rewards from investments: Saracen Mineral Holdings Limited’s (ASX: SAR) latestdrilling results demonstrated the potential for extended production growthand mine life at both Carosue Dam and Thunderbox. Further, the company is on track to hit the 300kozpa production rate in the current quarter with FY18 outlook of 170koz for Carosue Dam.Drilling at the Karari underground has continued at an aggressive pace over the last two months, while there is focus on defining the distal strike extents of the previously tested mineralization. Notably, the solid drill outcomes demonstrated significant growth opportunity at Karari while confirming the mineralization remains open in all directions. Further, the significant drilling results included 18.0m @ 6.8g/t, 13.1m @ 7.4g/t, 9.2m @ 12.0g/t, 11.5m @ 6.2g/t and 36.2m @ 3.8g/t. In April 2017, more than 100,000 tons of ore and 9,000oz of gold was mined at Karari, exceeding the targeted ramp up to 1.0 – 1.2Mtpa and 100,000ozpa, three months ahead of schedule. Further, investments in key infrastructure (twin decline, ventilation, electrical reticulation and pumping) enabled production to almost double by taking full advantage of Karari’s outstanding extensional growth. Importantly, the establishment of new platforms at depth will facilitate further extensions and build significant visibility on the potential long life (+10 years) at the Karari mine. At Deep South, drilling highpoints included 7.5m @ 11.6g/t, 11.0m @ 7.3g/t, 10.8m @ 6.9g/t and 3.8m @ 9.0g/t (~250m below Reserve). At Whirling Dervish, underground development is ongoing and diamond drilling platforms are expected to be established in July 2017. 
 

Growing Production(Source: Company Reports)
 
Financial Position:During Q3FY17, the company spent $7.2 million on exploration drilling at Karari, Deep South and Thunderbox, and further results are expected to be released shortly from all three key projects plus Kailis resource definition drilling.  As at 31 March 2017, total cash and equivalents stood at $30.6 million (A$43.9 million at 31 December 2016), comprising $24.5 million cash and $6.1 million gold in transit, while there was no corporate debt drawn at the end of the quarter. Although group all-in sustaining cash costs (AISC) were on track on a total A$ million-basis, on a A$/oz, the same were temporarily elevated at A$1,510 due to the reduced weather related production of 5,000oz (A$1,400/oz normalised).
Quarterly Budget Estimation (Source: Company Reports)
 
Gold sales: Gold sales for the quarter stood at 68,471oz at an average sale price of A$1,612/oz, for total revenue of A$110.4 million (excludes movements of gold in transit). Further, 42,000oz of gold hedging was delivered during the March quarter, representing 15% of the total hedge book. At 31 March 2017, the hedge book comprised 236,343oz at an average delivery price of A$1,546/oz. The hedge book is forecasted to reduce a further 17% to 195,343oz by 30 June 2017 with 41,000oz to be delivered in the June quarter at an average price of A$1,558/oz.
 
H1FY17 driven by gold sales from King of the Hills: For H1FY17, SAR had reported a revenue growth of 47% yoy at $186.6 million while NPAT grew by 89% yoy at $14.9 million. Revenue growth was largely driven by $14.0 million of gold sales during H1FY17, at the back of production at King of the Hills. Further, the company’s optimization initiatives have been underway to capitalize on recent production and drilling activities. Moreover, long term cash flows are expected to be driven by Karari and Thunderbox as the mining developments are progressing ahead of schedule. 

H1FY17 Summary (Source: Company Reports)
 
Building a long-term resource position: Saracen owns 100% of the Carosue Dam Operations (CDO) through its wholly owned subsidiary Saracen Gold Mines Pty Ltd. CDO tenement holdings and gold deposits are one of the world’s most prospective gold provinces, incorporating the Laverton and Keith Kilkenny Tectonic Zones, north-east of Kalgoorlie, Western Australia. Notably, this province is home to several world class gold mines and deposits including Sunrise Dam, Granny Smith, and Wallaby. More than 23 million ounces of gold in resources have been found and/or brought into production in this province. During Q3FY17, total underground mining spent at Carosue Dam increased to A$37.7 million (against December quarter expense of A$32.6 million) predominately due to the expedited ramp-up of the Karari mine resulting in an elevated figure of A$1,613/oz during this investment phase. However, this is expected to deliver more than 1.0Mtpa ore and 100kozpa gold for FY17. At Thunderbox Operations, acoarser grind size was selected to maintain mill throughputs at ~2.2Mtpa on 100% fresh rock, resulting in a decline in mill recoveries to 87.9%. Increased quantities of secondary crushing and small quantities of low grade oxide ore from D Zone have subsequently been added to the mill blend in the June quarter. This will increase mill throughput and recoveries. Milling rates are now anticipated to increase to +2.4Mtpa as softer high grade Kailis ore enters the blend in the December half 2017.


