San Gold (SGR-T) shares tumbled 42% over three trading days after the gold miner 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 that 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 his 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 wrote to clients. “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 correctly predicted that San Gold would have to secure US$50 million this year through debt and equity to carry out its 2013 plans to boost production at the Rice Lake complex in Bissett, 235 km northeast of Winnipeg.
In a recent technical report, San Gold predicts it would cost US$284 million to ramp-up underground production at the Rice Lake complex over five years (from 2013 to 2017) to meet mill capacity. Roughly US$83 million is estimated in total expenditures for 2013.
The junior states that development at the property this year will occur in four main areas: the 16 Level, 26 Level, A-Shaft of the Rice Lake mine, and within other active mining areas of the 007, Cohiba, Hinge and L13 deposits.
But CIBC analyst Cosmos Chiu echoed the concern that San Gold didn’t have enough free cash flow at press time 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 said.
Along with the high capital requirements, both analysts underscored that gold grades in the updated reserve and resource statement have declined.
Reserves grew 21% to 252,600 oz. gold and measured-and-indicated resources increased 21% to 655,100 oz., while grades dropped 15% to 5.10 grams and 19% to 6.55 grams.
In the inferred category, ounces decreased 18% to 2.8 million oz., and the grade fell 18% to 5.92 grams.
Quast said he predicted more inferred resources would have been upgraded to the higher categories, but notes that the company’s management indicated that it lacked the infrastructure to access resources.
“Given minimal resource conversion, mine life remains a concern, as reserves represent approximately 2.5 years of production,” he said.
On the lower grades and higher capex, Chiu dropped his $1.25 target to 65¢ and rating to “sector underperformer” from “sector performer.”
For the fourth quarter of 2012, San Gold produced 19,000 oz. gold, bringing its full-year output to 86,506 oz., below the 95,000 to 105,000 oz. target. The firm says that lower quarterly production was 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 a fourth-quarter grade of 6.2 grams and quarterly production of 24,000 oz. gold.
“While fourth-quarter 2013 production was weaker than expected, guidance and the updated reserve statement is likely what drove the stock lower,” Quast writes. He points out that the 2013–15 production guidance outlines a slower ramp-up at the Rice Lake complex than anticipated. San Gold is guiding gold output of 85,000 to 95,000 oz. in 2013, 95,000 to 105,000 oz. in 2014 and 105,000 to 115,000 oz. in 2015. Cash costs for 2013 should come under US$800 per oz.
On Feb. 12, San Gold closed at 39¢ on 6.8 million shares traded.
On Feb. 13, San Gold announced a $50-million bought-deal offering of convertible debentures with a syndicate of underwriters co-led by Scotiabank and CIBC. The underwriters have an option to buy up to an additional 15% of the offering within 30 days of the closing date, expected on March 6, 2013.
Priced at C$1,000 apiece, the debentures will mature on March 31, 2018, and will bear interest at 8% per year. They will be convertible at the holder’s option into San Gold shares at a conversion price of 50¢ per share.
San Gold says the money will fund continued development of the company’s mineral properties and for general working capital purposes.