Saracen Mineral : 160115 Hartleys upgrade target price to 88c

97f55c3e-6442-4ace-9c47-085789c30121.pdf

Saracen Mineral Holdings Ltd

SAR.asx Buy

Page 1 of 7

Share Price

15 Jan 2016

$0.725

SARACEN MINERAL HOLDINGS (SAR)

First half exceeds expectations, sets up a strong 2016

Saracen has announced DecQ gold production of 44,265oz and 1H FY16 production of 82,405oz (vs FY16 guidance of 150-160koz). The Karari underground mine at Carosue Dam Operations (CDO) is now cashflow positive and in commercial production. With the Thunderbox development progressing well and Karari exceeding our expectations we see potential for FY16 group production of up to ~200koz followed by FY17 production of

+315koz.

Gold: Producer / Developer

Thunderbox development ahead of schedule (~20koz in FY16) The Thunderbox development is progressing ahead of schedule and commissioning of the processing plant is planned to commence during MarQ. The Company has previously indicated Thunderbox has potential to add

Valuation $0.84

Price Target (12 month) $0.88

Brief Business Description:

WA gold producer, developer and explorer

Hartleys Brief Investment Conclusion

Thunderbox development and CDO transition to underground sees SAR on track to double production to

+300kozpa

Chairman & MD

Geoffrey Clifford (Chairman) Raleigh Finlayson (MD)

Top Shareholders

Wroxby 8.2%

Paradice Investment Management Pty Ltd 7.9% Karara Capital Pty Ltd 6.2%

Van Eck Associates 5.1%

Company Address

Level 4, 89 St Georges Tce

Perth, WA, 6001

Issued Capital 792.8m

~20koz to FY16 production in addition to the guidance (CDO only) of 150-

160koz. We now model the Kailis satellite pit to feed high grade (~3g/t Au) to Thunderbox during CY17. The Kailis satellite pit reduces the Thunderbox (AISC) operating costs (from ~A$1,491/oz to ~A$1,274/oz) in FY17 while the

• fully diluted

  Market Cap

• fully diluted Cash (31 Dec 15a) Debt (31 Dec 15a)

EV

792.8m A$574.8m A$574.8m A$42.1m

A$0.0m

A$532.7m

open pit cutback is established.

12.

The Company has a strong cash position (A$42.1m) with no drawn debt and Prod (koz Au)	FY15a 167.5	FY16e 187.2	FY17e 314.4
Op Cash Flw	65.4	101.1	144.4
has now spent ~A$33m (~50%) of the total ~A$65m capex required to develop Norm NPAT	11.3	24.3	83.1
Thunderbox. We expect maximum cash drawdown during MarQ and a cash CF/Share (cps)	1.4	1.7	8.1
EPS (cps)	1.4	1.7	8.1
position similar to the current ~A$42m at the end of FY16. With the completion P/E 50.5 42.0 8.9
of the Thunderbox development during 2H FY16 we see potential for further	Au
Resources (Moz) share price appreciation. Reserves (Moz)	7.6 1.5

Strong cash position with half of Thunderbox capex now sunk

EV/Resource oz A$70/oz

EV/Reserve oz A$359/oz

Prelim. (A$m)

As Thunderbox ramps up to full production levels from FY17 onwards we see the Company generating free cashflow of ~A$100mpa at consensus prices (~A$1,700/oz). We model 5 years of open pit mining followed by 3 years underground at Thunderbox combined with a total minelife of 8 years at CDO (combined from Karari, Deep South, Whirling Dervish, Red October and pits).

Karari and Thunderbox progressing well, maintain Buy

The rapid progress of the Karari and Thunderbox developments gives us further confidence that the Company will continue to exceed guidance and market expectations. As the full potential of the Karari underground is understood by the market and the Thunderbox development is fully executed over the coming quarters we expect SAR will continue to be re-rated.

With the market beginning to value the free cashflow generated from both projects from FY17 onwards we see potential for the Company to trade on multiples more in line with larger peers (4-5x EV/EBITDA). Currently trading on FY17 EV/EBITDA of 3.2x (consensus) and 4.5x (spot) the market is now beginning to value the Company for its strong growth profile over the coming years.

