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Beadell Resources - Green Shoots Among The Rubble
Summary

Beadell Resources has confirmed most of our dire predictions for H1.
The company has been unable to bring out the value of the Tucano gold mine so far.
New management, and operational changes have been implemented.
We observe first and tentative signs of a possible turnaround.

Beadell Resources (OTCPK:BDREF) has been punished by the market for its failure to deliver on what the Tucano mine has on offer, and the company's market capitalization has dropped from $700+M to less than $100M during the past two years. Consequently, we have been quite scathing about Beadell Resources in our most recent article pointing to repeating sequences of mishaps, and stating that 2015 appeared to be following the same miserable pattern. Since publication of our article in early July most of our predictions have been proven correct, and dismissing the company's performance as a death spiral remains tempting.
However, beneath this seemingly bleak surface we believe that some green shoots are showing as a result of recently implemented changes, and we are less pessimistic now than we were only a few months ago. Specifically, we are tentatively encouraged by recent changes in the company's management; and we believe that the latest quarterly report was in fact better than would appear at first sight.
The market appears ignorant of these green shoots and continues to price Beadell Resources for failure. In the present article we would like to update our analysis of Beadell Resources, and explain how a bull case might be developing for the company early next year, in case the mentioned green shoots can be fostered and markets remain ignorant.

A Brief Summary

Beadell Resources owns and operates the Tucano gold mine in Northern Brazil. This is a potentially world-class asset with a standard CIL plant designed to produce around 200,000 ounces of gold per year, a relatively simple operation on surface but seemingly capable of throwing up a string of challenges throughout the three years Beadell Resources has been mining its multiple open pits.
Tucano would be the third-largest gold mine in Brazil if only nameplate production could be ensured. Current reserves support seven more years of production from open pits. Additionally, there are substantial resources and exploration results that point towards a much longer mine life; plus ongoing studies to expand the mine underground in due time.
Told You So...

In our last piece on Beadell Resources we predicted that the company would be falling short of its already downward-revised 2015 production guidance, as well as exceeding its cost guidance for the year. Furthermore, we also predicted that the company would not be able to complete the cutback at the Duckhead pit in time for mining of this high-grade source to be performed in 2015, therefore losing additional 20,000 low-cost ounces of annual production.
Lo and behold, the first two of our predictions were confirmed within just a few weeks and the third was confirmed not long ago when the company released its Q3 report.

• After selling a disappointing amount of just 53,986 ounces in H1, the company is now guiding for 65,000-80,000 ounces in H2, for an annual total of 119,000-134,000 ounces -- or 30% less than guided for at the start of the year.
• After achieving all-in sustaing costs (or AISC) of $1,065/oz in H1, and revising the cost guidance to a range of $850/oz to 950/oz for H2 the average annual AISC will be $940/oz at best, but more likely in the $950/oz-$1,000/oz range -- or 10%-20% higher than originally guided for.
• Starting the cut-back at Duckhead was delayed by regulatory hurdles and mining of high-grade ore will now take place early in 2016, knocking 20,000 low cost ounces off this year's tally.

Quite a dog's breakfast one is tempted to quip, and quite a questionable achievement to double down on a very similar dismal performance in the prior year.
Markets did as could be expected and responded with the ubiquitous drop in share price taking the company below a $100M market capitalization, a level last seen at a time when the company was still a promising explorer and developer, as opposed to the operator of a potentially world class asset.
But let's shift focus now away from the rubble and towards the green shoots mentioned in the introduction.
Green Shoot #1 - Mining Performance

Beadell Resources has done the reverse of many other mining operations: rather than starting out with a mining contractor and switching to owner mining once the operation is established and running smoothly, the company has gone the other way and has switched from initial owner mining to contractor mining. For good reason, we might add.
MACA Limited (ASX ticker MLD) is the contract miner that was awarded the mining contract for the Tucano pits in early in 2015 and judging by September 30 results mining operations are finally taking a turn for the better. This assessment is not immediately obvious when reading the quarterly report as disappointing production numbers and high costs certainly draw initial attention (see above); but the data listed in the table below indicates improvements nevertheless.
Waste movement has increased substantially from around 3M tonnes per quarter to close to 5M tonnes in the September quarter. This will add flexibility to future mining activities, and it will be of especial benefit in the wet season that has spoilt first quarters in the past two years. Increased waste movement rates also serve as an explanation for the high AISC in the third quarter, a cost factor that we expect to decrease in Q4 on a per-ounce basis, and to drop substantially in Q1 when the Duckhead cut-back is completed.
Mined ore tonnage has more than doubled and for the first time in many quarters the mill could be supplied without having to tap stock piles. We note again that preserving stockpiles will be important for the upcoming wet season where mining rates are bound to decrease.
The company has notified markets that 14,000 ounces were sold in October, a notable uptick compared to monthly output reported for the first three quarters; and also a sign that the observed improvements in the mining operations are starting to translate in production rates, and presumably also costs. The company will need to maintain this momentum in order to achieve its latest guidance, and we are optimistic for once that it will be able to do just that.
As every year the Q1 wet season will provide the prove of the pudding. We believe that this time around the company will be substantially better equipped than in the previous two years. The mine should be well ahead with waste stripping by year end, new and better suitable equipment will be available, high-grade stockpiles will be available, and MACA is an excellent and experienced operator able to operate under adverse conditions.
(click to enlarge)
Processing capacity remains the Achilles heel at Tucano. The plant has a nameplate capacity of 3.5M tpa, and run rates of up to 4.3M tpa have been achieved in the past. Annualized Q3 milling rates transfer almost exactly to the nameplate tonnage, but lag higher milling rates reported on a regular basis in 2014. We believe that the reason for the reduced throughput lies in elevated levels of primary ore that has been blended with oxides in order to achieve recovery rates around 90%. The higher level of primary ore is turning the crushing and grinding circuits into bottlenecks that are currently keeping Tucano from reaching its full potential. We therefore expect Beadell Resources to purchase additional crushing and grinding capacity in the near future and we budget $10M for this purpose in our economical model for this purpose.
Green Shoot #2 - Duckhead

