Super Pit ... Super Smart ???, page-126

Saracen Mineral Holdings Ltd (SAR.AX)

|Buy

Super Pit brings sunrise on SAR

19 Nov 2019 10:29:30 ET

CITI

• Move to Buy

  We upgrade our recommendation to Buy after the now-likely acquisition of Barrick’s (GOLD.N) 50% stake in KCGM and a pullback in the SAR share price, with a 20cps lift in TP to A$4.10/sh. We caution that the acquisition has near-term downside risks but overall on Citi’s gold price deck the deal is DCF/EPS/CFPS accretive with opportunities for SAR to exercise its underground expertise and bring a focus on organic growth.

• Super Pit terms

  SAR will fund the A$1.1bn (US$750m) purchase price (that’s an A$1196m deal with fees) from a A$400m facility (maturing Dec’22) and A$796m raising at $A2.95/sh (13% discount to the 15-Nov close). We estimate the deal to be 1%/17% EPS accretive in FY20/21. As SAR will acquire 100% of the shares in Barrick (Australia Pacific), the right of first refusal by Newmont Goldcorp (NEM.N) does not apply. While the timeline is to be confirmed, we conservatively model earnings from JunQ’20. NEM will remain the operator but after May’20, it’s possible for KCGM to revert back to a 50/50 management structure which would enable SAR more autonomy to drive organic growth. A structure that enables SAR to focus on management of the underground; arguably its area of expertise, would make sense.

• Corporate

  SAR expects pro-forma debt of A$204 (vs ~A$200m net cash at 30-Sep.). FY20 gearing (ND/equity) could increase to an uncomfortable ~50% but there’s upside to our no’s from a CY20 deal close. At our base case however, FY21e operating cash flow is A$580m so SAR can deleverage. On a pro-forma basis, by production SAR will become a top-four producer with ~650kozpa.

• A fair deal

  Our first-pass NPV valuation (5% real) is A$1.4bn (US$996m) or A$1.31/sh post dilution; that’s a ~20% discount to purchase. On spot gold of US$1500/oz, the valuation is A$1.15bn (US$793). We model four years at ~245kozpa @ A$1470/oz AISC with A$105m over 3.5yrs for remediation of the wall failure (SAR’s contribution) with production lifting to ~370koz @ AISC A$1170/oz from 2024 to reserve depletion by 2034. There are valuation risks from non-completion of the deal, which is subject to a state approval, as well as possible operational challenges (and higher capex) from wall remediation; the plan is currently undergoing review.

Buyfrom Neutral
Price (19 Nov 19 16:00)	A$3.39		Expected share price return	20.9%
Target price	A$4.10		Expected dividend yield	2.4%
from A$3.90			Expected total return	23.3%
Market cap	A$2,824M
	US$1,923M

SAR.AU revisions (Y/E Jun)	2018A	2019A	2020E	2021E	2022E
Sales (A$m)	511.2	555.7	896.7	1,507.0	1,599.7
% revision	0.0%	0.0%	19.6%	66.2%	61.1%
EBIT (A$m)	113.6	131.6	348.2	634.0	714.3
% revision	0.0%	0.0%	22.4%	62.4%	56.8%
Core Net Profit (A$m)	76.5	94.2	238.7	435.4	488.1
% revision	0.0%	0.0%	16.9%	53.5%	43.9%
Core EPS (A¢)	9.3	11.3	24.4	38.9	43.6
% revision	0.0%	0.0%	0.8%	16.5%	9.2%
EPS Growth (%)	144.6	21.5	115.2	59.4	12.1
PE Ratio (x)	36.4	29.9	13.9	8.7	7.8
Dividend Yield (%)	0.0	0.0	2.2	3.5	3.9
Source: Company Reports and dataCentral, Citi Research.

Changes to estimates— the deal lifts our DCF valuation by 8% to A$3.58/shr and FY21 EPS by 17% driven by the contribution of the Super Pit to earnings and consequently we increase our target price to A$4.10/shr (previously A$3.90) .

Bull/Bear: Saracen Mineral Holdings Ltd (SAR.AX)

Saracen Mineral Holdings Ltd

Company description

Saracen Mineral Holdings Ltd (SAR) is a gold mining company operating in Western Australia. Their two operations are at Carosue Dam: including the Karari and Whirling Dervish mines and at Thunderbox: including the Thunderbox and Kailis mines.

Investment strategy

We rate SAR as Buy, based on valuation. We caution that the recently announced acquisition of Super Pit has near-term downside risks but overall is value accretive to earnings with opportunities for SAR to exercise its underground expertise and bring a focus on organic growth. The Atbara porphyry discovery near Carosue Dam and SAR's recent near-mine acquisitions provide some interesting upside to SAR's exploration portfolio.

Valuation

We value SAR using a combination of NAV ($3.58/sh) x1.0, forward two-year average P/E x15 and EV/EBITDA x8 with respective weightings of 50/25/25. This yields a value and share price target of $4.10. Earnings multiples are chosen based on historic averages and industry peers.

To derive a sum-of-the-parts NAV we apply a real WACC of 5% to discounted cash flows over the life of the group’s individual assets. Our long-term assumptions include US$1200/oz gold, AUDUSD of 0.75. Our DCF valuation is net of cash and overheads.

Risks

SAR operates two complex multi mine operations which could negatively impact operating efficiency. Developing mines may be delayed or fall short of production estimates. Exploration drilling and feasibility studies may be below expectations.

Our valuation is exposed to macroeconomic developments affecting the gold price and exchange rates, operational risks that might affect volumes and input costs, and political risks that might affect costs. If the impact on the company from any of these factors proves to be less/more negative than we anticipate, the stock could materially outperform/underperform our target price.

This stock is High Risk based upon our quantitative model but this risk rating is not supported by qualitative factors such as steady operational growth, high-quality management and Citi's medium term view of the gold price. Therefore a High Risk rating has not been applied.