Thunderbox Operations Outcome(Source: Company Reports)
 
At Karari, the company made a significant focus during FY2016 and a substantial increase in mine production is expected soon. As a major milestone, the mine closes in on its target of >1.0Mtpa ore and >100kozpa contained gold in the June quarter. The mine head grade has increased by +10% quarter-on-quarter from 2.4g/t to 3.0g/t since the September quarter 2016. At Deep South, drilling has continued with two underground diamond rigs with focus on infilling and extending the mineralization below the current Ore Reserve. Further, exploration drilling up to 250m below the current ore reserve intercepted significant widths and grades, confirming the mineralization continues with 3.8m @ 9.0g/t and 1.0m @ 12.8g/t grades. Underground development has been underway at Whirling Dervish after the commencement of infrastructure and portal works late in the March quarter. Approximately 500m of development will be completed initially to establish underground diamond drilling platforms by July 2017. Further, in the December half 2017 two underground diamond drill rigs will be deployed to complete a planned 30,000m of drilling. This drilling will de-risk the underground resource ahead of planned mine development.
 
Focus on mine extension opportunities:Building additional mine life is a critical path to growth andmaximises value from the existing operationsfor any resource company. During FY16, drilling activities at Carosue Dam, Red October and Deep South, focused onimproving the resource confidence and extending the known mineralisation. Importantly, the company was successful in delivering material results which have advanced each of the projects.At Carosue Dam a number of mapping and sampling programs were completed, while geological mapping and re-sampling of historic drill holes toadvance the knowledge of gold mineralisation in several prospectswas taken up at Thunderbox Operations.
 
Update on acquisition of the Bundarra gold project: Early this year, Saracen proposed for acquiring the Bundarra gold project from Bligh Resources, located 30 km south of its Thunderbox plant for the consideration A$8.5m in Saracen shares. As per the revised acquisition terms, the 100% of the project was to be acquired for A$9m through 7,142,857 SAR shares (remaining the same as earlier) and cash to make the share and cash consolidation equal to A$9m at settlement (increase in cash only). However, Zeta Resources has been announced to have come up with a better offer as indicated by Bligh, and accordingly, Saracen transaction is said to lapse.
 
Delivered over production and cost guidance in FY16:The company manifested the fourth consecutive year with over production and cost guidance during FY16. Net profit after tax grew by 132% to $25.9 million after allowing for an income tax provision of A$12.4 million. Importantly in FY16, 10.6% yoy revenue growth was driven by significant increase in gold production at 188,656 ounces (2015: 167,531 ounces) coupled with increase in average gold prices (A$1,629/oz versus A$1,547/oz in 2015). In turn, net cash flow generated from operations also increased substantially led by 10.5% growth in EBITDA. Further, the newly developed assets provide Saracen with unique growth opportunities to ramp up production.
 
Stock Recommendation:SAR stock has declined by 2.7% over the past three months, while it was down by 14% for last twelve months as on May 23, 2017.  Given the mining developments across the portfolio and an increased weighting towards extensional work, significant updates can be expected over the Q4FY17 and going forward, as the group remains poised for high impact/high probability drilling for growth. Some bit of volatility might prevail at the back of gold prices and the impact can be seen with SAR stock’s initial slip of about 4.4% on May 24, 2017 at the back of commodity price movement. However, given the prospects and a long-term view based on encouraging exploration results, exploration push at Carosue Dam, other capital enhancement projects, and expected material production upgrades, the company is poised to track well. We initiate a coverage with a “Buy” recommendation on the stock at the current market price of $1.045
 

SAR Daily Chart (Source: Thomson Reuters)
 

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