Perseus Mining Limited

Company Overview: Perseus Mining Limited (ASX: PRU) is a metal and mining company, mainly involved in gold production, mineral exploration and gold project development in the Republic of Côte d’Ivoire and Republic of Ghana, both located in West Africa. The company’s Edikan gold mine is located in Ghana, and it achieved commercial production in 2012. Edikan has Mineral Resources of 3.0 million ounces, including 1.61 million ounces of Ore Reserves with a grade of 1.10g/t Au. The company’s other two mines - Sissingué gold mine and Yaouré gold mine are located in Côte d’Ivoire.

PRU Details

Top-Line Growth Supported by Decent Production Performance: Perseus Mining Limited (ASX: PRU) is a West African-focused gold company that owns and operates three gold mines, namely Edikan, Sissingué and Yaouré. As on 6 April 2021, the company’s market capitalisation stood at ~$1.34 billion. The company’s strategy is focused on unlocking value by efficiently and effectively converting mineral resources into producing gold mines while generating targeted returns on funds employed. Despite the challenges presented by the COVID-19 pandemic during FY20, the company was able to report decent operational and financial performance during the year, with 67% YoY growth in EBITDA from operations and 41% YoY growth in net cash flows from operations. From 2016 to 2020, the company's top-line has grown at a CAGR of 23.74%, supported by the decent production performance from its operating mines.

5-Year Revenue Trend (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

PRU’s major focus in FY21 is on the development of its third gold mine - Yaouré. The company expects a material contribution from the Yaouré Gold Mine in the coming periods, which will further improve the company’s earnings and cashflow. At its Edikan and Sissingué gold mines, the company intends to implement improvement initiatives that are aimed at increasing gold production and reducing AISC. With a healthy balance sheet comprising cash and bullion balance of $153.2 million as of 31 December 2020, PRU seems well placed to continue the growth of its business through both organic means as well as by mergers and acquisitions opportunities that could offer attractive returns on its investment.

Decent Growth in H1FY21 NPAT: For the half-year ended 31 December 2020, the company reported total production of 137,386 ounces of gold, up 2% on the previous corresponding period (pcp). One of the important milestones of H1FY21 was the completion of the development of PRU’s third gold mine, Yaoure, ahead of schedule and budget. Revenue for H1FY21 stood at $286.7 million, up by 4.5% on pcp. Gross profit from operations stood at $80.5 million in H1FY21, up 68.3% on pcp. As a result of the decent operating performance at the low-cost Sissingué Gold Mine in Côte d’Ivoire, combined with steady gold production at the Edikan Gold Mine, PRU’s net profit after tax grew by 61% YoY to $49.1 million in H1FY21. As at 31 December 2020, the company had cash and bullion of $153.2 million and total interest-bearing liabilities of $168.9 million.

H1FY21 Result Highlights (Source: Company Reports)

FY20 Performance Highlights: For the year ended 30 June 2020 (FY20), PRU reported total gold production of 257,639 ounces at an AISC of US$972 per ounce. Total gold sales for FY20 stood at 272,778 ounces at a weighted average sale price of US$1,457 per ounce resulting in a cash margin of US$485 per ounce. The company reported a total EBITDA of $273.8 million, up 67% on the previous year, reflecting PRU’s long term strategy in action. Further, net cash flows from operations stood at A$212.8 million in FY20, up 41% on the previous year. NPAT for FY20 stood at $94.42 million, up from a net profit after tax of $7.6 million in the previous financial year, driven by the rise in revenue resulting from higher gold prices as well as higher gold sales at Sissingué compared to the prior year.  As at 30 June 2020, the company had cash and bullion on hand of $237.5 million, up 41% on the previous year.

FY20 Operational Highlights (Source: Company Reports)

Key Metrics: PRU’s profitability margins in FY20 have improved over the previous year, supported by higher gold prices as well as higher gold sales at Sissingué. EBITDA margin for FY20 stood at 43.0% in FY20, higher than 29.5% reported in FY19. Net margin for FY20 stood at 16%, higher than 1.5% in FY19. Current ratio for FY20 stood at 3.3x, higher than 3.13x in FY19, demonstrating that the company has improved its ability to pay short-term obligations.

Past 5-year Financial Performance for Year Ending 30 June 2020; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 33.26% of the total shareholding while the top four constitutes the maximum holding. Van Eck Associates Corporation and The Vanguard Group, Inc. are holding a maximum stake in the company at 11.02% and 4.83%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

First Gold Poured at Yaouré Gold Mine: On 18 December 2020, the company announced that it has completed the first pour of gold at its third mine, Yaouré Gold Mine in Côte d’Ivoire, five weeks ahead of schedule, in-line with PRU’s “stretch target” of first gold at Yaouré in December 2020. This marks a major achievement in the construction and commissioning of PRU’s third gold mine and demonstrates the skill, resilience and dedication of the company’s in-house development team, technical and commercial support staff, its contractors and consultants.

Key Risks: The company is exposed to the risk related to COVID-19 pandemic and associated impacts. Moreover, the company’s results could also be impacted by the fluctuations in gold prices. As a Western African focused gold producer, the company is also exposed to the risk associated with the change of law or policy in the jurisdiction.

Outlook: For the second half of FY21, the company is focused on further debt reduction and expects a significant reduction in its capital expenditure.  Gold production for H2FY21 is expected to be in the range of 175,000 – 190,000 ounces with Average All-In-Site-Costs (AISC) of between 950 -1,150.  With a healthy balance sheet capacity and decent cash flows, PRU seems well placed to fund its growth and a future dividend stream. The combination of gold production from PRU’s existing assets, including increased production at Edikan, and the new production from Yaouré is expected to lift the company’s total gold production to more than 500,000 ounces of gold per annum by FY22.

Gold Production Guidance (Source: Company Reports)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of PRU has corrected by 18.47%. The stock is trading below the average 52-week price level band of $0.895 and $1.660. On the technical analysis front, the stock has a support level of ~A$1.02 and a resistance of ~A$1.422. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe the company can trade at a premium to its peers, considering the company’s geopolitically diverse portfolio, improved gold price scenario, and modest outlook. We have taken peers like Resolute Mining Ltd (ASX: RSG), Regis Resources Ltd (ASX: RRL), St Barbara Ltd (ASX: SBM), etc. Considering the company’s decent performance in H1FY21, expected contribution from Yaouré, continued focus on organic growth opportunities, continued focus on debt reduction, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of A$1.130, up by 2.727% on 06 April 2021.

PRU Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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