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San Gold Corporation - one of Canada's most exciting new exploration companies and gold producers.
Message: TD WATERHOUSE
San Gold Corp. (SGR-V) C$3.40 Commercial Production at Hinge; Continued Exploration Success Event On November 13
th
, San Gold reported Q3/09 results and provided a
comprehensive update of its activities. Results were highlighted by the company reporting its first quarter of positive operating income, largely driven by the first quarter of commercial production from the high-grade Hinge zone.
Impact - POSITIVE
Given no changes to operational guidance, we make only minor adjustments
to our estimates to reflect slightly lower than expected production year-to-date
from the company’s Rice Lake Mine and improved production potential from
the Hinge zone.
With the company already contemplating the feasibility of developing the
recently discovered L-13 and Cohiba zones, we introduce a $150 million
exploration credit in our valuation to reflect the significant exploration
potential associated with the company’s land package and our expectations
for continued drilling success.
Taken together, our NAV5% rises to $3.22/share (from $2.58/sh). Based on
our expectations for a steady ramp-up in production, we raise our target
multiple to 1.5x (from 1.4x). As a result, our 12-month target price rises to
$5.00/share (from $3.50). We maintain our BUY recommendation.
Details
Q3/09 Results
•
Financial and operating results demonstrated improvement on a
sequential and year-over-year basis, largely driven by a ramp-up in production volumes, highlighted by a significant contribution from the Hinge zone.
•
The company recorded revenues of approximately $8.8 million from the
sale of 8,398 ounces of gold, compared to $2.1 million on sales of 2,276 ounces in Q3/08. Reported EPS were a net loss of -$0.02, compared to - $0.04 in Q3/08.
Gold & Precious Minerals
Recommendation: BUY
Unchanged
Risk: HIGH
12-Month Target Price: C$5.00
↑
Prior: C$3.50
12-Month Total Return: 47.1%
Market Data (C$)
Current Price $3.40
52-Wk Range $0.71-$3.49
Mkt Cap (f.d.)($mm) $930.2
Dividend per Share $0.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 1,701,635
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 273.6
Float Shares (mm) 215.1
Net Debt/Tot Cap 0.0%
NAVPS (current)(f.d.) $3.22
Resources (mm oz) 1.5
Working Cap ($mm) $30.6
Estimates (C$)
Year
2007A 2008A 2009E 2010E
EPS (f.d.) (0.19) (0.15) (0.08) 0.13 EPS (f.d.)(old) -- -- 0.02 0.17 CFPS (f.d.) (0.17) (0.14) (0.04) 0.24 CFPS (f.d.)(old) -- -- 0.08 0.32 Valuations Year
2007A 2008A 2009E 2010E
P/E (f.d.) nmf nmf nmf 26.2x P/CFPS (f.d.) nmf nmf nmf 14.2x Supplemental Data Year
2007A 2008A 2009E 2010E
Gold Prd (koz) nmf nmf 47.0 110.8 Cash Cst ($oz) nmf nmf n/m 418 All figures in C$, unless otherwise specified. Daniel Earle Shey Ylonen, CFA (Associate) Action Notes November 18, 2009
Equity Research 15 of 24 •
Approximately 4,484 ounces of gold were recorded in inventory that was shipped in the period
immediately subsequent to quarter-end and is expected to be reflected as revenue in Q4/09.
•
The company posted record milling activity in September with over 794 tons/day processed in the month.
The mill averaged 582 tons/day over the full quarter.
•
Development activity at the Hinge and Rice Lake mines continued with 2,500 feet of level and decline
development having been completed during the quarter. In addition, the company drilled 72,740 feet underground during the quarter and 55,364 feet from the surface.
•
Following the discovery of the Cohiba zone in Q2/09, drilling in the quarter featured the discovery of the
L-13 zone. Currently, San Gold is advancing plans to determine the feasibility of both zones. In addition, the company also reported the discovery of the Deep West zone from deep drilling at the Rice Lake Mine.
•
As of Q3/09, the company reported $4.4 million in cash, in addition to $15.6 million in marketable
securities. Based on estimated operating and capital expenditures in FY10, along with the proceeds from planned gold sales, we believe the company has sufficient liquidity to fund its planned exploration and development activities.
