The note from Seymour Pierce followed Monday’s third quarter results from Medusa.

In the first three months of 2012, which was the third quarter of the company’s financial year, its Co-O mine in the Philippines produced 18,258 ounces at an average grade of 8.1 grammes per tonne (g/t) and cash costs of US$239 per ounce.

This represented an improvement from the previous quarter when Medusa produced 16,270 ounces with an average grade of eight g/t and costs of US$242/oz. Total gold production for the first nine months of the financial year reached 45,100 ounces.

Seymour Pierce analyst Asa Bridle expects Medusa to produce 60,000 ounces of gold at a cost of US$261 per ounce and sell 67.5 ounces at an average price of US$1,589/oz in the year to end June, giving it earnings per share of US$39.4.

The analyst has decided to main these forecasts, but said the company could exceed them if the production rates achieved in the third quarter are maintained. This, said Bridle, will depend on the sale of all of the gold produced in the fourth quarter and a portion of the existing bullion inventory.

“Even in these challenging times, Medusa remains one of the most cash generative gold stocks on the market. As cash seems to be the commodity of choice at present, we are happy to retain our positive rating on this leading cash producer,” said Bridle.

Seymour Pierce currently rates Medusa as a ‘buy’ with a target price of 416 pence, a significant premium to yesterday’s closing price of 340 pence, which values the group £642.3 million.

The latest drilling results from Medusa Mining’s (LON:MML) Co-O gold mine in the Philippines drew a positive reaction from brokers with both Fairfax and Seymour Pierce advising investors to buy the stock.

Medusa said yesterday that the results confirmed its belief that the project hosts a multi-million ounce deposit of high grade veins.

The drilling report showed grades of as high as 79.18 g/t over 1.9 metres, 93.4 g/t over two metres and 69.11 g/t over 1.6 metres, while holes L5-097 and L6-010 even returned 377.24 g/t gold over 0.8 metre and 159.23 g/t over 2.4 metres, respectively.

Medusa said surface drilling continues to provide resource infill and extension information for mine planning mainly to the east of the Oriental Fault, while underground drilling continues to confirms vein continuity.

Two surface drill rigs are about to start drilling to the west of the fault and four will remain on the east side of the fault.

In a note today, Seymour Pierce highlighted the intersection of high grade mineralisation below 1,000 metres for the first time with hole EXP127 intersecting 3.3 g/t over 0.9 metres at a depth of 1,055 metres and 10.39 g/t over one metre from 1,076 metres.

“While it will be some time before Medusa is needing to mine at these depths it does add further evidence to the scale and quality of this asset,” said Seymour Pierce analyst Asa Bridle.

Bridle reiterated his ‘buy’ recommendation on the stock, as did Fairfax analyst John Meyer, who said the results suggest that the Co-O gold mine has good long-term potential for multi-million ounce content and for the extraction of further high grade gold zones.

Meyer noted that veins appear discrete with some showing bonanza grades, while others look more marginal.

“This should give the mining team opportunities to maximise returns through access to higher grades early on leaving lower grade veins for later days,” the analyst said.

Peter Hepburn-Brown bought 2,000 ordinary shares at an average price of A$5.18 per share to take his total holding to 17,000 shares or approximately 0.01% of the shares.

Hepburn Brown also has an interest in 250,000 performance rights.

The purchase follows yesterday’s lowering by Medusa of its production forecast for the current year to between 60,000 to 65,000 ounces after four leach tanks at the Co-O mine were taken off line an earthquake and heavy rain caused them to subside.

The company said there would be a stoppage of 10-14 days in the June quarter for upgrade work to the site's electrical system.

House broker Fairfax expects gold production for the 2013 financial year to recover to 120,000oz and to reach 200,000 oz by 2014 and 400,000 oz in 2015 as the Bananghilig Mill comes on stream.

- adds broker comments

Medusa Mining (LON:MML) is well able to cope with the weather and maintenance issues that have further disrupted this year’s gold production in the Philippines, according to broker Fairfax.

Medusa today revised down its forecast for production this year to June from its Co-O mine to between 60,000 and 65,000 ounces from a previous estimate of 75,000 ounces.

Heavy rain has caused four leach tanks to tilt, said Medusa. They have been taken off-line while electrical maintenance at its mill will also restrict the amount of tonnage that can be processed over the next three months. 

The company said the upgrades will improve power usage and will considerably reduce the maintenance of electrical motors, in particular pumps at the mine and in the mill. The costs of repairing the leach tanks will also be borne by the contractor.

Expansion work including the Saga Shaft at Co-O, underground development and new mill construction is on schedule, the miner added.

Fairfax, which is Medusa’s house broker, said the miner had been targeting 23,220oz for the current quarter but is now likely to produce between 10,000-15,000oz.

