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.

Tropical storm Sendong and continued bad weather over Christmas and New Year had caused disruptions to the operations at the Co-O mine in the Philippines. This has adversely impacted gold production, the company said.

The firm now expects to produce 75,000 ounces of gold, rather than the previously estimated 90-100,000 ounces. Consequently, cash costs per ounce are expected to be higher at US$242 rather than US$230.

The disruption was said to be a short term setback and managing director Peter Hepburn said that Medusa remains in a healthy financial position and investors should focus on the group’s long term objectives.

In that respect Hepburn told investors that the mine expansion is ‘picking up pace’ and building work starts on the mill this month.

The current expansion programme aims to increase annual gold production to the 200,000 ounce mark. Beyond that the firm is targeting 400,000 ounces per year by the end of 2015 or early 2016.

The company also confirmed that during the three months ended December, it sold 10,000 ounces of gold at an average price of US$1,761 per ounce. The company is debt free and has US$80 million in cash and cash equivalents. 

“While the short term decline in performance is frustrating we believe that the long term outlook for Medusa and the Co-O mine remains positive,” said Asa Bridle, analyst at broker Seymour Pierce.

“The investment argument for Medusa remains strong with a robust mine margin being maintained at the same time that the company is moving on with its development plan.”

Bridle’s view was echoed by fellow mining analyst John Meyer, of Fairfax Securities. 

In a note today, Meyer said that today’s news may disappoint some investors in the short term but he continues to believe that Medusa offers investors a good growth profile.

He also believes that cash costs per ounce will come down to US$230 for the full year as production increases in the second half of the year.

“The cash cost is still very low compared to industry standards,” Meyer said.

“Importantly the company continues to benefit from strong cash flows which can fund their ongoing development programme.”

Medusa Mining (LON:MML, ASX:MML) revealed more positive results from the Bananghilig gold deposit in the Philippines where drilling continues.

Medusa is currently validating the existence of a 650,000-ounce resource at Bananghilig, which it aims to extend to a reserve of around 1 million ounces. It is currently focused on upgrading the resource to the indicated category.

This reserve would form the basis for a feasibility study, which would target production of 200,000 ounces of gold per year from a new milling facility.

The Bananghilig gold deposit is contained within the Tambis Project and is operated under a deal with Philex Gold Philippines which covers 6,262 hectares.

It consists of three zones, each around 1 km in length and open in all directions, known as the Sorex, Garden and Malinao zones.

From August 31 to December 31 last year, 8,568.95 metres of diamond drilling in 21 holes were completed, said the company.

Results included 6.05 metres with 17.09 grammes of gold per tonne and 28.55 metres with 1.54 g/t of the precious metal.

Medusa's managing director Peter Hepburn-Brown said: "It is pleasing that drilling continues to provide positive results in and around the existing resource which allows us to progress to infill drilling and to upgrade the resource category to predominantly Indicated, which will then be used for reserves modelling later in the year.

"We have seven rigs in the area and it is our intention to continue drilling throughout this year."

Broker Fairfax, which rates the stock a 'buy', said in a note today: "These drill results are part of the process to upgrade the resource base at Bananghilig and the company are on course to do this."

Analyst John Meyer added: "We continue to believe that Medusa offers upside value and have a target price of 573 pence."

Elsewhere, Seymour Pierce analyst Asa Bridle, who also recommends a 'buy', commented: "It remains our top pick in the gold sector based on the very low operating cost profile at its Co-O mine, the short and medium term production expansion plan and its strong cash position.

The broker targets a price of 526 pence for the shares (current price: 367.75 pence).

Today's results follow those reported in September last year, where the highlights included one hole with a 5.3 metre section, which returned a grade of 20.14 grammes of gold per tonne and another at 8.67 grammes over an 8.25 metre section.

From July 24 to August 31 last year, the firm had drilled over 93 holes for a total of 32,000 metres.

The broker says market expectations are for Randgold to grow production by 17 per cent in the next full year and by 9 per cent in 2013.

EBITDA margins over these two years are 62.8 per cent and 62.3 per cent respectively while the South African firm is trading on earnings multiples of 16.2 and 16.5 and price to cash flow multiples of 12.5 and 12.9. 

Medusa, meanwhile, offers production growth of 27.1 per cent and 66.0 per cent in the years to end June 2013 and full year 2014, with EBITDA margins of 78.9 per cent and 77.5 per cent but trades on an earnings multiple of 8.4 and price to cash flow of 8.2 times dropping to 6.1. 

The broker says Medusa also offers a yield above 1 per cent against 0.6 per cent at Randgold. 

It adds it has “no axe to grind against Randgold” but the disparity highlights the fact “there are well financed alternative producers further down the market cap scale that would appear to offer significant value”.

Medusa also trades below the weighted average for its London listed gold peer group on all three earnings metrics for the full year to 2013.

Seymour Pierce has a buy rating on Medusa with a price target of 526p.

Medusa recently forecast production of 90-100,000 ounces gold production this year to June, rising to 120,000 ounces in 2012/13 and 200,000 ounces the year after.

It is currently producing gold at the Co-O mine in the Philippines and developing a second deposit in the country at Bananghilig.

Medusa’s ambition is to become a mid-tier producer of 400,000 ounces of gold by late 2015 and has earmarked at least US$22million this year for gold exploration.

