St Barbara ((SBM)) has provided a positive outlook for its newly-acquired Moose River mine while expansion activities weighed on the Gwalia performance in the September quarter. As a result, St Barbara has reduced FY20 production guidance for the Gwalia operation by -11% to 175-190,000 ounces. This comes with slightly higher costs (AISC), now expected at $1390-1450/oz.
A step-change in production at Gwalia, Macquarie suggests, will be important in demonstrating improved operations following the removal of ventilation constraints. Existing mining and the extension activities are currently competing for limited ventilation.
Credit Suisse acknowledges the full details on the September quarter may help understanding, but suspects overly ambitious forecasts for the mine’s capacity to cope with the constrained ventilation system have cause the production downgrade. While a constraint will be removed when the upgrade is delivered during the March quarter it leaves insufficient time to catch up on the shortfall, in the broker’s view.
While acknowledging this is not a great start to FY20, Ord Minnett points out the extension, when completed in the March quarter, will set the mine up for its current life to 2031.
St Barbara has a competitive platform, in the broker’s view, with visibility to 2030 for two 200,000ozpa mines, and one potential 100,000ozpa mine. The Gwalia extension project is effectively doubling underground ventilation and Ord Minnett expects a 25% rebound to around 220,000ozpa when completed.
Volume growth once the extension is completed could push the mine back up to 250,000 ozpa while grades are sustained. As this is a high-quality orebody it comprises more than half of the broker’s valuation.
Moose River
Production and costs for Moose River, Nova Scotia, have been provided for the first time. Production guidance is broadly in line with broker estimates, with 95-105,000 ounces expected, although costs are higher. Macquarie now expects costs of $936/oz at Moose River, noting the company intends to spend $11-13m on exploring the tenements in FY20.
Ord Minnett remains positive on the prospectivity of the region and expects St Barbara to entrench its position in the operations over the next 12 months, confirming medium-term production targets and de-risking the permitting of future pits.
Added costs probably reflect an increase in sustaining capital to improve the operation but may also reflect an upward revision to unit cost assumptions, Credit Suisse suggests. If the latter turns out to be the case, this will need explanation, as projections are relatively recent.
The company has retained FY20 guidance for Simberi, PNG, at 110-125,000 ounces at costs of $1285-1450/oz. Ord Minnett awaits further drilling outcomes and the release of the sulphide strategy. Already, with 1.4m ounces in reserves, the broker believes the sulphides have potential to unlock value, as current oxide operations will wind down in FY21.
FNArena’s database has three Buy ratings and one Hold (Citi, yet to comment on the quarterly). The consensus target is $3.23, signalling 25.5% upside to the last share price. The dividend yield on FY20 and FY21 forecast is 4.5% and 4.9% respectively.