Saracen remains one of our preferred AUD gold producers albeit is now trading closer to our spot NAV of 76c (0.95x) and NAV of 84c (0.87x). The recent outperformance should continue as the Company continues to deliver on the Thunderbox and Karari development projects which will begin to underpin significant free cashflow generation over the coming years. We maintain our Buy recommendation with a price target of 88c per share (previously 77cps).

Saracen Mineral

0.80

14.

0.70

0.60

0.50

A$0.40

0.30

M

0.20

0.10

0.00

4.

2.

Sector (S&P/ASX SMALL RESOURCES) - LHS

10.

8.

6.

Jan-15 May-15 Sep-15

Volume - RHS

SAR Shareprice - LHS

.

Jan-16

Source: IRESS

Scott Williamson Resources Analyst Ph: [phone]

E: [e-mail]

The analyst has a beneficial interest in SAR shares

Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000

Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys' regulatory disclosures can be found on Hartleys website www.hartleys.com.au

SUMMARY MODEL

Saracen Mineral Share Price SAR $0.725 Key Market Information Share Price $0.725 Market Capitalisation - ordinary A$575m Net Debt (cash) -$42m Market Capitalisation - fully diluted A$575m EV A$533m Issued Capital 792.8m Options 0.0 Issued Capital (fully diluted inc. all options) 792.8m Issued Capital (fully diluted inc. all options and new capital) 792.8m Valuation $0.84 12month price target $0.88 P&L Unit 30 Jun 15 30 Jun 16 30 Jun 17 30 Jun 18 Net Revenue A$m 249.9 308.1 536.3 564.3 Total Costs A$m -182.9 -239.8 -370.7 -382.3 EBITDA A$m 67.0 68.3 165.6 181.9 - margin 27% 22% 31% 32% Depreciation/Amort A$m -49.5 -52.3 -84.8 -82.5 EBIT A$m 17.5 16.0 80.8 99.4 Net Interest A$m -1.0 2.6 -0.6 -0.1 Pre-Tax Profit A$m 16.4 18.7 80.2 99.3 Tax Expense A$m -5.0 0.0 -10.5 -28.3 Normalised NPAT A$m 11.3 24.3 83.1 72.5 Abnormal Items A$m 0.1 -10.6 -18.5 -6.5 Reported Profit A$m 11.4 13.7 64.6 66.0 Minority A$m 0.0 0.0 0.0 0.0 Profit Attrib A$m 11.4 13.7 64.6 66.0 Balance Sheet Unit 30 Jun 15 30 Jun 16 30 Jun 17 30 Jun 18 Cash A$m 38.4 42.4 141.9 257.2 Other Current Assets A$m 71.3 52.5 78.4 80.9 Total Current Assets A$m 109.6 94.9 220.2 338.2 Property, Plant & Equip. A$m 145.9 177.6 124.7 62.2 Exploration A$m 38.4 46.4 54.4 66.4 Investments/other A$m 6.4 6.4 6.4 6.4 Tot Non-Curr. Assets A$m 190.7 230.4 185.5 135.0 Total Assets A$m 300.3 325.3 405.8 473.2 Short Term Borrowings A$m 0.8 0.8 0.8 0.8 Other A$m 22.7 34.0 49.9 51.3 Total Curr. Liabilities A$m 23.5 34.8 50.7 52.1 Long Term Borrowings A$m 0.6 0.6 0.6 0.6 Other A$m 47.0 47.0 47.0 47.0 Total Non-Curr. Liabil. A$m 47.5 47.5 47.5 47.5 Total Liabilities A$m 71.1 82.4 98.3 99.7 Net Assets A$m 229.2 242.9 307.5 373.5 Net Debt A$m -37.0 -41.1 -140.5 -255.9 Cashflow Unit 30 Jun 15 30 Jun 16 30 Jun 17 30 Jun 18 Operating Cashflow A$m 70.6 98.4 155.6 180.8 Income Tax Paid A$m -5.0 0.0 -10.5 -28.3 Interest & Other A$m -0.2 2.6 -0.6 -0.1 Operating Activities A$m 65.4 101.1 144.4 152.4 Property, Plant & Equip. A$m -35.9 -84.0 -32.0 -20.0 Exploration and Devel. A$m -11.1 -13.0 -13.0 -17.0 Other A$m -2.2 0.0 0.0 0.0 Investment Activities A$m -49.2 -97.0 -45.0 -37.0 Borrowings A$m -12.0 0.0 0.0 0.0 Equity or "tbc capital" A$m 0.0 0.0 0.0 0.0 Dividends Paid A$m 0.0 0.0 0.0 0.0 Financing Activities A$m -13.6 0.0 0.0 0.0 Net Cashflow A$m 2.5 4.1 99.4 115.4 Shares Unit 30 Jun 15 30 Jun 16 30 Jun 17 30 Jun 18 Ordinary Shares - End m 792.8 792.8 792.8 792.8 Ordinary Shares - Weighted m 792.8 792.8 792.8 792.8 Diluted Shares - Weighted m 792.8 792.8 792.8 792.8 Ratio Analysis Unit 30 Jun 15 30 Jun 16 30 Jun 17 30 Jun 18 Cashflow Per Share A$ cps 8.2 12.7 18.2 19.2 Cashflow Multiple x 8.8 5.7 4.0 3.8 Earnings Per Share A$ cps 1.4 1.7 8.1 8.3 Price to Earnings Ratio x 50.5 42.0 8.9 8.7 Dividends Per Share AUD - - - - Dividend Yield % 0.0% 0.0% 0.0% 0.0% Net Debt / Net Debt + Equity % -19% -20% -84% -218% Interest Cover X 16.8 na 125.3 776.6 Return on Equity % 5% 10% 27% 19%

