Perseus shares hit by double whammy

A lowered guidance for gold production and a shrinking resource estimate sent Perseus Mining (TSX: PRU; ASX: PRU) shares reeling in mid-December.

After markets closed on Dec. 14, the West Africa-focused gold producer updated investors on its Edikan gold mine in Ghana and three gold projects in Côte d’Ivoire: Sissingué, Bélé and Yaouré. More than half of the update was rather bleak, sending shares down 38% over three trading days.

Despite mill improvements at Edikan, the company’s sole producer has struggled to recover from a longer-than-planned mill shutdown in October. While Perseus was finishing upgrades, it took the mill offline for six days longer than the planned nine days. This, combined with lower head grades, led Perseus to lower its expectations for the December 2016 half year. (Perseus’ current fiscal year ends on June 30, 2017.)

The company has downgraded the December half-year guidance by 12–20% to 70,000 to 80,000 oz. gold. All-in site costs should come in between US$1,550 and US$1,650 per oz., up from US$1,285 to US$1,595 per oz. gold. The June 2017 half-year target is unchanged at 125,000 to 145,000 oz. gold.

“You would need to ask the consultants how they failed to identify contamination in drill holes.”
Jeff Quartermaine
Managing director and CEO, Perseus Mining

“While we consider the downgrade disappointing, we continue to look to second-half 2017 for a move to positive cash flow based on improved operational performance and higher grades,” Canaccord Genuity (Australia) analyst Reg Spencer writes.

Meanwhile, Perseus requested that Snowden Mining Industry Consultants re-estimate the May 2015 resource statement of its feasibility-stage Sissingué project for contamination. The December 2016 update cut Sissingué’s measured and indicated gold ounces by 20% and the inferred ounces by 8%.

The re-estimation request came after Perseus managing director and CEO Jeff Quartermaine asked a recently appointed group mine geologist to “totally familiarize” himself with the project’s geology and resource and reserve estimates so he could liaise with a bank’s technical team. “He noted a discrepancy between a diamond hole and an adjacent reverse-circulation (RC) hole, and started a more thorough investigation,” Quartermaine says in an email.

Perseus reassessed the project’s drill database — used by both Runge Ltd. and Snowden in earlier resource estimates — ahead of planned discussions with prospective debt financiers. Perseus found a number of wet RC holes with possible “downhole contamination” that could have affected the “gold grade in specific holes or parts of holes,” the company said in the update.

“You would need to ask the consultants how they failed to identify contamination in drill holes. Up until now, the company has [not unreasonably] relied on the findings of its well-credentialed independent consultants, that all was in order in terms of quality assurance and quality control,” Quartermaine says.

Perseus Mining’s Edikan gold mine in Ghana. Credit: Perseus Mining.

To determine the amount of contamination, the company cut 6,587 metres of diamond drilling in 64 holes.

Snowden reviewed both the new and old drill data and confirmed the company’s observations that some of the previous RC samples contained “smearing of grades as a result of wet drilling in ‘sticky’ material.” Snowden removed 5%, or 200 intervals, from the previous RC samples, and incorporated the new drill results before re-estimating the resource. (It did not discard any drill holes.)

Sissingué’s measured and indicated resource now stands at 700,000 oz. (13 million tonnes grading 1.6 grams gold per tonne) compared to 880,000 oz. (16 million tonnes at 1.7 grams gold). Inferred resources have dropped to 58,000 oz. (940,000 tonnes at 1.9 grams gold) from 63,000 oz. (1.1 million tonnes at 1.7 grams). The resource comprises over 202,000 metres of drilling in 2,042 RC and diamond drill holes.

Perseus says the 20% reduction in resources could also lower Sissingué’s reserves. But the company says it can’t confirm this until it finishes “detailed mine planning based on recently tendered mining costs, and other revised mining and processing parameters.”

In February 2015, Runge calculated reserves of 429,000 oz. gold (5.5 million tonnes at 2.4 grams gold). This contributed to the revised April 2015 feasibility study.

Based on those open-pittable reserves, Sissingué could crank out 385,000 oz. gold over a 5.3-year mine life, with annual production averaging 75,000 oz. for the first five years. The cost to get the mine up and running is US$106 million.

Perseus aims to confirm the reserves and the feasibility assumptions in early 2017, Quartermaine says.

Given the uncertainty of the reserves, the company plans to lower the project debt it seeks to build Sissingué, while increasing internal funding. It previously aimed to secure US$60 million through debt and US$40 million through cash flow and cash reserves.

Perseus has since adjusted Sissingué’s timeline, pushing initial gold production back four months to the end of February 2018.

On a positive note, Perseus tabled a maiden resource estimate for the Bélé project, which is within trucking distance of Sissingué. Bélé has an inferred resource of 260,000 oz. gold from 5.2 million tonnes at 1.6 grams. Drilling is ongoing, with an update and an initial reserve estimate expected out in early 2017.

“While Bélé offers potential to replace lost ounces in the reserve plan, at current gold prices we consider Sissingué a marginal project. The situation is exacerbated by reduced debt draw [US$30 million from US$60 million], and with the balance of development costs now borne by cash flow, coupled with the delayed production,” Spencer writes.

Perseus also highlights that at its more substantial growth project, Yaouré, it is on track to finish a definitive feasibility study in mid-2017. But this depends on whether the company can finish a 42,000-metre resource definition program before the next wet season in June 2017, Spencer says. Perseus aims to reach a compensation agreement with landowners so that it can drill immediately.

The stock closed Dec. 19 down 11% at 33¢, with Perseus shares having lost 38% since the Dec. 14 update. At press time on Jan. 12, the stock traded had recovered to 38¢.

Spencer had a “buy” rating on the stock in late December and lowered his price target to A85¢ from A90¢. “While we are disappointed, our investment case remains driven by an expected turnaround at Edikan from first-quarter 2017, and production growth from the 200,000 oz. per year Yaouré development project.”

Editor’s note: this story has been updated to include comments from the company and an analyst.