RE: DUNDEE SECURITIES TARGET $5.30I have watched SGR for a while, to see if it would be worth taking a big position in. However, based on their last quarter's performance and this estimate information that First Class posted (which is legitimate as it shows up in my BMO Investorline when I click on SGR), I believe that Avion Gold (AVR.to) is the BETTER buy. I have put comparative information for AVR in yellow highlighted parentheses, information that you can check yourself on their website. I guess Mali is a bit riskier than Canada, but insiders/institutions have been buying a TON of AVR these past few weeks. Anyways, I welcome the discussion.
J$
San Gold Corporation
(SGR-T: C$2.64)
Idea Support
BUY, High Risk*
12-month target price: C$5.30 (was C$5.50)
March 29, 2011
Good Things Come to Those Who Wait
Source: See Note 1
Patience required; BUY rating unchanged
1. · On March 28th, 2011, San Gold (SGR) reported its full year financial results. While financial results for the fourth quarter were largely in-line with expectations, production in Q4 (9,280oz) (26,090oz) came in lighter than we'd expected (13,400oz). The production shortfall was primarily attributable to a higher degree of development muck encountered resulting in lower grade ore being processed.
2. · As SGR continues to work through the development process, grade variability is normal and expected. The company advised that subsequent to year-end, SGR has seen significant grade increases resulting in both better recoveries and production levels. In our opinion, the near term pain (reduced grades) is justified by the long-term gain (accessing higher grade ore bodies).
3. · We estimate that SGR is trading at 10.8x and 8.5x 2012 EPS and CFPS. This represents a 1.8x and 0.9x discount to its small producer peer average. We believe this discount is overstated and while we've relaxed our target price (due to the recent equity issuance and revising 2011 production), a rich reward may be in store for investors willing to exercise patience; hence our BUY rating and $5.30 target price.
Closing the books on 2010
4. · San Gold reported its 2010 year-end results which included full-year EPS of (
.08) (.09) which was in-line with our estimate of (
.07). Full-year CFPS of (
.05) which was also consistent with our estimate of (
.04). Q4 results were in-line though revenues were supported by inventory sales as production came in lower than forecast.
5. · In Q4, ~65% of ore was produced from the Hinge mine with the remainder coming from Rice Lake. Total cash costs for 2010 averaged $1,105/oz ($574/oz) ($945/oz at the Hinge and $1,786 at Rice Lake) and was relatively consistent with our modelled estimate of $1,092/oz.
Setting the stage for things to come in 2011
6. · We continue to view San Gold as a "2011 story" and with some positive changes in 2010 (George Pirie joining the company), the path ahead looks promising. Management highlighted that it currently forecasts 2011 production of 80,000oz (100,000oz) at cash costs averaging $825/oz ($540/oz) for the year.
7. · The company plans to spend >$20 million on exploration along the surface of Shoreline Basalt and at depth along the projected mineralized zones. Additionally, significant capital development is planned in order to access new faces at the 007, 007 East, Cohiba, L10 and L13 zones. With new faces, production grade should improve significantly in 2011.
8. · While 2010 exploration at Rice Lake demonstrated promise, 2011 will be focused on production as the exploration program will shift closer to identified deposits in order to assist in the planning of future production.
SGR: Price/Volume Chart
Source: Thomson ONE
Company Description
San Gold is an emerging gold producer with 100%-owned operating mines and exploration properties in the Rice Lake area of southeastern Manitoba.