African Barrick’s (ABGL) second quarter results are scheduled to be released on Monday July 23 at 0700 British Summer Time (GMT+1hr). At the time of its Q1 results, Edison forecast Q2 EPS of 8.4 U.S. cents. Since then however, the gold price has declined by US$50/oz, to US$1,594/oz. In addition there has been some evidence of a hangover from the earlier power supply consistency problems at Buzwagi. As a result, Edison has now revised its Q2 EPS expectation to 6.3 US cents (excluding any effect from changes in inventory).
Key Equals Rising Grades In both H2 And The Long Term
Notwithstanding Edison’s adjustment to its Q2 earnings forecasts, FY12 will be a turnaround year for ABG. Whereas the focus of mining in H1 at Bulyanhulu was on lower-grade areas of the mine, in H2 the grade is anticipated to increase by c 4%, to 9g/t. At the same time, and as its waste stripping programme is completed, the head grade at North Mara will also begin to revert back towards its reserve grade, rising from 2.1g/t to exceed 3g/t in Q412 – a level that it should then maintain until the next cut back in 2016. In tandem with a higher head grade, metallurgical recoveries are also expected to rise 86% (vs 79% in Q112). At Bulyanhulu, the longer-term target grade is 11g/t (28% above Q1 levels), which management expects to be attained in approximately FY20 and then maintained until the official end of the mine’s life in FY34.
Valuation: £4.20-7.17 (Plus Blue Sky) Depending…
The increase in grades in both the long and the short term at Bulyanhulu and North Mara should reduce unit costs of production from an estimated US$922/oz in Q212 to c US$671/oz in the longer term (in real terms). On this basis, and assuming a long-term gold price of US$1,350/oz, Edison estimates that the net present value of the future (maximum potential) dividend stream to investors from existing producing assets is US$5.37 (£3.48) per share. This valuation excludes any upside from either the Bulyanhulu plant expansion (which Edison has previously valued at 22.6 US cents per share), Nyanzaga (which Edison has previously valued at 87.4 US cents per share), or any additional blue-sky exploration potential. Including the first two, Edison’s estimated value for ABG, using the flat/nominal methodology, increases to US$6.47, or £4.20, per share (plus blue-sky exploration potential). At the current gold price of c US$1,600/oz, this valuation increases to US$9.03 (£5.86) per share and potentially as high as US$11.05 (£7.17) per share in the event that unit costs increase at the same rate as unit revenues in future (as opposed to ‘in excess of’ as in the case of Edison’s US$6.47/share valuation – see pages 7-9 for explanation).
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