Central Rand Gold - Initiating Coverage
Central Rand Gold updated its production guidance to 100,000oz pa by 4Q09, and is fully funded to reach this. The company intends to mine in the Witwatersrand basin in suburban Johannesburg using a decline rather than a more traditional shaft. Surface pilot mining has proceeded well to date, and beyond 2009 the company should lift production to 250,000oz pa by 2011.
A drop in cash, partially related to forex losses, has created short-term price weakness, but we remain positive and maintain our production forecasts. We think share price momentum will resume later in the year, and Central Rand remains one of our top gold picks for 2009. We expect positive momentum to resume once the reserve statements are released in March 2009, along with more detailed mine schedules, which should de-risk operations.
Applying a conservative 60% discount to NPV10% and not modelling production beyond 250,000oz equals 66p/share. We typically use a pre-BFS discount of 75%, but have reduced this based on progress to date and the large resource. Once in production 1x NPV10% of post-tax FCF for 250,000oz pa equates to £1.36/share; should production reach 500,000oz pa by 2013, 1x NPV is £2.33/share.
The reserve conversion should enable a step-up valuation, but may disappoint. A positive study may enable a step-up valuation, but this comes with a warning: reserve conversion may disappoint investors looking for 5Moz+ reserves. However, the strong management team gives us enough confidence that most hurdles will be overcome, so we initiate coverage with a BUY recommendation and a 66p target price.
