Company Overview: Dacian Gold Limited (ASX: DCN) is an Australian mid-tier gold producer with a highly prospective land package in Western Australia. The company has a 100% ownership interest in Mount Morgans Gold Operation (MMGO), a very highly endowed goldfield with numerous multi-million-ounce gold deposits. MMGO is primarily comprised of 2.5 Mtpa CIL treatment plant, the Jupiter open-pit mine and the Westralia underground mine. The company’s operating strategy is focused on generating low risk, sustainable positive cash flow and unlocking future through existing resources and exploration.

DCN Details

Sustainable Operating Profile: Dacian Gold Limited (ASX: DCN) is a Western Australian based gold producer mainly involved in the gold mining, processing and exploration at its 100% owned Mount Morgans Gold Operation (MMGO). The MMGO is a 520 km² tenement package, situated in the Laverton gold district, which is known to contain around 30 million ounces of gold. With MMGO in its portfolio, DCN has a sustainable operating profile with multiple levers to unlock value. DCN’s growth strategy is to optimise production to maximise cash flow whilst aggressively exploring its large tenement package in pursuit of organic growth opportunities. Over the last five years, the company has witnessed significant improvement in its bottom-line, from a net loss of $8.05 million in FY15 to a net profit of $3.02 million in FY19.

Financial Overview (Source: Company Reports)

Amid COVID-19 pandemic, the company’s MMGO operations are continuing unimpacted with a range of protective and preventative measures implemented at the sites. The company recently reported a decent June quarter performance which allowed DCN to achieve its FY20 production guidance. Looking ahead, the company is focused on making new discoveries through to mine life extensions, and growing development pipeline at MMGO. DCN’s sustainable production profile of an average 110,000ozpa @ AISC of $1,425/oz (FY2021-2023) provides a decent platform to pursue growth opportunities.

FY19 Result Highlights: The financial year 2019 or FY19 was a significant year for the company as it was it’s first full-year as a gold producer having poured the first gold bar from the newly commissioned 2.5Mtpa Mt Morgans treatment plant. During the year, the company produced 138,911 ounces of gold and reported gold sales revenue of $132.6 million. In FY19, the Jupiter open pit mined 2 million tonnes of ore for 65,000 ounces of gold mined and the Westralia underground produced over 830,000 tonnes of ore for 85,000 ounces of gold mined.  For FY19, the company reported a net profit after tax of $3.02 million, as compared to the net loss of $5.4 million recorded in FY18.

FY19 Key Financials (Source: Company Reports)

H1FY20 Result Highlights: For the first half of FY20, the company reported total production of 75,237 ounces of gold at an All-In Sustaining Cost of $1,562 per ounce. Further, the company reported gold sales revenue of $141.8 million, generated from the sale of 73,147 ounces.

For the half-year period, the mine production at the Jupiter open pit stood at 724kt at 1.3 g/t for 30,608 ounces of contained gold. The underground mine production at Westralia stood at 417kt at 2.7 g/t for 36,526 ounces of contained gold. For H1FY20, the company reported a consolidated net loss after tax of $78.5 million, impacted by $68.5 million of MMGO asset impairments and a net tax expense of $18.1 million.

Production Summary for H1FY20 (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 34.42%. Franklin Advisers, Inc. and Perennial Value Management Ltd. hold the maximum interest in the company at 7.57% and 5.05%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick look at Key Margins: Over the last year, the company has witnessed significant improvement in its profitability margins. For H1FY20, the company’s asset turnover multiple stood at 0.43x, higher than the industry median of 0.26x. For the same period, the company’s debt to equity multiple stood at 1.04x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

March Quarter Performance: During the March 2020 quarter, the company produced 31,695 ounces at an MMGO AISC of $1,810/oz. The Jupiter open-pit mined 475,380t @ 1.0 g/t gold for 14,849 contained ounce and the Westralia underground mined 200,775t @ 2.9 g/t gold for 18,409 contained ounces. Due to the outbreak of COVID-19 during the quarter, DCN implemented a number of protective measures at MMGO.