The June quarter will also see a reduction in gold production from its 25,000oz target probably to near 20,000oz.

Cash costs will rise to around $250/oz from previous guidance of $220/oz before falling back to $210/oz on a return to more normal gold processing.

Fairfax also says Medusa can cope financially with the expected disruption, adding the company expects to finish the year with a cash balance of $40-45m after costs this year.

Medusa also currently holds some 25,000oz of unsold gold on its balance sheet.

Fairfax expects gold production for the 2013 financial year to recover to 120,000oz and to reach 200,000 oz by 2014 and 400,000 oz in 2015 as the Bananghilig Mill comes on stream.

Medusa now expects its Co-O mine to produce between 60,000 and 65,000 ounces in the year to June. 

Adverse weather over Christmas and the New Year had already seen the this year's target reduced from 90-100,00 ounces to 75,000 ounces.

Output in the next three months will also be affected by an upgrade to the electrics at the processing mill and mine at Co-O, Medusa said.

An earthquake centred near eastern Negros Island combined with persistent rain since December has caused four large leach tanks built in the last two years to subside and tilt.

A worsening of the situation recently prompted the company to take the tanks off-line. Remedial work to rectify the problem will take four to five months with the cost borne by the contractor said Medusa.

The shut-down of the four tanks will limit the mill’s throughput to approximately 700 tonnes per day.

The electrical upgrades, meanwhile, will mean between 10 and 14 days of production being lost between the mill and the mine during the June 2012 quarter.

Medusa said the upgrades will improve power usage as well as considerably reduce the maintenance of electrical motors, in particular pumps at the mine and in the mill.

Expansion work including the Saga Shaft at Co-O, underground development and new mill construction is on schedule, the miner added.

Medusa Mining (LON:MML, ASX:MML) expects to produce 75,000 ounces of gold in the current year to end-June 2012 at cash costs of approximately US$230 per ounce.

The group reported on its first half to December 31 2011, in which it produced 26,780 ounces.  The figure was below the 51,127 ounces it produced in the previous first half, which is due to the planned expansion and development of its flagship Co-O mine in the Philippines.  The work at the mine is progressing well.

Medusa booked revenues of US$40.9 million in the first half, compared to US$78.3 million a year earlier, and the lower production was partially offset by a higher average price received on sale of gold.

Medusa is an un-hedged gold producer and received an average gold price of US$1,655 per ounce from the sale of 25,446 ounces of gold for the half-year to December. It previously realised US$1,291 per ounce selling 48,883 ounces.

The company remains debt free and had total cash and cash equivalent on hand of US$80.2 million at December 31 2011, compared with US$87.2 million a year earlier.

It is paying an interim dividend payment of A$0.05 per share.

Medusa started new, large scale haulage in the form of the Saga Shaft in January 2011. It has made good progress and expects the shaft to be fully operational from 350 metres below surface in the last quarter of the calendar year 2012.

This will allow development of more levels ahead of increased production and the stockpiling of ore ahead of the new mill commencing operation in mid calendar year 2013.

Due to continuing exploration success to the east of the Agsao Shaft, Medusa has begun preparations for another deep shaft in this area, initially to approximately 750 metres, but possibly to a final depth of approximately 1,000 metres.

Construction work has begun at the mill and it anticipates that all long lead time items will be delivered on schedule.  

The construction of a number of buildings is also in progress. Medusa is confident it will achieve its timelines for the Co-O expansion, barring interference from the weather.

At the Bananghilig deposit, drilling is continuing with emphasis on converting the historic 650,000 inferred resource ounces and additional inferred resource ounces to the indicated category. The aim is to achieve an initial reserve of approximately 1 million ounces for a 200,000 ounces per year operation.

Managing director Peter Hepburn-Brown said: “This financial year is a year of transition at the Co-O Mine while expansions to the haulage capacity from underground are completed, and accelerated development is prioritised.

“Our growth plans remain intact and are progressing steadily forward. This year promises to be an exciting year as we move the Co-O Mine construction forward to completion, and we look forward to providing updates as milestones are reached,” he added.

Broker Seymour Pierce has reiterated its ‘buy’ recommendation for the stock and its price target of 526 pence. Medusa was last trading at 405 pence.

Metals and mining analyst Asa Bridle said in a note that Medusa retains a very attractive operating margin and that, with no debt as well as with cash and bullion of US$80.2 million at the end of December, it can continue with its expansion plans while also paying a dividend.

“Although further challenges remain for Medusa in its efforts to fulfil the expansion, we continue to take comfort in the preservation of a very profitable operation, which continues to generate significant cashflow during this transition period,” Bridle added.