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Gold Road rewarded for honesty amid Gruyere ramp-up delay - S&P Global Market Intelligence

Tuesday, 25 June 2019

Imminent gold miner Gold Road Resources Ltd. was rewarded for its honesty in admitting a three-month delay to full ramp-up of its highly anticipated 50%-owned Gruyere project in Western Australia, with its share price rising despite the bad news.

Gold Road, which is in a joint venture with Gold Fields Ltd. at Gruyere, announced June 19 that construction of the process plant flow sheet is complete, the semi-autogenous grinding and carbon in leach circuit mills have been commissioned and are operating, and first gold is on track for delivery in the current quarter, as per guidance.

With all those areas and services operating in line with expectations, Gruyere is achieving about 500 tonnes per hour of output, and final commissioning of the gravity circuit, elution circuit and gold room is underway.

However, commissioning of the entire process plant flows sheet, particularly of the ball mill, will be delayed by more than a month, so the 1,000-tonne-per-hour design throughput will be achievable over six to seven months from ball mill commissioning.

The ball mill is now expected to be commissioned early in the September quarter. Broker Bell Potter said in a June 20 note that while the ball mill issue is "disappointing," it is "quite minor in the overall scheme of things for such a large Tier 1 gold project."

The new ramp-up period represents a deferral of about three months to reaching a steady-state production run rate of about 300,000 ounces per annum. Macquarie Research had expected the process plant to be running at full capacity in the first quarter of 2020.

Gruyere's 2019 production guidance was cut to between 75,000 and 100,000 ounces, from 100,000 to 120,000 ounces, though the cost is still in line with the A$621 million final forecast capital cost estimate. Gold Road added that Gruyere's all-in sustaining costs for the period from commercial production to the end of 2019 are likely to be above the previously guided range of A$1,050 per ounce to A$1,150/oz.

On the upside, mining is tracking ahead of plan, with about 2 million tonnes of ore mined and stockpiled to date, which Gold Road said de-risks the mining-related aspects of the operation during the commissioning and ramp-up phases.

Gruyere's life-of-mine average annual production is forecast at about 300,000 ounces per year, with average all-in sustaining costs over a 12-year life of about A$1,025/oz.

Yet Gold Road's share price rose from 96.5 Australian cents per share June 19 to A$1.05 per share by June 21, which independent analyst Keith Goode said reflected the market rewarding the company for being honest enough to telegraph delays ahead of time.

"The market likes you to hold its hand, explain the problem, and you get the reward points for it," Goode said in an interview. "It's when the market doesn't know what's going on and the analyst guess … when it's an absolute disaster. You don't want the analysts to guess what's going on."

Australian analysts from Bell Potter, RBC Capital Markets and Macquarie Research retained their 12-month price targets and ratings on Gold Road's stock, though Canada's Haywood Securities changed its rating from hold to sell.

Canaccord Genuity's Australia-based analysts covering the stock also kept their speculative rating but cut their 12-month price target from A$1.20 per share to A$1.15 per share while paring back their 2019 production assumption to 86,000 ounces and assuming costs would remain capitalized for 2019.

The firm also tapered its 2020 production assumption slightly due to the deferred ramp-up migrating into the first quarter of 2020. It now stands at 292,000 ounces at all-in sustaining costs of A$1,091/oz; it was 304,000 ounces at all-in sustaining costs of A$1,065/oz.

"While any production downgrade is disappointing, it is important to note that in this case the issue is addressable, rather than a fundamental problem at the asset level and in the context of a 12-year, 300,000 ounces per annum Tier 1 project, the impact of a minor delay is benign, in our view," Canaccord said in a June 20 note.

RBC sees "no significant impediments" to Gold Road eventually reaching the base case outlined in the recent life-of-mine plan and, as such, retains its "constructive" view on the miner given "the medium- to long-term metrics appear to remain intact."

"Whilst the project nears commercial production, we expect exploration news flow to provide potential additional catalysts for the stock in the interim," RBC said in a June 19 note. "We remain mindful of the potential mismatch at times when a company's valuation approaches 'full,' yet the underlying risks in delivery remain."

Meanwhile, Gold Road continues to advance regional exploration on multiple prospects and targets in its large, highly prospective Yamarna area, which includes working toward a maiden resource at the advanced Gilmour prospect with others potentially following not too far behind and new targets being progressively evaluated.

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