Medusa Mining: Big margins put this buoyant gold stock ahead of the rising tide 2:40 pm by Jamie Ashcroft
There�s an old stock market adage that says a rising tide lifts all boats. It means the up-trend in any market drags along with it even the decidedly ropey and indifferent stocks.
We have seen just this phenomenon in the gold sector in the past 18 months. The price of the precious metal has dragged up the valuation of just about every company with an area of land or hole in the ground that is prospective for gold.
However all this forgets quality. These days you have to be very picky. But it is there if you care to look carefully.
Medusa Mining (LON:MML, ASX:MML, TSE:MLL) is a case in point. Its performance has been stellar, rising from 30 pence in late 2008 to 480 pence just a few weeks ago, but completely warranted. And as we will see the analysts feel that the current valuation may be a little conservative � so there is a feeling our rising tide probably hasn�t dragged the stock high enough.
Medusa has some of the lowest operating costs around at US$185 an ounce with a 200,000 ounce annual production, which means it has the ability to survive and prosper should the sky-high gold price begin to fall.
Expanding production at the Co-O gold mine on the Mindanao Island in the Philippines has transformed Medusa from a small AIM-listed junior into a dividend paying, main market, gold producer in just a few short years.
It acquired the mine, which was then producing 40,000 ounces of gold a year, back in December 2006 when it completed a merger with privately owned Filipino miner Philsaga Mining Corporation.
In the years that followed it extended the mining operation substantially, taking the run-rate first to 60,000 and then to 100,000 ounces a year. Importantly the high-margin and cash generative mining operation gives Medusa the financial clout to keep expanding the mine.
As mentioned, Medusa is now working to take production up to the 200,000 ounce a year level and ultimately it is aiming to be a 300,000 to 400,000 ounce a year, mid-tier gold producer.
This morning in a note entitled �a lady of independent means� Seymour Pierce�s Asa Bridle surmised Medusa�s appeal.
�We believe that Medusa should be a core holding in any gold equity portfolio based on the company's market-leading operating margin, dividend payment, lack of debt and ability to self fund a 100 percent increase in production,� Bridle said.
The analyst reckons that Medusa should be key holding for investors in the gold sector because of its profitability and growth profile. He has a 554 pence target for stock - which implies around 22 percent to the current price of 454 pence a share.
The note was prompted by Medusa�s latest quarterly production report. On 25 January Medusa revealed that it had unearthed 26,123 ounces of gold at an average cash cost of US$185 per ounce in the second quarter ended 31 December 2010.
It also rubber-stamped the construction work for the next stage of Co-O�s expansion. Medusa has ten drill rigs working at Co-O, as well as a further nine rigs at nearby projects - six at the Bananghilig deposit and three at the Saugon prospect.
Bridle adds: �The ongoing mine development will provide the feed for the new, US$80 million, 750,000 tonne per year plant which the company plans to fund from future cash-flows and existing reserves.
�The new plant will allow the company to double production at Co-O to 200,000 per year, but with a capacity of 750,000 tonnes a year, the plant could theoretically achieve annual production of over 250,000 ounces if current grades are maintained.
�However, the company has no plans at present to raise mining and hauling rates to the level required to achieve this. All the same, we are excited by the fact that the opportunity exists at least.�
Fairfax Securities seems to share Seymour Pierce�s assessment of Medusa�s value. In a recent note analyst Marc Elliot raised his price target by 16 pence a share to 557 pence and said: �We have assumed that the expansion to 200,000 ounces takes place in 2014 with production at 125,000 ounces next year and the following year.�
In conclusion
Medusa Mining has successfully doubled production from the Co-O mine at the most opportune moment, with record gold prices enhancing its competition busting margins even further. It is already producing 100,000 at a remarkably cheap US$185 an ounce.
As the next phase of Co-O�s expansion, up to 200,000 ounces a year, nears the horizon it is clear that Medusa�s credentials are in �ship-shape� and this buoyant gold stock being held up by much more than a rising tide.
Importantly Co-O�s compelling economics mean the mine is unlikely to run aground should gold prices eventually ebb away and other lower margin producers are left stranded.
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