L-13 Discovery – Potential for Rapid Development; Reinforces San Gold Targeting Model
•
On November 6th
, the company reported drill results that outlined a new discovery, labelled the L-13
zone, in close proximity to the Rice Lake Mine. Results included 3.1 metres of 44.9 g/t gold and 2.3 metres of 19.2 g/t gold.
•
L-13 appears to be ideally located below the decline to the Hinge zone where production is currently
ongoing. We believe that accessing mineralization at L-13 would simply require a spiral decline from the ramp at very low cost, suggesting the potential for rapid development that could offset lower grade material from the Rice Lake mine in the mill as early as 2010. However, based on the early stage of development at L-13, we have not incorporated production from the new zone into our project model at this time.
•
Nevertheless, we note that L-13 is now the third high grade discovery made by the company within the
past 18 months using a geological targeting model that originally identified the Hinge zone in April 2008. In our view, these developments provide further indications of the significant exploration potential associated with the company’s land package.
Revised Estimates
•
We have adjusted our estimates for 2009 and 2010 following the release of Q3/09 results. With respect to
2009 production, we have lowered our estimates due to slightly lower-than-expected production year-todate. For 2010, we now estimate production of 110,801 ounces at a total cash cost of US$418/oz, which compares to the company’s forecast of approximately 110,000 ounces at US$380/oz. We note that our estimates do not assume any production from the recently discovered Cohiba or L-13 zones, which could present upside potential to our current forecasts.
Outlook
We expect exploration results will continue to serve as the primary catalysts for the stock in the near-term.
Currently, the company has ten drill rigs employed (5 surface, 5 underground), with results expected on an
ongoing basis. We expect an initial resource estimate for the Hinge zone by year-end, with a property-wide
estimate appearing unlikely in the immediate future.
Valuation
We calculate that San Gold is currently trading at 1.06x corporate NAV5% and an implied EV/oz multiple of
$577/oz. This compares to its peer group of gold companies in our coverage universe, which currently trade at
an average of 1.32x NAV5% and $234/oz, respectively. We note that in calculating the EV/oz for San Gold,
no credit is given for the potential resources associated with the Hinge zone. Therefore, we expect the
company to trade closer to its peers on a per-ounce basis with the release of a resource estimate for the Hinge
zone in Q4/09.
Action Notes
November 18, 2009
Equity Research
16 of 24
Exhibit 1. P/NAV Peer Comparison
0.00
0.30
0.60
0.90
1.20
1.50
1.80
NGX SGR MFL AGI JAG LSG NGD IMZ GAM IMG
Source: TD Newcrest estimates.
Justification of Target Price
We generate our target price from the application of a 1.5x multiple to our corporate NAV5% which we
calculated using a long term gold price of US$900/oz and USD/CAD exchange rate of $0.85. Our valuation
includes a $150 million exploration credit based on the application of $150/oz to a hypothetical discovery of
1,000,000 ounces.
We note that companies expected to achieve rapid growth with declining costs in politically safe jurisdictions
have typically commanded premium multiples. This is especially true of those with high-grade projects, like
San Gold, which tend to benefit from greater exploration potential and lower capital and operating costs per
ounce than their low-grade peers.
Key Risks to Target Price
Gold and fuel prices, forecast risk relating to deposit size, the governing fiscal and legislative regimes, the
timing of key developments, market conditions, capital and operating costs, foreign exchange rates, resources
and reserves, operating parameters, permitting, environmental, indigenous peoples, and staffing and key
personnel retention.
Investment Conclusion
Following Q3/09 results, we have made minor adjustments to our estimates and incorporated a $150 million
exploration credit in our valuation. Taken together, our NAV5% rises to $3.22/share (from $2.58/sh). Based on
our expectations for a steady ramp-up in production, we have raised our target multiple to 1.5x (from 1.4x). As
a result, our 12-month target price increases to $5.00/share (from $3.50). We maintain our BUY
recommendation.
November 18, 2009
Action Notes
Equity Research
17
7 Recommendations
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