The Big Boys, page-400

CG

I do not have a strong background in following SAR over the years. I read the SAR thread occasionally and from around mid 2015 became interested in buying some shares on a pullback but never pulled the trigger because it had already made a strong run or I thought there would be an even bigger pullback than what occurred. Last week's pullback to 46.5 got me interested in buying but I thought gold could go a lot lower, which it has not.

My assessment is that it is about fully priced given the AUD POG and current reserves with some limited upside into the low 60 cents for those that believe that the POG was going higher. I think the market has pretty much priced in most of the benefits from the production expansion that is to be fully in effect in mid 2016.

SAR's current mill sources its ore from both underground mining and pits and the ore is blended to a level that provides a high enough grade to currently make the operation economical, in fact fairly attractive. This mining effort requires a strongly focused management team, and I note that their costs have been much higher in the past. I believe SAR has had some operational issues in the past and that some years ago their former Chairman sold a large parcel of his shares when the share price was much higher prior to SAR announcing poorer performance, with the resultant decline in the share price (have a look at the chart). Subsequently SAR raised some capital and that is why there are almost 800m shares on issue.

I think the new management is doing a good job. Since this is a more complex operation the success of SAR will depend on the quality of its management, and changes in personnel can become an issue. I think it will take some more time for the market to give SAR the sort of star treatment that it has given some other mid-tier producers, in particular they will need to prove that their recent costs are not short term and that they can duplicate their operational success at the new mining venture. Comments on the SAR thread suggest the CEO is very capable, and I note that the former Chairman I mentioned has recently retired from the Board.

As long as SAR can maintain its projected costs I think SAR is one of the safer goldies and they appear to have enough ore reserves to operate both mines for a reasonable period warranting a PE ratio of about 7. Their resource base suggests a longer life span, but we do not know how much of the resources will be converted into reserves. Their exploration team has shown to be reasonable capable and they are on the acquisition trail of whatever is cheap (eg recently sale of some useful SBM custoffs to SAR).

They have plenty of cash on hand ($45m), no debt and have not accessed their debt facility yet to fund the development of their Thunderbox project.

I would buy SAR on a general goldie puke, and mid 40 cents seems a good entry level at the current gold price, but perhaps such an entry may not become available near term if fundies are accumulating. MacBank has SAR as one of its preferred goldies, can not recall their target price. See link which indicates a possible price range for SAR and medium target price of 68 cents.

http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=sar:ASX

Hope you can find something useful in my comments,

loki