Be Wary Of St. Barbara Ltd.

Gary Bourgeault | Seeking Alpha

St. Barbara Ltd. is gold miner based in Melbourne, Australia, which is facing a possible writedown and a stoppage in spending after a terrible performance of its Papua New Guinea and Solomon Islands gold mines in the most recent quarter.

Soaring production costs at Simberi and Gold Ridge mines during the quarter ending in June also generated questions as to whether or not the company should have acquired Allied Gold in 2012. The growing sense is the $556 million price tag was too high.

Since the last time St. Barbara surpassed the $12 per share mark on October 17, 2012, the share price has plunged to under $2 per share in June, and closed at $2.31 per share on Friday, July 26.

With a trailing P/E (TTM) of 1.98, I don’t see that as a positive or that there is little downside risk, but rather it being a reflection of the fact the company is in trouble. It has dropped to as low as $1.68 per share in the last year, and it could definitely fall much further if costs aren’t brought under control.

Price of Gold
Even the rebound in gold prices hasn’t been able to help St. Barbara find support. While it did rise in conjunction with the bottom in gold price on June 28, when it hit $1,192, the share price plunged on the news of the underperformance at some of its projects, along with the high costs.

On June 28, the miner was trading at $2.14, and climbed to as high as $3.02 on July 22. From there it plummeted to $2.31 as of July 26, 2013. The point is its performance was so bad even the upward price movement of gold wasn’t able to help the share price.

Since a higher price in gold can make any company look good, all the weakness associated with St. Barbara will be overcome if the gold price continues to rise. Now that the weakness has been identified, that will weigh on the company even in a strong gold price environment. The share price of the company will move up if gold continues to rise, but not to what it would have before.

Since St. Barbara flies under the radar of most investors, it could be considered an exploration miner or a company just starting production. That’s not the case, as the firm was launched in 1969.

It has approximately 16 million ounces of gold under its umbrella, with about 5 million ounces in ore reserves.

The changing dynamics of the gold industry no longer rewards resources and production as it has in the past, as the only real factors to consider now are the price of gold and how much the real all-in costs are to produce that gold.

So while St. Barbara is sitting on a nice stash of gold, its cost to produce it has risen, as has all the miners with significant exposure to gold. Increased production is a negative when it is done at a loss.

All of this is obvious, and yet miners like St. Barbara continue to emphasize the quantity of production, while trying to take the focus off of true production costs.

Increasingly it will be the quality of the ore grade that determines the value of resources, not the size of the projects. Astute miners have already started to shed assets with low ore grades while seeking out smaller projects with higher ore grades. Unfortunately, St Barbara hasn’t been one of them.

Production Costs
The takeover of Allied Gold in 2012 is a good example of what miners are trying to stay clear of these days.

When the company reported its first production costs at the Gold Ridge deposit in the Solomon Islands, it was an unbelievable $2,553 an ounce. In the latest quarter it has come down some, but it will be a challenge for St. Barbara for many years to cut costs down to profitable levels.

At its Papua New Guinea Simberi project, costs there were far less, but still a hefty $1,592 an ounce. The only thing that saved the company in the latter half of 2012 was the sales price from its Pacific operations came in at $1,675 an ounce. We’re not going to see those numbers again for some time.

Now after buying an asset for $556 million, St. Barbara will have to focus primarily on cutting expenditures in a major way. The better-managed companies would have seen the heavy risk associated with Allied Gold and passed on it.

Operating costs at the Simberi and Gold Ridge mines for its latest quarter ending June 2013, were still extremely high. While emphasizing the offensive production numbers, St. Barbara is actually in a defensive mode, one it will struggle to overcome for a number of years.

Gwalia Mine
If the company is to have a chance to rebound over the next year or two, it will depend on the performance of its Gwalia mine at Leonora. Being the flagship asset of the miner, it is projected to generate enough cash flow in full year 2014 to cover all costs of the company.
Guidance for 2014 at Gwalia is for 180,000 to 190,000 ounces of gold to be produced. Even at low spot gold prices the company believes it will be enough to support it.
Overall gold production at the company for 2014 is estimated in a range of 395,000 and 445,000 ounces. The fact that St. Barbara is counting on Gwalia reaffirms how high the costs are at its other production sites.

Along with the high costs at some of its projects, other factors are the delay in commissioning the Simberi oxide expansion, and the “lower-than-expected metallurgical recovery at Gold Ridge.”

Even though the company asserts its deal for Allied Gold will pay off in the future, there is no proof that will be the case. Already the costs and low metal recovery have crushed the company, and there is no guarantee Gwalia will be able to carry the company while it attempts to lower prices and boost production.

There is probably a big write-down coming, and that will further hit the share price.
Add to that the increase in production, which at most of its projects is done at a loss, and you can see why ST Barbara is teetering on the brink.

Delays in getting government permits at the Simberi project in Papua New Guinea, as well as in the electrical commissioning of the processing circuit, also continue to be a factor.

As long as the Federal Reserve continues to stimulate, the price of gold will probably continue to go up. I believe it’s going to shoot above the $1,400 an ounce mark, and probably be rangebound between $1,400 an ounce and $1,500 an ounce for a period of time.

That will take some time to achieve, and gold may not surpass the $1,400 an ounce until the latter part of 2013 or early part of 2014. It depends on how long it takes to break the $1,350 an ounce mark. If it does that soon, it could happen quicker than expected.

If the Fed does taper, we will see the price of gold correct for sure. The degree of the correction will be determined by how much stimulus is taken off the table.

Either way, the high cost of gold production by St. Barbara won’t be helped that much by that higher price, although the market usually rewards all miners when the gold price shoots up. The recent plunge in price confirms gold prices along won’t support a company that has multiple problems like St. Barbara has.

It is totally unpredictable as to which way the company will go. If it continues to struggle it could even be a takeover target, although the problems it faces now aren’t of the type most miners would want to inherit. The only positive is the amount of gold the company has under its control. Yet when production is at best about breakeven, along with the high risk of gold prices falling further, this is a company I would stay away from.


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Filed under Financial returns, Papua New Guinea, Solomon Islands

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