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SARACEN (SAR)

SARACEN (SAR)

Saracen's 2005 deal to purchase the Carosue Dam operations from St Barbara (who had acquired them from the carcass of Sons of Gwalia ) brought a fantastic portfolio of assets under its control.

Not only did Saracen secure existing open-pit gold mines but also significant exploration upside and a 2.5-million tonnes per annum processing facility.

Management has subsequently done a good job of joining the dots and Saracen is now in its second full year of production. But the best is yet to come.

The assets' exploration potential is still largely untapped and underground development is set to deliver a substantial step-up in production over the next few years.

Management expects Saracen to be producing 250,000 ounces of gold per annum from 2015, compared to 120,000-130,000 now.

The miner's cash cost of production is running at a rather high $730 per ounce. This would not have been a commercial operation before 2009 when the Aussie dollar gold price was yet to sustain its break above $1000 per ounce.

It's a very different story now, with gold comfortably above $1600 per ounce in Aussie dollar terms and trending upwards. Indeed, Saracen achieved an average sales price of $1653 per ounce in the September quarter. This delivered sales revenue of $50.6 million and operating earnings in the region of $26.3 million.

Gold prices are likely to remain firm over the longer term, with the metal likely to take out the $US2000 milestone in the not-too-distant future.

Saracen is very well positioned to take advantage of this through its expanding production profile. Production growth will drive top-line sales revenue but also enhance profitability as average cash costs recede.

Price

The production growth will be driven by the extraction of higher-grade ore, initially from beneath the Red October open pit. Management expects to begin milling ore from the underground operation in the June quarter of 2012. Saracen's share price can be expected to push higher as this step-change in production capability draws closer. Saracen's stock price hit an all-time high of $0.88 in January. The successful evolution to an underground miner and continued gold price strength should see the stock register a new high.

Those investors' who are comfortable with the risk associated with resource companies should consider buying Saracen below $0.80.


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