Trans-Siberian Gold initiated at BUY, TP GBp 126 - Grade potential at limited cost
We are initiating our coverage of Trans-Siberian Gold (TSG LN) with a BUY recommendation and a target price of GBp 126 per share. TSG is a small-cap low-cost (TCC of ca. USD 550/oz) gold miner expanding gold production with limited cost growth via the development of the higher-grade areas of the Asacha mine, in particular, its East zone characterised by a 17g/t grade of its M&II resources. As a result, TSGs all-in costs (AIC) exceeding USD1260/oz in 2020e (one of the highest among peers) are to drop to USD1108/oz in 2024e. This should more than double FCF to USD 21.9 mn (DY of 10.8%) in 2024e from USD10.4mn (DY of 4.3%) in 2020e. An extra upside can stem from Rodnikova, TSGs second field, more than tripling the firms M&II resources, as well as from a higher-than-modelled gold price already exceeding USD1750/oz vs. the USD 1 650/oz estimated for 2020e. As TSG has begun the development of the East zones inferred resources, we consider their inclusion in our valuation to be reasonable. With the East zone included, TSG is now priced with a discount to its global peers on EV/Reserves and EV/EBITDA 2021e adjusted for the reserve life, with an extra premium possible on lower AIC.Trans-Siberian Gold is a U.K.-based resources company. Co.'s operations are focused on gold production and exploration and development activities within the Russian Federation. Co.'s wholly owned subsidiary, ZAO Trevozhnoye Zarevo holds mining license in the southern part of the Kamchatka peninsula, including the Asacha gold deposit, an epithermal gold/silver deposit located on a tertiary volcanic arc typical of ore systems found along the Pacific Rim. As of Dec 31 2016, the main ore zone at Asacha consisted of five steeply dipping veins. Veins are characterized by low sulfidation quartz-adularia occurring predominately in dacite domes.
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