Perseus highlights its potential in West Africa

Junior gold miner Perseus Mining (TSX: PRU; ASX: PRU) has made three positive announcements, pleasing investors, who drove the stock up nearly 30% in recent days.

The West Africa-focused producer reported a strong March 2015 quarter at its flagship Edikan gold mine in Ghana, published an improved life-of-mine plan for Edikan based on updated reserves and resources, and tabled a revised feasibility study for its Sissingué gold project in Côte d’Ivoire.

Jeff Quartermaine, the company’s managing director, says the firm has come a long way in transitioning from a junior explorer to a reliable, mid-tier gold miner — noting that many small companies failed to complete the arduous journey. 

The multi-pit Edikan mine had a solid quarterly run. It churned out 47,450 oz. gold, down 2% from the previous quarter, despite government-imposed power restrictions that reduced the plant’s capacity to 66% in February and March. To address the power shortage, Perseus was bringing four diesel-powered generators online in late April.

The mine’s all-in site costs came in at US$903 per oz., reflecting an 11% quarter-on-quarter improvement, due to cost savings in several areas, including fuel and other inputs, mining services and maintenance activities.

Gold sales were 48,936 oz. at an average sale price of US$1,375 per oz., resulting in a US$472 per oz. cash margin. This helped boost Perseus’ working capital by 23% over the previous quarter to A$148.4 million ($140.93 million). Its cash and bullion grew 45% to A$83.7 million ($79.5 million) at the end of March.

Edikan is on track to meet or exceed its half-year guidance of 100,000 to 110,000 oz. gold at all-in site costs of US$1,150 to US$1,250 per oz.

The optimized life-of-mine plan, using a US$1,200 per oz. gold price, shows Edikan’s mine life has shortened by 14 months and reserves have decreased by 10% to 61.1 million tonnes grading 1.2 grams gold per tonne for 2.35 million oz. However, grades have improved by 8%, resulting in higher output and cash flow during the next eight years. Production from fiscal 2016 through 2023 should average 235,000 oz. a year at all-in site costs of US$937 per oz. In comparison, Edikan this year should yield 200,000 to 210,000 oz. at all-in cash costs of US$1,075 to US$1,125 per oz.

The optimization “increases the value of the mine and therefore shareholder wealth,” Quartermaine says.

Following the revised feasibility study for the Sissingué project, based on reserves of 5.5 million tonnes at 2.4 grams gold for 429,000 oz., Perseus is going ahead with the development. Once up and running, Sissingué should reduce the company’s risk of being a single-asset producer and improve its cost structure.

The study envisions miners recovering 385,000 oz. gold over a 5.3-year mine life. Annual production during the first five years should average 75,000 oz. Estimated life-of-mine, all-in sustaining costs are US$636 per oz., or 32% lower than Edikan’s average all-in costs over the next eight years.

Quartermaine notes that while Sissingué will “materially add to our cash flow,” it will also “greatly assist the company by providing a second income stream, which will make us less depended on our Edikan mine for earnings and liquidity.”

Perseus intends to fund the US$106-million development by using its current cash reserves and by taking on debt.

After securing financing and finalizing a mining convention with the Ivorian government, the company plans to build in the September quarter, with first production slated within 14 months.

Using a US$1,200 gold price, Sissingué has a net present value at a 10% discount rate of US$52.5 million, and a 27% internal rate of return with a 32-month payback.

BMO analyst Andrew Breichmanas writes that the firm is undervalued versus its West African and mid-tier producer peers. “With Edikan delivering more consistently, a solid balance sheet and growth opportunities emerging, the significant valuation gap is beginning to appear less justifiable in BMO Research’s view.” 

Breichmanas has an A50¢ (47¢) target and a “market perform” rating on the stock. 

Also in Côte d’Ivoire Perseus holds three concessions, Mahalé, Mbengué and Napié where the company has encounted gold mineralization in early stage exploration activity.

Perseus shares closed April 24 at 34.5¢, up 27% since the quarterly results came out on April 21.