Perseus Mining Limited (PRU) Going Short


Perseus Mining (PRU) is a gold explorer and producer, focused on under-explored gold belts in West Africa.

The group’s main assets are located in Ghana and the Ivory Coast, consisting of the Edikan Gold Mine (EGM), the Tengrela Gold project (TGP) and the Grumesa Gold Project (GGP).

The Edikan Gold Mine in Ghana has 5.6Moz of Measured and Indicated gold resources, including reserves of 3.4 million ounces of gold, and 1.7Moz Inferred gold resources. Production began at the mine in the 3rd Quarter of 2011.

The Sissingue Gold Project which is part of the Tengrela Gold Project. It is the group’s most advanced non-producing project.

Bearish outlook for gold

Gold holdings at exchange traded funds (ETFs) have fallen significantly in 2013. The drop in ETF holdings highlights the extent to which investment demand is weakening.

Inflation expectations have eased considerably in recent months as the world economy fails to gain traction despite coordinated central bank quantitative easing programs.

Below we graph the trend in ETF bullion holdings since the beginning of the year:

As we can see there have been major outflows in recent months, with the surge in supply overwhelming what demand remains for the precious metal.

Whilst physical demand from China and India is expected to continue and may even strengthen to take advantage of collapsing prices, we fear it won’t be enough to ignite a meaningful rally in gold prices.

Weak March quarter

PRU revealed a 12% increase in 3Q13 gold output (from 2Q13) to 57,169 ounces. This helped drive a 7% lift in revenue from the previous quarter to $77.2 million

Worryingly, quarterly cash costs were US$1132 an ounce (oz), up 7% from the previous quarter. PRU guided for cash costs of US$1,100/oz for the six months ending June 30, 2013.

At a time of falling gold prices, PRU’s elevated cash costs are translating into smaller cash margins, negatively impacting overall profitability.

This was evident in the March quarter, where PRU reported a net loss of $892,000. This was in stark contrast to the $15.1 million profit recorded for the December 2012 quarter.

PRU cannot afford more quarters like the previous one, but given how sharply gold prices have fallen since then we expect to see another weak result for the current quarter.

Outlook

Gold prices have suffered a dramatic decline of almost 18% since the beginning of the year. Higher cost producers are expected to be hit hard by the slump in prices.

PRU swung to a net loss in the March quarter amid a spike in operating costs. With cash costs to remain elevated through to the end of FY13, we fear the company is tracking for an even bigger loss in the current quarter.

This is likely to translate into continued share price weakness for the group.

Perseus Mining was listed in the traders report as a sell share for our members on May 22nd. For all of our latest share tips and trading ideas sign up for FREE 7 Day Trial and gain full access our research files.