- Macquarie initiates on Alacer Gold with an Outperform rating
- Strong production growth and improving valuation are likely catalysts
- News flow should be positive in coming months
- Buy ratings on Alacer continue to dominate stockbroker views

By Chris Shaw

Alacer Gold ((AQG)) has been among the preferred listed gold plays in Australia, the FNArena database showing the stock had been rated as a Buy by three of the five brokers offering coverage. This has increased to four positive views, as Macquarie has initiated coverage with an Outperform rating.

The attraction for Macquarie is a clear correlation in the listed gold space between a company's production levels and the price to net present value (NPV) multiple the stock trades on. Since Alacer was created early this year Macquarie notes a P/NPV re-rating to 1.25 times net present value has occurred.

This re-rating is expected to continue, Macquarie seeing scope for Alacer to trade on a P/NPV of 1.5-1.6 times in the coming 12-18 months. This implies a valuation range for the stock of $12.20-$13.00.

Another factor supporting Macquarie's positive view is a strong production growth profile, as from current output of around 410,000 ounces the broker sees potential for total production to move above 700,000 ounces per year by FY15. Total reserves currently stand at 5.9 million ounces with projects in both Australia and Turkey.

Two projects should account for the increase in production, Macquarie expecting Copler will deliver about 170,000 ounces of the increase and South Kalgoorlie around 100,000 more ounces.

This production increase should be achieved without any increase in production costs, as Macquarie expects total operating costs will decline from around US$560 per ounce at present to about US$550 per ounce by FY15.

Macquarie has identified a number of factors that should help Alacer achieve this growth in production. One is an aggressive exploration program that covers all the mines in Alacer's portfolio, which includes Copler, the South Kalgoorlie operations, Higginsville and Frog's Leg.

Alacer also plans some technical work such as a bypass of the crushing circuit to allow the treating of lower grade ore at Copler oxides. Work is also being done to deliver higher than nameplate throughput of the POX circuit and an improvement of the block model at the Copler sulphides.

Assuming the exploration program delivers the success expected, Macquarie's view is Alacer looks solid value relative to global peers. A further attraction is a strong cash generation profile, as despite a forecast US$730 million in capex between now and 2015, Macquarie expects Alacer will grow its net cash position to around US$1.05 billion over the same period.

Investors should benefit from a consistent news flow from Alacer over both the short and medium-term. Macquarie notes this reflects both the exploration program and the ongoing feasibility study for the Copler sulphides.

In initiating coverage Macquarie has set a price target of $13.00, while pointing out there is upside to a valuation of more than $16.00 pending the results of exploration work and production expansion at existing projects.

Macquarie's target puts it broadly in line with other brokers covering Alacer, as the FNArena database shows a consensus price target of $12.49. Targets range from BA Merrill Lynch at $9.50 to Deutsche Bank at $13.65.

The target of UBS has come down to $13.60 from $14.40 to reflect the impact of a option held by 5% owner of Copler, Lidya Madencilik Sanayi ve Ticaret, to move to 20% of the project via the exercise of this option for $37.8m.