Recent share price weakness from Medusa Mining (LON:MML, ASX:MML) means that investors have a “fresh opportunity to gain exposure to a low cost producer which can self fund the cost of doubling production”, according to Seymour Pierce.

The broker, which published new research on the firm today, noted that yesterday Medusa lowered its 2012 production guidance from 100,000-110,000 ounces to 90-100,000 ounces following a poor first quarter and a fatality at one of its sites in the Philippines. Seymour said that a result of this has been the shares underperforming the market by more than nine per cent during the last month, but that the dip gives investors the opportunity to buy into a firm that it values at 526 pence per share (compared with the current share price of 422 pence).

Yesterday, at Medusa’s annual general meeting in Perth, Western Australia, its chairman Geoff Davis said that the firm was “steadily progressing” towards its objective of becoming a mid-tier producer of 400,000 ounces of gold per annum by late 2015. The firm is currently expanding mill capacity at its Co-O gold deposit to produced 200,000 ounces per year, and it is continuing to enjoy exploration success at its Bananghilig deposit while building a second 200,000-ounce per annum milling facility.

Seymour expects Medusa to produce revenue of around US$152 million for the year to June 2012, along with a pre-tax profit of US$110.3 million (58.6 cents earnings per share), which would be in line with the revenue and profits the firm made last year. However, for 2013 it forecasts revenue of US$180 million and profit of £126.7 million (67.3 cents EPS).

Today, Medusa announced that Davis yesterday sold one million shares at an average price of A$6.72. The proceeds from the sale will be used to pay personal income tax as well as to provide funds for charitable undertakings, said Medusa.

Following the sale, Davis’s interest in Medusa amounts to more than four million shares (2.15 per cent of its issued share capital).

Speaking at the firm’s Annual General Meeting in Perth, Western Australia, Geoff Davis said that Medusa was “steadily progressing” towards its objective, with the current expansion of mill capacity at its Co-O gold deposit to produce 200,000 ounces per year and through continued exploration success at its Bananghilig deposit along with the construction of a second 200,000-ounce milling facility.

Meanwhile, Medusa’s ambitions in the Philippines do not stop with Co-O and Bananghilig, added Davis. “We are positive that these two gold projects will not be the end of the gold story,” he said, pointing out that the firm has budgeted US$27 million for exploration, “which keeps 20 diamond drill rigs turning 365 days of the year”.

Davis said that the firm intends to fund its future capital expenditure out of cash flow, and at the same time will also continue to pay a small dividend to shareholders. Once all future capex requirements are satisfied by cash in the bank, the firm plans to review its dividend policy, he added.

During its last financial year, Medusa produced 101,474 ounces of gold at cash costs of just US$190 per ounce, generating a net pre-tax profit of US$110 million. For this year the firm expects production to be between 90,000 and 100,000 ounces.

Shares in Medusa were down 1.6 per cent at 420 pence each in early trading this morning.

In the three months to September 30, the company produced 10,510 ounces at a recovered grade of 8.33 g/t gold at cash costs of US$291 per ounce. In the comparative quarter in 2010, the firm produced 25,004 ounces at 15.77 g/t at costs of US$187 per ounce.

Medusa also said it spent US$5.36 million on capital works, associated sustaining capital at the mine, and also costs for the new mill construction and infrastructure in the three months to September 30 this year.

It also paid out US$6.74 million on general and accelerated mine development, including shaft sinking costs compared to US$4.5 mln in the June quarter this year.

The Agsao Shaft at the Co-O mine was shut down for extensive refurbishment in July and August with a consequent reduction in production for the period.

At the same time, a larger winder and skip were installed, increasing the haulage capacity of the shaft to more than 400 tonnes per day and commissioning began on 01 September 2011.

Permitting of the Co-O mill expansion - part of plans for a new Co-O plant- has been delayed due to typhoons in September and October, the firm revealed.

In today's statement, managing director Peter Hepburn-Brown said: "Now that we know the layout of approximately two million resource ounces in the mine, the mine is undergoing major renovations to modernise it."

He pointed out that, as with any renovations, there were inconveniences and altered work practices in the process.

"Despite these short term hiccups, on completion we will have a modern efficient underground mine serviced by efficient shafts and underground haulage systems," he said.

This quarter, the sinking of the Saga shaft went smoothly and is expected to be hauling ore in the June 2012 quarter after reaching Level 6 late in the December 2011 quarter, he said.

Hepburn- Brown added: "I urge all shareholders to focus on our long term objectives of developing a profitable long term asset and not to be influenced by short term production volatility".

Analyst Kate Craig, of broker Oriel Securities, described the results as "a departure" from the company’s usual production of 25,000 ounces at cash costs of less than US$200 per ounce but added:

"This does not alter our full year production estimate of 100,000 ounces at US$206 per ounce. We maintain our 'buy' recommendation and 584 pence target price."

In today's report the firm also updated investors about current drilling at the Co-O mine, where six surface and five underground rigs are in action.

The results include 1.40 metres at 28.02 grammes per tonne (g/t) gold, 1.45 metres at 56.23 g/t gold, 2.50 metres at 72.80 g/t gold and 1 metre at 21.53 g/t gold.