Broker SP Angel results report

Medusa Mining (ASX:MML) A$0.41, A$85.2m – Asset Impairment of US$260m
SP Angel

• As the carrying value of the assets within the company were considerably higher than their market value, the company had to perform an impairment test.
• This has resulted in an impairment charge of US$260m to FY 2015 year accounts in accordance with AASB 136.
• The impairment is based on changes in the economic assumptions for the assets with the main changes related to gold price and discount rate assumptions.
• The gold price assumption has fallen to US$1,200/oz for the period 2016-2020 from US$1,300/oz for the period 2015-2019.
• The post-tax discount rate used is now 11.1% against 10% used previously.
• The probable reserves fall from 820,000 oz to 590,000 oz.
• Production capacity increases from 120,000 per annum to 135,000-150,000 per annum.
• The break down for the impairment charge is broken down as follows:
Development carrying amount of US$274,386 is written down by US$187,339
Plant & Equipment of US$113,148 by US$68,126
Mineral Properties of US$15,156 by US$4,130

• The key sensitivity to impairment charges is the gold price with a US$100/oz move resulting in a US$54,200 charge.
• A 1% move in discount rate impacts by US$4.780 and a 5% increase in operating costs by US$36,700.
• The cash profit for the group is not impacted achieving US$41.5m against US$30.9m last year.

Conclusion: The impairment charge was inevitable given the current market cap of the company. Medusa remains profitable even under current gold prices with an AISC of around US$1,000/oz with scope for this to come down as operational improvements are put into place to improve mining throughput to match plant capacity. Continued generation of cash and return of management credibility will be key to re-rating the shares as well as a stable gold price.

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