Saracen Minerals Holdings Ltd (ASX: SAR) is an Australian gold miner. Saracen has three main projects in Western Australia. These include the Carosue Dam Operation, the Thunderbox Operation and the recently acquired 50% interest in the Kalgoorlie Consolidation Gold Mine (KCGM) Super Pit (from 1 December 2019). Saracen has a market capitalisation of A$4.12 billion.
What are the key points from Saracen’s December quarterly report?
- Total gold production for the December quarter is 120,127oz, up 25% from the previous quarter (including one month’s production from the KCGM operation).
- All-in Sustaining Costs (ASIC) for the December quarter is A$1,098.00/oz, up 14% from the previous quarter (including one month’s production from the KCGM operation).
- Gold production at the Thunderbox operation for the December quarter is 46,594oz, (up 2% from the previous quarter) at an ASIC of A$754.00/oz (up 10% from the previous quarter).
- Gold production at the Carosue Dam operation for the December quarter is 52,899/oz (up 1% from the previous quarter) at an ASIC of A$1,231.00/oz.
- Gold production at KCGM for the month of December is 20,634 at an ASIC of A$1,522.00/oz (Saracen 50% interest).
What are the drivers of this result?
The main driver of the increase in production is due to Saracen’s 50% acquisition of the KCGM operation. The acquisition cost US$750 million (~A$1,1 billion). Saracen financed a proportion of the investment with debt.
KCGM is one of the largest gold mines in Australia with gold production of 490koz in FY19 and 730koz in FY18. The production was down significantly in FY19 due to a rock fall. Saracen management have mentioned that it will take more than three years to recover from the rock fall but note that the acquisition will pay off in the long-term and provide additional revenue growth.
What is the outlook for Saracen?
Saracen’s management note that FY20 group production guidance is +500koz and in FY21 +600koz. As at 31 December 2019, Saracen held cash, bullion and investments of A$293.8 million and debt of AS385 million.
The outlook for Saracen is positive. The acquisition of the KCGM Super Pit could allow Saracen to transition from a mid-tier to top-tier gold producer. The acquisition is estimated to more than double Saracen’s total gold production in the coming years.
The outlook for gold is not looking as favourable as it has been last year. This reflects global economic conditions improving and new developments with certain countries that can improve economic certainly within the global economy. In particular, the United States (US) and China recently signed phase one of a new trade deal between the countries. Additionally, there is increased certainty that the newly elected Prime Minister Boris Johnson will deliver Brexit, with the United Kingdom (UK) expected to leave the EU on 31 January 2020. After this, the UK will begin the transition period involving the UK negotiating a new trade deal with the EU. If this deal is reached, global economic and political concerns may ease, causing the outlook for the gold price to be not as favourable as it had been in 2019.
A key issue for investors is whether Saracen commences making dividend payments in respect of first half FY20 earnings for the first time. Saracen has previously announced that it is targeting a dividend payout ratio equal to 20-40% of NPAT subject to maintaining a cash balance of A$150 million. The December quarter report notes that Saracen paid tax which suggests that it could pay a fully franked dividend.
What is the market reaction?
The market reaction to Saracen’s quarterly activities report is positive. Saracen is up 3% today and is currently trading at A$3.85. Saracen has a forward P/E ratio in the low twenties.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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