15 January 2016 Buy Directors Company Information Geoffrey Clifford (Chairman) Level 4, 89 St Georges Tce Raleigh Finlayson (MD) Perth, WA, 6001 Barrie Parker (Non-Exec Director) [phone] Martin Reed (Non-Exec Director) [phone] Samantha Tough (Non-Exec Director) Mark Connelly (Non-Exec Director) www.saracen.com.au Top Shareholders m shares % Wroxby 63.5 8.2 Paradice Investment Management Pty Ltd 62.9 7.9 Karara Capital Pty Ltd 49.1 6.2 Van Eck Associates 40.3 5.1 Reserves & Resources Mt g/t Au Moz TOTAL RESOURCE 141 1.7 7.6 Measured 9 1.1 0.3 Indicated 92 1.8 5.2 Inferred 39 1.7 2.1 Reserve 25 1.8 1.5 Production Summary (CDO) Unit Jun 15 Jun 16 Jun 17 Jun 18 Mill Throughput Mt 2.4 2.4 2.3 2.3 Head Grade g/t 2.48 2.44 2.80 2.93 Combined Recovery & Payability % 90.5% 90.0% 90.0% 90.0% Gold (koz) 167.5 160.6 180.6 188.4 M&I Resource Conversion % 24.4% 24.4% 24.7% 27.9% Mine Life yr 8.25 7.25 6.25 5.25 C1 cash costs A$/oz 878 892 966 964 All in sustaining costs (AISC) A$/oz 1,139 1,117 1,188 1,138 Production Summary (Thunderbox) Unit Jun 15 Jun 16 Jun 17 Jun 18 Mill Throughput Mt 0.0 0.5 2.4 2.5 Strip Ratio x 0.0 8.0 8.0 7.0 Mined grade g/t - 1.80 1.91 1.95 Combined Recovery & Payability % - 92.0% 92.0% 92.0% Gold (koz) 0.0 26.6 133.9 144.2 M&I Resource Conversion % - 19.8% 20.1% 20.1% Mine Life yr 8.00 8.00 7.00 6.00 C1 cash costs A$/oz - 1,042 1,014 926 All in sustaining costs (AISC) A$/oz - 1,019 1,274 1,179 Group Gold (koz) 168 187 314 333 All in sustaining costs (AISC) A$/oz 1,139 1,103 1,225 1,156 Costs Unit Jun 15 Jun 16 Jun 17 Jun 18 Cost per milled tonne A$/t 76.2 84.1 79.3 79.7 EBITDA / tonne milled ore A$/t 27.9 24.0 35.4 37.9 Total cash costs A$/oz 1,092 1,281 1,179 1,149 C1: Operating Cash Cost = (a) A$/oz 729 914 986 947 (a) + Royalty = (b) A$/oz 767 971 1,055 1,015 C2: (a) + depreciation & amortisation = (c) A$/oz 1,024 1,193 1,256 1,195 (a) + actual cash for development = (d) A$/oz 1,023 1,432 1,129 1,059 C3: (c) + Royalty A$/oz 1,063 1,250 1,324 1,264 (d) + Royalty A$/oz 1,061 1,489 1,198 1,127 Price Assumptions Unit Jun 15 Jun 16 Jun 17 Jun 18 AUDUSD A$/US$ 0.81 0.69 0.69 0.73 Gold US$/oz 1262 1124 1183 1242 Gold A$/oz 1551 1620 1704 1697 Hedging Jun 15 Jun 16 Jun 17 Jun 18 Hedges maturing? Yes Yes Yes Yes Sensitivity Analysis Valuation FY16 NPAT Base Case 0.67 13.7 Spot Prices 0.76 (13.4%) -0.2 (-101.6%) Spot USD/AUD 0.70, Gold $1078/oz. AUDUSD +/--10% 0.49 / 0.92 (-27.7% / 36.6%) -3.7 / 40.2 (-127.0% / 194.1%) Gold +/--10% 0.90 / 0.47 (32.9% / -30.4%) 37.0 / -5.0 (170.7% / -136.4%) Production +/--10% 0.90 / 0.44 (33.8% / -34.1%) 38.4 / -19.3 (180.8% / -240.7%) Operating Costs +/--10% 0.53 / 0.82 (-21.6% / 21.6%) -7.5 / 26.7 (-154.9% / 95.1%) Share Price Valuation (NAV) Risked Est. A$m Est. A$/share 100% Thunderbox (pre-tax NAV at disc. rate of 12%) 259 0.33 100% CDO - Southern (pre-tax NAV at disc. rate of 8%) 234 0.30 100% CDO - Northern (pre-tax NAV at disc. rate of 8%) 147 0.19 100% CDO - Pits (pre-tax NAV at disc. rate of 8%) 92 0.12 100% CDO - Stockpile (pre-tax NAV at disc. rate of 8%) 30 0.04 Other Exploration 50 0.06 Forwards 0 0.00 Corporate Overheads -65 -0.08 Net Cash (Debt) 42 0.05 Tax (NPV future liability) -125 -0.16 Options & Other Equity 0 0.00 Hedges 2 0.00 Total 666 0.84

