This was published Sept 5th. If the operating results are improving in Q3 they need to tell the markets.
Downgrading to Sector Perform: Operational turnaround likely to remain challenging
Our view: We downgrade TMAC to Sector Perform from Outperform and
reduce our price target to C$7 from C$8. While the company's operational
results have improved, we are losing confidence in the plant’s ability
to ultimately deliver design recoveries. We also believe the company's
long-term development strategy could see it pursue a larger expansion,
increasing its risk profile and impacting its medium-term FCF outlook.
Key points:
Plant performance has continued to lag expectations
TMAC has made numerous improvements to the plant at Hope Bay which
has seen throughput and recoveries improve to 1,630 tpd and 81% over
the past year from 825 tpd and 71% in the prior year. Management is
now confident in being able to operate the plant at 2,000 tpd, based
on performance in Q2/19. However, with recoveries still tracking below
design rates of 90%, we now model steady-state recoveries of 88% based
on recent run-rates and forecast gains as modifications are completed.
Long-term development strategy likely to carry near-term risks
We expect TMAC to release a Pre-Feasibility Study in Q4/19 evaluating
the long-term strategy for Hope Bay, including continuing to utilize the
current plant, building a new 10 Ktpd plant fed by an open-pit mine at
Madrid, or a mid-range scenario with a new ~5 Ktpd plant fed by an
expanded underground. Given shortcomings of the existing plant, we
expect TMAC to develop a new larger-scale plant at Madrid, likely fed
from underground. While this should enhance its long-term value (i.e. the
correct business decision, in our view), we expect it to keep investors on
the sidelines in the medium-term given (1) current preferences for nearterm FCF, (2) financing uncertainty, and (3) elevated execution risk.
Exploration continues to be encouraging
On a more positive note, TMAC has continued to demonstrate exploration
upside. At Doris, the company has focused on growing the high-grade
Doris North BTD Extension, with recent success highlighting ongoing
near-mine extensions. At Madrid North, TMAC demonstrated that
mineralization at Suluk extends well below the current resource as well as
indicating the potential to add resources in the Patch 7 zone. In addition,
we see the potential for positive exploration news flow from Boston later
this year with the camp having been re-opened after a 2 year hiatus.
Downgrade to Sector Perform; Target down to C$7
We downgrade TMAC to Sector Perform from Outperform reflecting
ongoing operational underperformance and uncertainty around the
company's long-term development strategy. We have also reduced our
price target to C$7 from C$8. While we have increased our gold price
forecasts, our lower target reflects lower recovery assumptions as well as
higher unit cost forecasts, more in-line with recent run-rates.