They say Mt Cattlin is strong on costs, recovery soft. And yet, recoveries were in line with GXY's production guidance of 40,000 to 45,000 tonnes. Why then would MacBank have had an expectation of higher recoveries? We should also note that the production for the month of March alone was equivalent to an annual production rate of 200,000 tonnes, which is outstanding. And this was in a quarter when they were moving into the new pit and finessing the YOP.
They say recovery of greater than 70% could be at risk because the company is prioritising product grade. To this I say "so what". Presumably this is to meet customer specifications, and in any event doesn't a higher grade translate to higher sell price?
They have lifted their weighted average cost of capital (WACC) for SdV and have therefore reduced their valuation of SdV by $90m. That means they have assumed a lesser rate of return. But why? By holding out for a strategic partner that better reflects the company's own assessment of the value of this world-class asset, it is possible that the WACC should be reduced.
MacBank's reduced earnings and consequential target price revision seem to fly in the face of the good news that I took from the quarterly report and conference call. The rationale for the revised target (only $1.50 for God's sake) is the higher debt loading they have assigned to SdV (i.e. the increased WACC). However that higher debt load is an artificial construction that comes out of their modelling.
GXY Price at posting:
$1.60 Sentiment: Hold Disclosure: Held
