San Gold (SGR-T) tumbled 42% in the last three trading days after it missed market expectations with its 2012 production results, three-year guidance and updated reserve and resource estimate, all published on Feb. 8. In response, analysts axed their price targets, cautioning the company would need to raise more funds this year to continue developing its prized Rice Lake mining complex in Manitoba.
Following the “disappointing” string of events, BMO Capital Markets analyst Brian Quast hacked his target price to 50¢ from $1.60 and rating to “market perform” from “outperform.”
“A large portion of the outperform rating was predicated on there being no need for external financing in 2013,” he writes in a note to clients, adding the “lower production and higher capex numbers have removed any confidence that BMO Research may have had on the ability of San Gold to be able to live within its means.”
He estimates San Gold will have to secure roughly US$50 million this year through a mix of debt and equity to carry out its 2013 plans to boost production at the Rice Lake complex, located in Bissett, 235 km northeast of Winnipeg.
In a recent technical report, San Gold predicts it will cost a total of US$284 million to ramp up underground production at the Rice Lake complex over five years (2013-2017) to meet mill capacity. Roughly US$83 million is estimated in total expenditures for 2013.
The junior states development at the property this year will occur in four main areas: 26 Level, 16 Level, A-Shaft of the Rice Lake mine and within other active mining areas of the 007, Hinge, L13 and Cohiba deposits.
However, CIBC analyst Cosmos Chiu echoes the concern that San Gold may not have enough free cash flow to carry through with the planned work.
“Based on our analysis, at the current spot price for gold (US$1,650 per oz.), we believe operating cash flow is insufficient to cover capex until at least 2016,” Chiu says.
Along with the high capital requirements, both analysts highlight gold grades in the updated reserve and resource statement have declined.
Reserves grew 21% to 252,600 oz. gold and indicated and measured resources increased 21% to 655,100 oz., while grades dropped 15% to 5.10 grams and 19% to 6.55 grams, respectively.
In the inferred category, ounces decreased 18% to 2.8 million oz. and the grade fell 18% to 5.92 grams.
Quast says he predicted more inferred resources would have been upgraded to the higher categories, but notes the company’s management indicated that it lacked sufficient infrastructure to access the resources at that time.
“Given minimal resource conversion, mine life remains a concern as reserves represent approximately 2.5 years of production,” he says.
On the lower reserve grades and higher capex, Chiu lowered his $1.25 target to 65¢ and rating to “sector underperformer” from “sector performer.”
For the fourth quarter of 2012, San Gold produced roughly 19,000 oz. gold, bringing its full-year output to 86,506 oz., below the 95,000-105,000 oz. target. The firm says quarterly production came in light due to lower than planned grades realized in several stoping blocks at the 007 mine.
The head grade for the quarter was 4.2 grams gold per tonne, dragging down the average grade for 2012 to 5 grams. BMO Research had estimated fourth-quarter grade of 6.2 grams and quarterly production of 24,000 oz.
“While Q4/13 production was weaker than expected, guidance and the updated reserve statement is likely what drove the stock lower,” Quast writes. He points out the new 2013-2015 production guidance outlines a slower ramp-up at the Rice Lake complex than anticipated.
San Gold is guiding gold output of 85,000-95,000 oz. in 2013, 95,000-105,000 oz. in 2014, and 105,000-115,000 oz. in 2015. Cash costs for 2013 should come under US$800 per oz.
On Feb. 12, San Gold closed the day at 39¢ on 6.8 million shares traded.
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