Impressive growth profile
In October Vancouver based miner Placer Dome (US:PDG) released an impressive third quarter result, achieving earnings of US$148 million compared to US$27 million last year. Encouragingly, management reaffirmed the company is on track to meet 2004 production targets. Management also presented an upbeat assessment of next year's prospects
| "In our opinion, PDG will benefit from its position as a low cost producer with substantial reserves, and significant leverage to gold and copper prices." |
Last month PDG traded at US$23.67 for the first time in almost eight years, buoyed by the strong gold price, which breached US$450 an ounce for the first time in more than sixteen years. In recent weeks however, the share price has fallen, and a period of consolidation is now unfolding. While the initial correction has been relatively sharp, the overall upward trend remains firmly intact in our opinion.
Placer's mine operating earnings for the first nine months of the year increased 45 percent to US$404 million. Placer's cash flow from operations increased a healthy US$64 million over last year to US$334 million.
Gold production for the first nine months declined 3 percent on last year to around 2.7 million ounces, while copper production increased 2 percent to 319 million pounds. Placer remains on track to produce 3.6 million ounces of gold and 415 million pounds of copper in 2004. Encouragingly, cash operating margins remain buoyant. The average realised gold price in the nine months to September 30 increased 5 percent on last year to US$389 per ounce. Total production costs increased 5 percent to US$287 per ounce due to the weakness in the US dollar, and rising energy prices. In our opinion, high gold prices should continue to support Placer's solid margins.
Placer has reduced forward sales by over one million ounces in 2004 to a maximum of 9.43 million ounces at an average price of US$390 per ounce. The hedge position represents approximately 16 percent of reserves. Placer intends to reduce committed ounces to around 9 million ounces by the end of the year, in line with the company's bullish outlook for the gold price.
Meanwhile, solid progress is being made at Placer Dome's 60 percent owned Cortez mine in Nevada. Placer is actively drilling the deposit to expand an already impressive reserve base of 7.5 million ounces (Placer's share is 4.5 million ounces). The company's exploration budget for 2005 has been increased by 20 percent to around US$90 million, with close to two-thirds of this directed toward exploration at existing mine sites. We agree with management's decision to focus on current operations in order to optimise existing infrastructure.
Placer Dome's exploration and capital expenditure program is supported by a robust balance sheet. The strong cash generative nature of Placer's operations has enabled further debt repayment, with gearing falling to 44 percent from 49 percent last year. The company also recently raised US$451 million through a capital raising to allow further financial flexibility to fund new project developments and other capital expenditures.
From a charting perspective, we believe the recent correction represents a temporary setback within an ongoing bull market. Corrections are a routine part of any healthy upward trend and allow a stock time to consolidate prior to a further advance. Considering that PDG has rallied by as much as 83 percent over the past seven months, recent volatility is not surprising.
In our opinion, PDG will benefit from its position as a low cost producer with substantial reserves, and significant leverage to gold and copper prices. We expect further upgrades to the company's reserve base at year-end on the back of exploration successes over the past twelve months. We believe Placer offers solid value at around 15 times 2004 mine operating earnings. Whilst further consolidation in the shares is possible in the near-term, we believe that higher levels are ultimately achievable. PDG remains firmly held in the Fat Prophets Portfolio.
Disclosure: Interests associated with Fat Prophets declare a holding in PDG.
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As at the date at the top of this page, Directors and/or associates of the Fat Prophets Group of Companies currently hold positions in Avexa (AVX), Evolution (EVN), Cerro Resources (CJO), Energy Action (EAX), Mt Isa Metals (MET), Telstra (TLS), Woodside Petroleum (WPL), ANZ (ANZ), Austar (AUN), Carsales.com (CRZ), Gold Road (GOR), IOOF Holdings (IFL), Magellan Financial group (MFG), Paladin Energy (PDN), QBE Insurance (QBE), Platinum Australia (PLA), Datasquirt (DSQ), Hodges Resources (HDG), Newcrest Mining (NCM), Oil Search (OSH), Zambezi Resources (ZRL), Auroa Minerals (ARM), Billabong (BBG), Pioneer Resources (PIO), Runge (RUL), Westpac (WBC). These may change without notice and should not be taken as recommendations.