Source:Goldman Sachs

St. Barbara (SBM.AX): Gwalia to continue trucking; no GMX simplifies outlook; Upgrade to Buy at 0.9x NAV

24 Mar 2019 at 8:23pm AEDT

St. Barbara

(SBM.AX)

Gwalia to continue trucking; no GMX simplifies outlook; Upgrade to Buy at 0.9x NAV

25 March 2019 | 7:23AM AEDT

SBM has elected not to proceed with its hydraulic hoisting solution known as Gwalia Mass Extraction (GMX). Gwalia production guidance is down 20-60koz over FY20-22 vs. the GMX PFS. SBM also downgraded Gwalia FY19 production by 10-15koz due to impacts from construction of the Gwalia Extension Project (GEP). After revising our production and cost profile to reflect ongoing trucking operations, we upgrade SBM to Buy. Our revised 12-month target price (A$3.90/sh) implies 21% TSR upside.

Growth in trucking fleet from GEP should lift mined tonnes

We have rebased our expectations for production over the medium and long term for Gwalia. We now forecast long-run production of c.255koz p.a. from FY22 (1.1Mtpa at 7.4g/t, below reserve grade), AISC of c.A$1,000/oz (FY19 real). We include A$110mn of ventilation capex over FY20-24. The company will provide additional detail on costs and full FY20 guidance with the 4Q19 Q report. We include further detail on our assumptions within this report. At last close (A$3.29/sh), we believe SBM is pricing in a long-run throughput of just 840ktpa at current reserve grade on our forecasts.

Upgrade to Buy on valuation, FCF yield, and de-risked outlook

Our revised 12-month target price of A$3.90/sh is still based on a 42.5%/42.5%/15% blend of NAV, EV/EBITDA and M&A value. Our NAV is down 28% to A$3.64/sh after incorporating the changes to Gwalia's production and costs. Our FY19/20/21 EBITDA estimates are down 11%/24%/27%. SBM is now trading on 0.9x NAV (vs. 1.1x peer average), with sector-leading FCF yield (6%/10% FY19E/FY20E) and the lowest EV/EBITDA multiple of the Aus. miners in our coverage (4.8x NTM EBITDA vs 7.0x peer average), even after the substantial downgrades.

Growth in trucking fleet from GEP should lift mined tonnes

SBM plans to grow the truck fleet at Gwalia from 9-10 trucks to 15 trucks, while at the same time reducing the amount of waste haulage required through use of the Paste Aggregate Fill (PAF) circuit (commissioning from 4Q19). However, Gwalia will remain ventilation constrained until the additional ventilation from the GEP is available in 2H20. We therefore forecast mining unit costs returning to their pre-GEP levels of A$125-130/t by FY22. Development in advance of production will then become the key constraint to mine output going forward. Three considerations give us confidence that SBM will be able to progress development to meet a 1.1Mtpa mining rate over time:

1. The transition to a dual-decline from the 1700mbs level, currently being implemented, will allow for two faces for vertical development and working access at both ends of the orebody (Exhibit 3).

2. Gwalia's orebody is transitioning from a narrow, high-grade zone in the South West Branch mineralisation to a wider, lower-grade geometry. Additional width, as well as the potential for bulk inclusion of the parallel Main Lode, implies larger stopes and more tonnage per vertical metre of development despite the lower grade.

3. Additional ventilation from GEP means the mine is able to better service multiple working development faces (vertical and lateral) versus current operating practice.

Valuation

Our revised 12-month target price of A$3.90/sh is based on a 42.5%/42.5%/15% blend of NAV, EV/EBITDA and M&A value.

• NAV (A$3.64/sh): Down by 28% (prev. A$5.02/sh) after: 1. removing GMX from our modelling and revising the outlook for Gwalia (-A$1.20/sh), 2. reducing our exploration valuation (-A13c/sh), with future Gwalia life extension at depth potentially constrained by haulage limitations, 3. lower net cash position (-5c/sh) with the softer production in FY19.

• EV/EBITDA (A$3.92/sh): Down by 23% (prev. A$5.07/sh). We have lowered our target EV/EBITDA multiple to 5.5x (from 6.0x), with the transition to flat-to-declining production and rising costs at Gwalia suggesting SBM should trade at a slightly larger discount relative to peers (7.0x EBITDA peer group average). Our FY19/20/21 EBITDA estimates are down 11%/24%/27%.

• M&A valuation: Contributes 15% of our target price, based on a 30% premium to NAV as per our M&A framework.

Exhibit 1 : SBM TP, NPV and earnings estimate revisions

Source: Company data, Goldman Sachs Global Investment Research

FY19 Guidance

SBM has downgraded Gwalia production guidance due to the impact from late commissioning of the Paste Aggregate Fill (PAF) plant and ventilation constraints. Simberi's production guidance has been increased to 130-135koz (vs. previous guidance of 120-130koz) on the back of continued outperformance. We now sit at the lower end of group production guidance and the middle of the AISC range.

Exhibit 2 : Revised FY19 Guidance

Revised group cost guidance inferred

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 3 : SBM Gwalia exploration cross-section

Shows widening geometry of orebody perpendicular to strike and start of twin decline

Source: Company reports

Risks

Key sector risks that broadly apply to all companies under our coverage include:

• Commodity prices: The key exposure to all companies in the sector is the gold price; however, other metals prices (copper, silver) may also affect revenues.

• FX: Most companies report in AUD and have Australian operations and are therefore most exposed to AUD:USD exchange rates; however, companies with global operations will have some cost exposure in the locally denominated currency.

• Operating risks: Production outages due to unplanned failures, technical issues or external factors (e.g., weather, industrial action, geopolitical factors).

• Project execution risks: Project timelines and budgets can be variable, and project construction and ramp-up phases are susceptible to commissioning risk.

• Costs: Higher-than-expected industry cost inflation could result in both opex and capex above our forecasts or company expectations. We broadly model 3% cost inflation, in addition to asset-specific cost profiles. Cost inflation is likely to continue, particularly on labour and technical services, maintenance and equipment, and raw materials (diesel, steel, explosives, power). On a unit cost basis, most operations are facing declining grades over the long term. The ability to manage these costs and preserve margins will be important for through-the-cycle profitability.

• Capital returns could increase significantly: Balance sheets across the sector are very undemanding, and almost every company under our coverage could afford to materially increase returns to shareholders based on current cash balances and future capital requirements (ex-M&A) on our forecasts.

SBM company-specific downside risks include: Production interruption at Gwalia, construction and commissioning risks at GEP, lack of exploration success at Gwalia.

SBM Summary in charts

Exhibit 4 : SBM GSe Gold production (LHS) and AISC (RHS)

Depletion of Simberi oxides in FY22

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 5 : SBM GSe EBITDA (LHS) and EBITDA margin (RHS)

Margins should return to pre-GEP levels

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 6 : SBM GSe capex by type

Groth capex is GEP & ventilation

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 7 : SBM GSe Use of Operating Cash Flow

FCF is shown post debt, dividends, and capex/investment

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 8 : SBM GSe Gwalia mined & milled tonnes (LHS) and gold grade (RHS)

Throughput expected to reach 1.1Mtpa

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 9 : SBM GSe Simberi mined & milled tonnes (LHS) and milled tonnes (RHS)

We model the end of Oxide reserves, with no upside from Sulphides

Source: Company data, Goldman Sachs Global Investment Research