During the quarter, the company announced updated Mineral Resources and Ore Reserves, as well as an accompanying three-year outlook for the MMGO. As per the outlook, the company expects to deliver average annual production of 110,000 ounces at an AISC of $1,350/oz over the period FY2021 – FY2023.

Fully underwritten $98 million Capital Raising: On 8th April 2020, the company announced an institutional share placement and an accelerated pro-rata non-renounceable entitlement offer to raise up to ~A$98 million. The company’s main objective behind this was to recapitalize itself so that it can deliver on its 3-year outlook, underpinned by a strengthened balance sheet. On 9^th April 2020, the company announced the successful completion of the bookbuild of the Placement and the Institutional Entitlement Offer to raise approximately $70 million. Later on 6 May 2020, the company announced that it has completed the retail component of its 1 for 1 fully underwritten accelerated non-renounceable pro-rata entitlement offer, taking Dacian’s total equity raised to approximately $98 million (before transaction costs). This equity raising resets capital structure, providing the flexibility to pursue high margin production, particularly following the run-off of hedges.

$15 Million Exploration Program: The company has set a $15 million exploration program focused on evaluating a number of advanced exploration targets across the MMGO and bolster the company’s current three-year outlook. On 24 July 2020, the company announced that its exploration program is yielding results with significant intercepts at the Phoenix Ridge, McKenzie Well and Mt Marven deposits. The initial results from the exploration program are indicating a strong potential for Mineral Resource growth over time. Further, the results highlight the size of the opportunity across numerous exploration projects.

June Quarter Update: During the June 2020 quarter, the company recovered 31,883 ounces at an MMGO AISC of $1,562/oz. This took the total FY2020 production to 138,814 ounces at an MMGO AISC of $1,619/oz, within the guidance of 138,000-144,000 ounces at an MMGO AISC of between $1,550-$1,650/oz.

The mining activities during the quarter were focused on ore delivery from the Heffernans open pit and commencement of pre-stripping of the Doublejay Stage 1 pit. During the June quarter, the processing plant milled 714,348 tonnes of ore, achieving a record total throughput of 2.96 million tonnes for FY20. At the end of June quarter, the company had total cash and unsold gold on hand of $57.3 million. Further, the company had a total debt of $64.1 million after repayments of $30.6 million.

Key Risks: The company has exposure to a variety of risks arising from its use of financial instruments. These risks include credit risk, liquidity risk, market risk, interest rate risk, market risk, commodity price risk, etc. Further, the company is also exposed to the risks and uncertainties related to the impacts of COVID-19 pandemic.

What to Expect: The company’s operating plan is focused on investment during FY2021 and harvesting through FY2022-2023. For FY21, the company expects the total production to be in the range of 110,000-120,000 ounces at an AISC of $1,400-$1,550/oz. The development capital in FY21 is expected to be around $55 million, which will be focused on making investments in pre-stripping campaigns across the open pits.

The company has recently affirmed its annual production outlook for FY2021-2023 of an average of 110,000 ounces at an updated AISC of $1,425/oz. In the next three years, the company expects the total development capital to be around $73 million.

Looking ahead, the company is focused on new discoveries through to mine life extensions, and growing the development pipeline at MMGO. Further, the company intends to improve its financial flexibility with continued reduction in legacy hedge commitments and refinancing of the existing debt facility. The company is seeking to refinance its existing Project Debt Facility into a corporate style facility which would provide greater flexibility and increased tenor than the existing Project Debt Facility.

Guidance (Source: Company Reports)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last six months, the stock of DCN has corrected by 18.89% on ASX and is inclined towards its 52-week low, offering a decent opportunity for accumulation. DCN’s sustainable production profile of an average 110,000ozpa @ AISC of $1,425/oz (FY2021-2023) provides a robust platform to pursue growth opportunities. We have valued the stock using a price to earnings multiple based illustrative relative valuation method and have arrived at a target price of an upside of lower double-digit (in % terms). Considering the company’s recent capital raising, its decent FY20 production performance, its three-year production outlook, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $0.350, down by 4.11% on 11 August 2020. 

DCN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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