Analyst Actions: Osisko Mining Target Cut at Credit Suisse
"OSK reported Q2 production of 47koz (we est. 51koz), at cash costs of $1,094/oz. Lower than expected grades, and start-up inefficiencies were the reasons for the miss, and we expect costs to decline going forward."
Grades lower than expected. "Grades came in 0.67g/t, less than our expected ~0.9g/t primarily due to production beginning earlier than planned, combined with noise limitations, which together restricted access to higher grade ore. Construction of the separation wall with the residential areas is now complete, the residences along the southern end of the pit have now been purchased, and the permitted noise level has been raised, allowing OSK to accelerate development of higher grade zones, with grades expected to improve in 2H 2011 and into 2012."
:Additional $32M in capex due to ore grinding issues. The crusher and ball mills are operating as planned, but ore elasticity issues at the SAG mill have required the purchase of a pre-crush circuit with delivery expected in Q1/12, at which time OSK expects throughput to expand to 60+ ktpd. A temporary pre-crushing circuit has been installed in the interim.
Guidance: "OSK has guided to 235-245koz of production in 2H 2011, at cash costs of $675-775/oz. In light of the challenges faced so far in 2011, we have revised our 2H/11 production estimate down to 209koz at an average cash cost of $758/oz (from 233koz at $513/oz). Given the cash cost guidance of $450-$500/oz for 2012, the installation of additional crushing capacity, and industry-wide inflation, we have also increased our LOM cash cost by 7% to $516/oz. We are revising our 2011/2012/2013 EPS estimates to C$0.20/C$1.32/C$1.32 from C$0.53/C$1.58/C$1.15 respectively."
Valuation: "Our NAVPS estimate has declined by 4% to C$14.41 on the higher cost assumptions. We continue to rate OSK Neutral, but have lowered our target price to C$16.50 (from C$17). Our target price remains based on a weighted average multiple of 1.1x to our NAVPS."
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