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.