Analyst: Scott Williamson [phone] Last Updated: 15/01/2016 "tbc capital" could be equity or debt. Our valuation is risk-adjusted for how this may be obtained. Sources: IRESS, Company Information, Hartleys Research

VALUATION

Fig. 1: Earnings changes
Unit		30 Jun 15	old	30 Jun 16 new % diff		old	30 Jun 17 new % diff		old	30 Jun 18 new % diff
Au Production	koz	168	186	187	0%	286	314	10%	328	333	1%
All in sustaining costs (AISC)	A$/oz	1,139	1,116	1,103	-1%	1,201	1,225	2%	1,133	1,156	2%
Net Revenue	A$m	249.9	309.8	308.1	-1%	474.3	536.3	13%	517.1	564.3	9%
Total Costs	A$m	-182.9	-236.6	-239.8	1%	-328.9	-370.7	13%	-369.2	-382.3	4%
EBITDA	A$m	67.0	73.3	68.3	-7%	145.4	165.6	14%	147.9	181.9	23%
- margin	0.3	0.2	0.2	-6%	0.3	0.3	1%	0.3	0.3	13%
Depreciation/Amort	A$m	-49.5	-59.9	-52.3	-13%	-93.8	-84.8	-10%	-88.8	-82.5	-7%
EBIT	A$m	17.5	13.3	16.0	20%	51.6	80.8	57%	59.1	99.4	68%
Net Interest	A$m	-1.0	2.6	2.6	0%	-0.6	-0.6	0%	-0.1	-0.1	0%
Norm. Pre-Tax Profit	A$m	16.4	16.0	18.7	17%	51.0	80.2	57%	59.0	99.3	68%
Norm. Tax Expense	A$m	-5.1	4.8	5.6	17%	11.7	3.0	-75%	-14.7	-26.8	82%
- rate	31.3%	-30.0%	-30.0%	0%	-23.0%	-3.7%	-84%	24.9%	27.0%	8%
Reported Tax Expense	A$m	-5.0	0.0	0.0		-1.8	-10.5	488%	-16.2	-28.3	75%
Normalised NPAT	A$m	11.3	20.8	24.3	17%	62.7	83.1	33%	44.3	72.5	64%
Abnormal Items	A$m	0.1	-9.8	-10.6		-18.5	-18.5		-6.5	-6.5
Reported Profit	A$m	11.4	11.0	13.7	25%	44.2	64.6	46%	37.8	66.0	75%
Minority	A$m	0.0	0.0	0.0		0.0	0.0		0.0	0.0
Profit Attrib	A$m	11.4	11.0	13.7	25%	44.2	64.6	46%	37.8	66.0	75%
capex + exploration	A$m	47.0	102.0	97.0	-5%	45.0	45.0	0%	37.0	37.0	0%
Net Debt	A$m	-37.0	-40.9	-41.1	0%	-131.8	-140.5	7%	-224.2	-255.9	14%
Dividends Per Share	cps	-	-	-		-	-		-	-

