Silver Lake: Interim result 2014 and raising
Recommendation
Alongside its half-year results, Silver Lake Resources has made the stunning announcement that it's going its close its high-cost Murchison project, strip infrastructure from the mine site and move it to the lower-cost Mt Monger mine.
To help it achieve all this, the company has raised $39m by placing 66m shares with institutions at 60 cents, a 12% discount to the pre-issue price. $12m will be spent closing the Murchison mine and the remainder will be used to increase output at Mt Monger, where latent processing capacity will be harnessed by adding power infrastructure from Murchison.
As a final admission that the Murchison venture has failed, Silver Lake wrote off $42m from the asset’s balance sheet value. When it was commissioned, the gold price was over $1,600 an ounce and Murchison was to produce 100,000 profitable ounces for years. For that plan to work, higher-grade underground material needed to be dug and blended with lower-grade surface ore.
Key Points
- Closing the Murchison mine
- Raising capital to increase output at Mt Monger
- Remains a Speculative Buy
With gold prices falling and cash becoming scarce, the company could not to pursue the underground development, spending cash on existing production and leaving Murchison a far higher-cost operation than was envisaged. Its closure is a costly reminder that miners remain at the mercy of prices.
Chasing profits
It's pleasing to see the company end unprofitable production. Too often the sector is characterised by the zealous pursuit of production and the neglect of profit (we’re looking at you, Newcrest). That doesn’t appear to be the case here. Replacing output from Murchison with output from Mt Monger will generate lower total production but higher returns on capital.
Half year to 31 Dec | 2014 | 2013 | /(-) (%) |
---|---|---|---|
Production (koz) | 123 | 52 | 135 |
NPAT ($m) | (47) | 5 | n/a |
EPS (cents) | (11.3) | 2.2 | n/a |
Dividend (cents) | 0 | 0 | 0 |
Amid so much activity, the half-year result was all but ignored but it confirmed that closing Murchison was the right call.
Production rose 135% to 123,000 ounces, offsetting a 13% decline in gold prices to lift revenue 104% to $174m. Production from Mt Monger – about 75% of total output – generated earnings before interest, tax, depreciation and amortisation (EBITDA) of $39m.
Losses from Murchison, however, lowered total EBITDA to just $20m, a 42% decline from last year. Impairments at Murchison resulted in a statutory loss of $47m. This was a terrible result. Although the Mt Monger mine is performing splendidly, that performance is being spoilt by poor economics at Murchison. The closure of Murchison should lead to better outcomes.
Increasing resilience
The closure will have two main results. Production rates will fall from about 300,000 ounces to between 150,000 and 170,000 ounces. Costs, however, will also decline, expanding margins. At current prices, EBITDA margins would rise to about $300 an ounce rather than $150 an ounce expected earlier, suggesting Silver Lake can generate operating profits of about $50m.
Closing Murchison improves the miner’s resilience in case gold prices fall but, if prices rise, recommencing output could lead to surging profits. At $1,600 an ounce, Silver Lake could generate operating profits closer to $100m; a 20% increase in the gold price could lead to a 100% increase in profit. At a market capitalisation of under $300m with no debt, Silver Lake makes an attractive speculation.
Gold miners aren’t for everyone and, for those interested in the sector, we recommend taking a portfolio approach, as discussed in AU, check out this gold portfolio (Speculative Buy – $0.69).
We’re lowering the prices in our recommendation guide to account for dilution and lower output but, with the share price up 31% since Gold portfolio takes a bath (Speculative Buy – $0.45), we’re sticking with SPECULATIVE BUY.
Note: Our model Growth Portfolio owns shares in Silver Lake Resources.