Medusa Mining set for £100 mln profit in coming year, says Fairfax

Medusa Mining (LON:MML, ASX:MLL,TSE:MLL) is set to make almost £100 million in profit this year, according to Fairfax Securities mining expert John Meyer.

The analyst’s assertion came as the group told investors that it expects to produce between 100,000 and 110,000 ounces of gold in the forthcoming year, beginning 1 July, at cash costs of around $200 per ounce. 

Medusa’s Co-O mine is currently going through a major expansion programme, which is intended to increase annual production up to 200,000 ounces. The next part of this expansion will see underground development work speed up rapidly, up to 800 metres a month.

This accelerated development phase will however have a negative impact on mined grades for a short period – mainly in the September quarter - and cash costs will also be affected.

Consequently Fairfax analyst John Meyer revised his production forecast for next year, reducing it from 125,000 to 105,000 ounces. While repeating a ‘buy’ recommendation the analyst also reduced his target price from 599 to 573 pence.

However it is important to point out that, despite the forecasted increased cash costs, Co-O is still one of the cheapest gold mines to run worldwide.

Furthermore Meyer also highlighted the fact that a decision to remodel the mine’s existing mill, rather than building a new one, will save around US$10 million. This means that the Co-O development programme will be one of just a few in the sector to reduce capex, Meyer said.

Another important part of the development will see Medusa refurbish a mine shaft, Agsao, and it will establish another new one, called Saga, later in September. 

The new Agsao and Saga shafts will be critical in feeding increased volumes of ore to the newly expanded mill and Medusa is well advanced in the development, the analyst added. Importantly Meyer doesn’t believe that permiting will be an issue for the Saga expansion.

“Medusa continues to produce gold at a low $200 an ounce cost allowing a high $1,300 an ounce operating margin with growth to 200,000ozpa in process,” Meyer said.

“Profits of near $100m are forecast for this year allowing ongoing dividends as well as good headroom for the capital cost of the mine expansion.”

In this morning’s statement managing director Peter Hepburn-Brown emphasised that Medusa is striving to improve its operations. He said that the various work at the mine would ultimately mean the firm will be able to supply increased ore to the new Co-O mill early next year - when the mill is completed.

"It is pleasing that we should now be able to achieve considerable savings on Capex with the new mill and that we are still on-track to receive permits for the expansion around late September," said Hepburn-Brown.

The accelerated development program at the Co-O mine is essential to prepare it for the increased production rates required under the expansion plans, said Medusa.

Expanding production at the Co-O gold mine on the Mindanao Island in the Philippines has transformed Medusa from a small AIM-listed junior into a dividend paying, main market, gold producer in just a few short years.

It acquired the mine, which was then producing 40,000 ounces of gold a year, back in December 2006 when it completed a merger with privately owned Filipino miner Philsaga Mining Corporation. 

In the years that followed it extended the mining operation substantially, taking the run-rate first to 60,000 and then to 100,000 ounces a year. Importantly the high-margin and cash generative mining operation gives Medusa the financial clout to keep expanding the mine.

As mentioned, Medusa is now working to take production up to the 200,000 ounce a year level and ultimately it is aiming to be a 300,000 to 400,000 ounce a year, mid-tier gold producer.