Australian Golds Research

RBC Capital Markets - Equity Research - 12 May 2016
Australian Golds: Trading focus on free cash flow as bull market gains momentum
http://docs.publicnow.com/viewDoc.a..._2106893CA08D9BAEA908AAE4634FCB890FDE4F16.PDF
Our preferred picks in regards to improved free cash flow moving forward are:
• Saracen Mineral Holdings (SAR, Outperform; price target A$1.40) - We continue to see the extensions
to known mineralisation at all current operations to show increased confidence in mine life extensions
and therefore valuations. From a cash flow prospective, the recent commissioning of Thunderbox
should provide greater free cash flow as capex is expected to be reduced significantly. We also see
the growth of the company to be a stand-out in our domestic peer group.
...
Cycles within cycles; trading for free cash flow turnaround…
We focus on which stocks in our domestic coverage have the potential to significantly
increase their near-term free cash flow and which may struggle to grow in this regard.
(Although Resolute has been the stand-out here, we believe the company may have already
hit peak free cash ability from its operations.)
The winner -
• Saracen Mineral Holdings (SAR; Outperform; price target A$1.40) – We expect
SAR’s free cash flow to see a strong turnaround from the JunQ’16 onwards. The
company has now completed the build of its newest asset Thunderbox, and should
see a significant drop in the investing cash outflows (capex). We expect it to
generate c.300koz Au p.a. from FY17 onwards, and so the group all-in sustaining
costs should still generate good margins of c.A$500-600/oz Au. We continue to like
the near-term cash flow ability, but perhaps more importantly, SAR has a number of
extensional targets which should provide the company with increased mine life,
which the market may not be factoring in at this time.
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Saracen Mineral Holdings (SAR) – Outperform; price target A$1.40
We expect SAR to see improvements to free cash flow into this JunQ’16 onwards. This is due
to the current decline in capital spend at Thunderbox. We should also see enhanced gold
production as Thunderbox ramps up. Greater free cash flow and significant organic growth
within the current set of operations, at both Carosue Dam and Thunderbox, should provide
for strong returns and could be a catalyst over the next 12 months.