We model an 8 year minelife at CDO and Thunderbox

The current stockpile at CDO allows SAR

~12 months of high margin feed

Hartleys sum of parts valuation for SAR is A$0.84/share

Source: Hartleys Estimates

Our sum of parts valuation for SAR assumes an 8 year minelife at CDO and Thunderbox. Our modelling of Thunderbox is in line with the feasibility study announced in March 2015. Our modelling of CDO is based on the Company's five year outlook announced in October 2015. The current stockpile at CDO allows the company ~12 months of high margin feed combined with the underground mines at Red October, Karari and Deep South.

We assume a 5 year minelife for the northern underground assets (Red October & Deep South) producing ~78kozpa at AISC of ~A$1,110/oz. We assume an 8 year minelife for the southern underground assets (Karari & Whirling Dervish) in combination with the satellite open pits. We model production of ~75kozpa at AISC of ~A$1,100/oz from the southern underground assets and we model ~35kozpa at AISC of ~A$1,200/oz from the satellite open pits. We assume a nominal $A50m ($0.06/share) value for exploration upside potential and we believe SAR is well positioned for further brownfield exploration success at Thunderbox and CDO.

Fig. 2: Hartleys Sum of Parts Valuation for SAR

A$m A$/share

100% Thunderbox (pre-tax NAV @ 12%) 259.30.33

100% CDO - Southern (pre-tax NAV @ 8%) 234.00.30

100% CDO - Northern (pre-tax NAV @ 8%) 146.80.19

100% CDO - Pits (pre-tax NAV @ 8%) 92.30.12

100% CDO - Stockpile (pre-tax NAV @ 8%) 30.0 0.04

Other Exploration 50.0 0.06

Forwards 0.00.00

Corporate Overheads -64.9-0.08

Net Cash (Debt) 42.10.05

Tax (NPV future liability) -125.2-0.16

Options & Other Equity 0.0 0.00

Hedges 1.9 0.00

Total 666.20.84

Source: Hartleys Estimates

Fig. 3: SAR production profile

500.0

450.0

400.0

SAR gold production profile

1,211
1,097 1,1431,1141,096
144	141	141
			134
				27
78	78	78	78
				61
48	76	76	76	76
52
	26	34	34	34

1,400

1,200

SAR has potential to produce ~300kozpa from FY17 onwards

Gold Production (koz)

350.0

300.0

250.0

200.0

All In Sustaining Cash Cost (A$/oz)

1,000

800

600

150.0

100.0

50.0

400

200

- 0

FY16 (e) FY17 (e) FY18 (e) FY19 (e) FY20 (e)

CDO - Pits CDO - Stockpile CDO - Southern CDO - Northern Thunderbox All in sustaining cash cost (A$/oz)

Hartleys 12 month price target is 88

Source: Hartleys Estimates

PRICE TARGET

Our price target for SAR is based on an 8 year minelife at Thunderbox and CDO. The transition to underground mining at CDO will see an increase in ounces at strong operating margins over the coming years. We have included weighting for the base case at consensus and spot pricing. Our 12 month price target is 88c (previously 77c).

Fig. 4: SAR Price Target Methodology

Price Target Methodology Weighting Spot 12 mth out

cents per share	NPV base case	60%	$0.84	$0.92
NPV base case at spot commodity and fx prices	40%	$0.76	$0.83
Risk weighted composite	$0.81
12 Months Price Target	$0.88
Shareprice - Last	$0.725
12 mth total return (% to 12mth target + dividend)	22%
Source: Hartleys Estimates