Outperform Speculative Risk TSX: TMR; CAD 4.87
Price Target CAD 9.00 ↓ 10.00
Site Tour: Hope Bay ramp-up continues
Our view: TMAC hosted an analyst and investor tour of its Hope Bay mine in Nunavut, highlighting recent and upcoming initiatives to bring the operation to design levels. While we continue to expect operating results to be volatile, we believe Hope Bay is nearing an inflection point with stronger output and lower costs forecast for H2. We also believe the balance sheet risk can be managed.
Key points:
Recoveries and throughput trending in the right direction
We continue to believe operating results at Hope Bay are near an inflection point with stronger production and costs in H2. We forecast higher throughput as the second processing line continues to ramp up, having already demonstrated the ability to operate at nameplate capacity over short periods. The next key operational gain is expected to come from installation of additional capacity to capture gravity recoverable gold in the circuit, which should directly benefit recoveries as well as lowering consumables costs and reducing pressure on the back end of the plant. While we expect the ramp-up to continue over the coming months and reach steady state by early-2019, we have taken a more conservative view on the company’s 2019 outlook. We have lowered our forecast for processed grades given greater use of long-hole stoping which is expected to generate greater mining dilution, partially offset by lower unit mining costs, improved productivity, and greater ore recovery.
Balance sheet risk has increased
We expect some external capital to be required to fund TMAC's annual sealift in Q3 and debt repayments starting in Q4. This is driven by only C$15M of restricted cash being released through demand bonds (prior indications of C$25M), weaker than expected output in July, higher capex, and declining gold price. We have incorporated a C$25M equity raise in Q3 to backstop the near-term funding needs and assume the US$30M bullet debt repayment in Q1/19 is deferred.
Number of initiatives expected as plant ramps-up
Once the processing plant completes the ramp-up and balance sheet challenges are addressed, we expect management’s attention to turn to (1) driving costs towards steady state levels, (2) optimizing mine sequencing across the Hope Bay camp, and (3) exploration to demonstrate the long-term potential of the asset.
Target lowered to C$9; Reiterate Outperform, Speculative Risk
Our price target has declined to C$9 from C$10 after updating our estimates post Q2/18 results, including guidance for lower mined grades, higher capital expenditures, and updated balance sheet outlook. While risks are elevated, we reiterate our Outperform, Speculative Risk rating as we believe the shares remain attractively valued and believe operating results are well positioned for a material improvement in H2.