Medusa Mining developing a reputation for outperformance June 17...

Medusa Mining developing a reputation for outperformance

June 17 2015, 4:38pm

The Philippines-focused miner's operational improvements are paying off at its flagship Co-O mine, and it has other irons in the fire.

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BIGPICTURE
CEO and founder Geoff Davis knows what it takes to operate mines in the Philippines

Things are looking up for Medusa Mining (ASX:MML), the owner of the profitable Co-O gold mine in the Philippines.
After a period in which it developed a reputation for being accident prone, the new management team has turned things around to the extent that the phrase “topped expectations” is being frequently used in reports on the company’s progress.

Results for the second half of 2014, released back in February, showed an 83% increase in revenues to US$62.2mln from US$34.0mln the year before, while underlying earnings (EBITDA) more than doubled to US$39.9mln.

The strong improvement in trading was achieved despite an unhelpful gold price; the average gold price received in the second half of 2014 was US1,234 an ounce, down from US$1,304 in the second half of the previous year.
Since then, the company’s first (calendar) quarter production update continued the improving production trend, with increased availability of ore from the level 8 shaft and various operational initiatives to mitigate dilution indicating the new management team, led by founder Geoff Davis who resumed the chief executive role, has a handle on things at Co-O.

Proof of that came in June when the company upped production guidance for the fiscal year to the end of June 2016. The company now expects to churn out 120,000 to 130,000 ounces, which is a 20 to 30 per cent increase on previous guidance; meanwhile, the company expects to see continued improvement in the following year with guidance set at 135,000 to 145,000 ounces.

As mother used to warn in our youth, it takes very little time to develop a bad reputation and a mighty long time to lose one, but the message seems to be getting through, with Medusa’s share price up almost 30% year-to-date to A$0.84.

Based on the last financial year’s earnings per share of 27 cents, that still leaves the shares at a jaw-dropping cheap earnings multiple of 3.1, which, even if you are bearish on the gold price, makes the stock a prime candidate for a re-rating.

As it happens, the gold price has been steady over the last three months, with the spot price edging up from US$1,160 an ounce in mid-March to around US$1,178 in mid-June.

With Medusa’s all in sustaining costs for the forthcoming financial year set to be somewhere between US$960 and US$1,060 an ounce – and that’s with around US$80 an ounce factored in relating to capital expenditure on improving the service shaft – the company has a decent cushion between production costs and selling prices.
Bear in mind also that after a period when the company had proved over-optimistic in setting guidance, the new management is erring on the side of caution as it seeks to restore confidence in the market.

Mining specialist SP Angel, a buyer of the stock, is a big fan of the stock and sees scope both for increased production and lower costs.
“After an extended period of disappointment, the new management team are turning things around,” the broker said back in April.

While the flagship mine continues to operate profitably and churn out cash, the company has a substantial pipeline of resource prospects in the Philippines that could add further benefits of scale.
Over the last 11 years the miner has acquired a portfolio of tenements with prospects that range from 'greenfields' to 'resource definition' stage.

Currently, apart from the Co-O mine, only the Bananghilig and Saugon deposits have resources, but Bananghilig is undergoing further geological work.
Medusa has identified two high priority exploration areas: the Co-0 mine environs - notably the NT series of veins, East Agsao and West Road 17 - and the Guinhalinan gold prospect.

According to CEO Geoff Davis: “Our core tenements have many years of exploration ahead as our substantial pipeline of prospects is systematically assessed, and more likely to be identified over time.”
In years gone by, that promise of “jam tomorrow” might not have cut much ice, but the new Medusa has proved its mettle in developing gold assets in the Philippines – although it appears not everyone in the market has realised this yet.

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