Will investors engage or wait?
Alacer Gold's re-rating is underway post successful permitting of the Çöpler Sulfide
project and revised capital & operating parameters. Despite increased capex (US$744m,
previously US$633m) and lower than expected JV contributions (US$35m) over the
development period (due to a withholding of JV payments over the last year), higher
processing rates, increased grades and a largely unchanged AISC (US$645/oz LoM) has
resulted in minimal change to our NPV. We value the Sulfide project at US$530m. Over
the next ~2.5 years to the first Sulfide gold pour in late 2018, production from the
Oxide project will reduce steadily, leading to increasing unit costs (CY16 UBS-e 160koz,
AISC US$770/oz). In our view, as Oxide FCF and cash balances are directed to funding
the Sulfide project, we see some investors sitting on the side-lines and re-engaging
when development risks have reduced and peak debt has passed. However, over this
period, the possibility for higher grades and higher production at the Oxide project as
well as a project update at Dursunbey provides catalysts that warrant some exposure.
Peak net debt of ~US$270m is manageable
We forecast peak net debt of ~US$270m in late 2018, we believe this is manageable.
Our forecasts assume an additional working capital allowance but we see scope for
peak net debt to come in lower than expected lead by gold price and the possibility for
increased production at the Oxide project, should regional exploration work succeed .
Maintaining the Buy rating – The re-rating isn't done yet
Alacer is a key pick for us in the Australian Gold sector. We highlight an undemanding
P/NPV multiple of ~0.7x (Sector average 1.3x) and if we risk weight our Sulfide NPV by
50%, our NPV would reduce to A$3.68/sh and the P/NPV would still remain a relatively
undemanding ~1.0x. Execution and geo-political risks are likely to weigh on domestic
investor sentiment given the choice of alternative gold exposures in Australia, but we
believe these can be overcome with upside from regional exploration opportunities.
Moreover, with gold equity sentiment remaining robust and valuations for other
domestic gold plays stretched, we see scope for increasing investor interest in Alacer.
Valuation: A$4.82/sh (DCF, 9.1% discount rate)
We update for the revised mine plan. Our PT reduces 2% (from A$4.90 to A$4.80), set
at 1.0x NPV.
PIVOTAL QUESTIONS
Q: Can Australian gold miners sustain their low AISC over the coming years?
Yes. The Australian gold sector has an average All-In Sustaining Cost (AISC) of US$833/oz with the
sector occupying the front end of the global cost curve, which has an average AISC of US$877/oz and
US$903/oz ex-Australia. Separating out and tracking where cost reductions have come from, as well
as their longer term sustainability is problematic and causing some investors to be cautious. In our
view, company specific factors should help to keep a lid on costs.
Q: Sector wide, can exploration dollars translate into improved cash flows long term?
Yes. Increasing margins are translating into expanded exploration budgets for near mine (brownfields)
exploration targets. We highlight a current focus on small, near mine high grade ore sources, which
are expected to drive a higher blended milled grade and subsequently, could help to keep the AISC
down and lift cash flows.
"Accelerating exploration" 12/05/2016
Q: Is peak net debt in 2018 manageable?
Yes. We see Alacer's net debt peaking at US$270m in late 2018. Importantly, cash flows from the
Oxide project is de-risked and could be hedged. Moreover, we see scope for regional exploration to
buoy Oxide production over the coming years.
UBS VIEW
Alacer is a key pick in the Australian Gold sector. Execution and geo-political risks are likely to weigh
on domestic investor sentiment given the choice of alternative gold exposures, but we believe these
concerns can be overcome with upside from regional opportunities. Moreover, with gold equity
sentiment robust and valuations for other domestic gold plays stretched, we see investor interest lifting
EVIDENCE
Peak net debt of ~US$270m is manageable, but operating autoclaves is not without risk, in terms of
both the delivery and operating performance. A prolonged ramp up or lower than expected
operational availability could act as a drag on future FCF and peak net debt.
WHAT'S PRICED IN?
We highlight an undemanding P/NPV multiple of ~0.7x (Sector average 1.3x) and if we risk weight our
Sulfide NPV by 50%, the P/NPV would still remain a relatively undemanding ~1.0x.
Alacer is expected to deliver a Technical Report (NI 43-101) within the next ~45
days. At that point, we expect increased granularity to lead to incremental
refinement in production and cost forecasts.
Risk to the current share price is heavily skewed (8:1) to the upside Upside (A$5.56/sh): Given that our base case NPV for the Sulfide project is unrisked,
we see limited upside to our base case mdoelling. However, if we increase
our gold price deck by US$100/oz, our NPV increases to A$5.56/sh.
Base (A$4.80/sh): Our base case assumes a production profile for the Oxide and
Sulfide projects that are as per the company's latest mine plan. In addition, our
Sulfide project is un-risked.
Downside (A$3.07): If we risk weight our Sulfide NPV by 25%, our NPV reduces
to A$3.07/sh.
AQG Price at posting:
$3.27 Sentiment: Buy Disclosure: Held