The Duckhead deposit is a gift to Beadell Resources, a bonanza grade ore body that starts at surface and seems to be extending underground. The ongoing Phase III cutback will provide access to another 20,000 ounces at 28.7 g/t. Mining of this production booster will commence immediately after Christmas and should turn a traditionally slow first quarter into a high-performance quarter to start next year.
As already mentioned before, mining of this gift will coincide with the wet season and from experience investors will put a question mark against these projections. We concur with this sentiment, and will wait to see progress reports closer to year end to make a call on the feasibility of mining at Duckhead during the wet season -- keeping well in mind that Duckhead lies outside the scope of work for MACA.
Nevertheless, Duckhead should provide 20,000 low-cost ounces early in 2016, for which most of the stripping cost will be paid for in 2015. We have called it a gift, and the gift will be delivered in 2016, and dare we hope, to coincide with a first wet season to be mastered without too many dents in the cash flow statement.
Green Shoot #3 - Management Re-Shuffle

There are plenty of candidates to serve as the proverbial straw that broke the camel's back, but one of this year's mis-haps must have been one too many, and former CEO Mr Peter Bowler had to take his leave, taking with him the COO and two members of the board. Mr Bowler has delivered tremendous value by finding and bringing Tucano into production. He is also responsible for destroying most of the value again by making numerous questionable calls while being in charge of operating the mine.
On November 10 a comprehensive management and board re-shuffle was announced and Mr Simon Jackson took over as the new CEO. Among other accomplishments we note that Mr Jackson was part of senior management at Redback Mining and co-authored its sale to Kinross Gold (NYSE:KGC) which ranks as one of the largest gold deals in history. At the same time Mr Peter Holmes was appointed as the new Chief Operating Officer, and two ex-Kinross Gold senior executives were appointed to the board adding operational and exploration expertise.
We view this comprehensive management renewal as a long overdue step, and applaud the company for allowing a new team to breathe some fresh air into Beadell Resources. We are also encouraged by the quality of the team that could be attracted to Beadell Resources.
Green Shoot #4 - Financial Position

In our last piece on Beadell Resource we expressed concerns about the company's financial position:
"[..] cash and cash equivalents will have dwindled to just $18M by mid-July as indicated earlier in this article, and that's without accounting for losses that are practically guaranteed to have occurred in Q2.
Based on these considerations we assume that liquidity must be running precariously low and we are not ruling out some kind of capital raising initiative in the near future."
Fortunately for shareholders, these concerns have not materialized. The company has been able to meet its debt repayments so far this year and seems to have narrowly avoided a dilutive capital raise for the moment. We will have to wait until the December quarter for a full update on the balance sheet since Australian public companies are required to file full financial reports only twice a year; but from data published in the Q3 report we are tentatively optimistic that the company has been generating sufficient free cash flow and we expect this trend to accelerate in Q4.
The Q3 report mentions cash and cash equivalents of $20M (A$28M) of which we need to deduct a loan repayment of $9M (A$13M) to MACA which was due in October, which leaves just enough room for the $5M quarterly repayment on the debt facility, plus the monthly interest payments. This might look like a very close shave at first sight, but we also expect free cash flows of $15M in Q4 (45,000 ounces, AISC of $750/oz, gold price of $1,100/oz) and barring further mis-haps we project working capital to slightly increase until the end of 2015.
We mentioned capex requirements for additional crushing and grinding capacity and we believe that Beadell Resources will be able to finance this plant upgrade from cash flow as soon as Duckhead starts contributing in 2016. And with this bottleneck removed we also see a realistic chance for Beadell Resources to finally live up to expectations in 2016.
Takeaway & Investment Thesis

Beadell Resources has been a serial disappointment for investors and the market is pricing the company as if this trend was set to continue. Much heavy lifting will have to be done by Beadell Resources to repair the damage that has already been done, and to regain market confidence.
We are first to acknowledge the problems of the past, but we also acknowledge the measures taken to turn the company around - most prominently contracting out mining activities to MACA, and appointing a new management team along with new board members. The Tucano mine is a great asset, and Beadell Resources is currently priced at a fraction of the NAV of this mine. Substantial upside exists in case the new management team can convince markets that it will bring out the value of this asset. A simple re-rating to the mean in terms of valuation multiples would open up significant upside for Beadell Resources. It is early days yet, but we recommend watching the company for signs of confirmation of the mentioned green shoots.
On a different note we would also like to point out that M&A activity is picking up in the metals mining space, and we contend that Beadell Resources represents a formidable target. Kinross Gold would be an obvious contender given the connections of the new board members and the CEO, however, this major has just spent a large portion of its fire power on assets in Nevada. But of course there are plenty of other candidates perhaps most notably Brio Gold which is getting close to be set adrift by Yamana Gold (NYSE:AUY).
And for those interested in technical analysis we leave you with a long-term chart of Beadell Resources, a classic example of a head in between two shoulders close to completion in near-perfect symmetry.