Company Overview: Dacian Gold Limited (ASX: DCN) is an Australian metal and mining company mainly involved in gold mining, processing, and exploration at its 100% owned Mt Morgans Gold Operation (MMGO). MMGO is primarily comprised of 2.5 Mtpa CIL treatment plant, the Jupiter open-pit mine, and the Westralia underground mine. The company’s strategy is to optimize production to maximize cash flow whilst aggressively exploring its large tenement package in pursuit of organic growth opportunities.

DCN Details

Long-term Outlook Supported by Robust Pipeline of Advanced Exploration Targets:  Dacian Gold Limited (ASX: DCN) is an Australian gold mining company with a highly prospective land package in Western Australia. As on 27 April 2021, the company’s market capitalisation stood at ~$316.43 million. The company’s 100% owned Mt Morgans Gold Operation (MMGO) covers a large portion of the highly gold prospective Laverton Tectonic Zone that hosts a number of important gold and nickel deposits. Despite the challenges created by the COVID-19 pandemic, the company was able to report decent operational and financial performance in FY20, with 103% YoY growth reported in sales revenue and 94% YoY growth reported in adjusted EBITDA. DCN has recently diversified its production profile by completing a strategic merger with NTM Gold Ltd. The merger has added the highly prospective Redcliffe project to the company’s production profile. The company currently has a sustainable production profile of an average 110,000ozpa @ AISC of $1,425/oz (FY21-23), providing a robust platform to pursue growth.

As a result of DCN’s recent merger with NTM Gold Ltd, the company now has a highly prospective land position of over 1,300km² in the Leonora-Laverton District with a significant organic growth pipeline of advanced exploration targets. Looking ahead, the company is focused on increasing its annual production, extending the mine life, and reduce its All in Sustaining Costs (AISC). Further, the company is also focused on growing its free cash flow, making new discoveries, and leveraging the Mt Morgans Infrastructure to facilitate growth.

5-Year Financial Summary (Source: Company Reports)

Decent Growth in H1FY21 EBITDA: During the half-year ended 31 December 2020, the company’s Mt Morgan Gold Operation (MMGO) produced 59,961 ounces of gold at an All in Sustaining Cost (AISC) of $1,356 per ounce. Revenue from ordinary activities during H1FY21 stood at $133.97 million, down by 5% on the previous corresponding period (pcp), reflecting lower gold production for the period. EBITDA for H1FY21 stood at $49.17 million, up 43.2% on pcp, due to lower AISC’s and higher average gold price received. Net profit for H1FY21 stood at $13.63 million, up 117.4% on pcp. During the half-year period, the company advanced multiple exploration and resource definition work streams across its large tenement package. As at 31 December 2020, the company had total cash and cash equivalents of $37.9 million and total debt of $23.4 million.

H1FY21 Results (Source: Company Reports)

FY20 Results Highlights: During the year ended 30 June 2020, company produced 138,814 ounces of gold at a Mt Morgans Gold Operation with AISC of $1,619/oz, generating $23.0 million in operating cash flow. Notably, FY20 revenue was 103% higher than the previous year’s revenue, reflecting the commencement of commercial production on 1 January 2019. For FY20, the company incurred a net loss of $116.5 million.

FY20 Results Highlights (Source: Company Reports)

Key Metrics: As a result of improved gold prices and reduced costs, the company witnessed decent improvement in its H1FY21 profitability ratios as compared to H1FY20. Gross margin for H1FY21 stood at 24.7%, up from 15.3% in H1FY20. EBITDA margin for H1FY21 stood at 36.6%, up from 26% in H1FY20. Current ratio for H1FY21 stood at 1.22x, up from 0.54x in H1FY20.

Profitability Metrics and Liquidity Profile, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 33.26% of the total shareholding, while the top four constitutes the maximum holding. DGO Gold Ltd. and Franklin Advisers, Inc. are holding a maximum stake in the company at 6.35% and 5.31%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Strategic Merger with NTM Implemented: On 15^th March 2021, DCN announced that its strategic merger with NTM Gold Ltd (NTM) has been implemented. As per the Scheme of Arrangement, DCN has acquired 100% of the shares in NTM. The shareholders of NTM have received 1 Dacian share for each 2.7 NTM shares held on the Scheme record date (25 February 2021). Following the implementation of the Scheme, the combined entity is continuing to trade as Dacian Gold Limited under the ticker DCN and NTM is now a wholly-owned subsidiary of DCN. The merger is in-line with DCN’s corporate strategy centred on a simplified operating plan that prioritizes open-pit production and growth through organic exploration, development and regional consolidation. The combined entity now has the opportunity to extend mine life at Mt Morgans, leveraging DCN’s operational expertise and processing infrastructure to unlock the potential of the Redcliffe Gold Project through regional consolidation. Moreover, the combined entity is expected to benefit from enhanced scale and market positioning and the potential future inclusion in relevant gold and ASX indices. DCN has already started its drilling programs and development studies on Redcliffe with an optimal mine plan integrated with Mt Morgans.

Exploration Update at Mt Morgans Tenement Package: On 14 April 2021, DCN provided an update on its exploration program targeting potential base load opportunities across its extensive Mt Morgans tenement package. DCN has been applying the Mineral Systems approach, which is supported by a variety of exploration techniques, including Aeromagnetic Geophysical Survey, Geomechanical Modelling, Geochronological Age Dating and UltraFine Soil Survey. So far, the company has completed the Airborne Geophysical survey to identify base load targets across untested & highly prospective southern tenement package. In mid-2021, DCN intends to commence the drilling of highly ranked and previously untested base load targets.

Key Risks: The company is exposed to the risks related to the fluctuations in the prices of gold. Further, the company is exposed to risk and uncertainties caused by the COVID-19 pandemic and associated impacts. DCN is also exposed to exploration-related risks.  As it has recently completed the merger with NTM, DCN is now also exposed to integration and synergies-related risk.

Outlook: As a result of the merger with NTM and the addition of the Redcliffe project, DCN now has multiple opportunities for growth to advance through the development cycle. The combined entity of DCN and NTM has a large, near-new processing infrastructure with low operating costs. At its Mt Morgans operations, DCN is targeting a large potential base load ore feed, satellite and high-grade deposits to bolster annual production rates.

The company is planning to deliver mine life extensions beyond the current outlook and identify incremental high-grade ore to increase annual production rates. It is targeting a base case mine plan of 110-000-120,000 ounces per annum for 5 years across the Laverton operations of Mt Morgans, including Greater Westralia, and the Redcliffe project. DCN is also accessing underground and open pit opportunities across multiple deposits for supplementary production. In FY21, the company expects its production to be in the range of 110,000-120,000oz at an AISC of $1,400-$1,550/oz. In FY21, DCN expects its development capital to be around A$55 million.

Three-Year Outlook (Source: Company Reports)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 24.27% and is trading lower than the average 52-week price band of $0.290 and $0.565, offering a decent opportunity for accumulation. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer median EV/EBITDA (NTM trading multiple), considering the risks associated with the company’s business, stiff competition, higher exploration expenditure and global uncertainties. We have taken peers like West African Resources Ltd (ASX: WAF), Regis Resources Ltd (ASX: RRL), Westgold Resources Ltd (ASX: WGX), etc. Considering the company’s decent performance in H1FY21, anticipated benefits from the merger with NTM, modest long-term outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the closing price of $0.390 as on 27 April 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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