Company Overview: Dacian Gold Limited (ASX: DCN) is an Australian gold mining company with a highly prospective land package in Western Australia. The company’s Mt Morgans Gold Operations (MMGO) comprises a ~3Mtpa CIL treatment plant, the Jupiter and Mt Marven open pit mines, and the Greater Westralia area underground and open pit opportunities. The company’s strategy is to optimize production to maximize cash flow while aggressively exploring its large tenement package in pursuit of organic growth opportunities.

DCN Details

Focused on Extending Mine Life to Improve Production Profile: Dacian Gold Limited (ASX: DCN) is an Australian mid-tier gold producer, mainly involved in gold mining, processing and exploration at its 100% owned Mt Morgans Gold Operation (MMGO). As on 15 June 2021, the company’s market capitalisation stood at ~$259.52 million. The company’s objective is to increase investment in growth and exploration to unlock value for shareholders. It recently implemented a merger with NTM Gold Limited and integrated its Redcliffe Gold Project into its operations. Despite the challenging conditions caused by the COVID-19 pandemic, DCN was able to report 117.4% YoY growth in its H1FY21 NPAT, driven by lower AISC and higher average gold price received.

NPAT Trend (Data Source: Analysis by Kalkine Group)                     

Looking ahead, DCN intends to pursue its three-pillar growth strategy, which is focused on making new discoveries, advancing its Redcliffe project, and restarting production at the Greater Westralia mining area. 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. DCN has completed an extensive definition drill program to bolster Mineral Resources and Ore Reserves for the upcoming Life-of-Mine plan. With increased regional presence, robust balance sheet, and ongoing exploration programs, the company seems well placed to grow its production and extend mine life.

Decent rise in H1FY21 NPAT: For H1FY21, DCN reported total production of 59,961oz at an AISC of $1,356/oz. Over the period, DCN sold 59,186 ounces of gold at an average gold price of $2,259 per ounce, generating sales revenue $133.7 million. EBITDA for H1FY21 stood at $49.2 million, up by 43% on pcp. Net profit for H1FY21 stood at $13.6 million, up 117.4% on pcp, reflecting the improved gold price and reduced costs achieved during H1FY21.

H1FY21 Results Highlights (Source: Company Reports)

FY20 Result Highlights: During FY20, DCN produced 138,814 ounces of gold at an AISC of $1,619/oz, generating $23.0 million in operating cash flow. DCN reported sales revenue of $270.04 million in FY20, up 103% on the previous year. DCN incurred a loss of $116.46 million in FY20, down from the profit of $3 million in FY19, mainly due to $68.5 million of MMGO asset impairments and losses on derivative instruments from deferred premium put options of $6.8 million. The bottom-line was also impacted by the immediately expensed exploration expenditure of $9.1 million; and a net tax expense of $20.4 million which includes the derecognition of deferred tax assets for previously recognised carried forward tax losses.

March 2021 Quarter Highlights: For the March 2021 quarter, DCN reported total gold production of 21,400oz at an AISC of $1,874/oz, taking the total FY21 YTD production to 81,361oz at an AISC of $1,492/oz. During the quarter, DCN completed around 30,000m of exploration and resource definition drilling. One of the important highlights of the quarter was the implementation of the merger with NTM Gold Limited and integration of the Redcliffe Gold Project to DCN’s operations. Over the quarter, DCN repaid $2.0 million of debt, which reduced the total debt to $21.4 million. As at 31 March 2021, the company had cash and gold on hand of $28.3 million.

Completed A$40 million Equity Raising: DCN recently completed a fully underwritten two-tranche institutional placement of approximately 142.9 million new fully paid shares at an offer price of A$0.28 per share to raise approximately A$40.0 million. The proceeds raised from the placement will be used to accelerate DCN’s three pillar growth strategy, building on the robust foundation established during FY2021. The company has recently opened a Share Purchase Plan (SPP) to raise up to a further A$5 million at the same issue price as the Placement. The proceeds from the SPP will be applied to additional working capital. SPP will close on 22 June 2021.

Key Metrics: The company’s gross margin in H1FY21 stood at 24.7%, up from 15.3% in H1FY20. Further, the company’s EBITDA margin in H1FY21 stood at 36.6% in H1FY21, up from 26% in H1FY20. The company’s debt to equity ratio in H1FY21 stood at 0.21x, down from 1.04x in H1FY20, reflecting the substantial reduction in the company’s debt over H1FY21.  Current Ratio for H1FY21 stood at 1.22x, up from 0.54x in H1FY20.

Liquidity Profile and Debt to Equity Ratio Trend (Data Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 35.68% of the total shareholding, while the top four constitutes the maximum holding. DGO Gold Ltd. and Regal Funds Management Pty. Ltd. are holding a maximum stake in the company at 5.66% and 5.64%, respectively, as also highlighted in the chart below:

(Data Source: Analysis by Kalkine Group)

Key Risks: DCN is exposed to the risks related to the fluctuations in commodity prices and exchange rates, specifically the USD denominated gold price and the AUD / USD exchange rate. Potential investors should also note that the company has not performed in terms of profitability in the past few years and its bottom-line was significantly reduced in FY20, mainly due to various cash and non-cash adjustments. However, in H1FY21 the bottom-line was significantly improved, owing to improved gold prices ad reduced cost. The potential supply chain disruptions resulting from the transmission COVID-19 in the community and measures implemented by governments around the world to limit the transmission of the virus could impact the company’s operations, financial position, prospects and ability to raise capital.

Outlook: With the proceeds of the recent capital raising, DCN intends to accelerate a significant exploration investment across Mt Morgans and Redcliffe project. Further, it intends to advance the initial high-grade Redcliffe open pits into production, including completion of mining studies, site establishment and initial pre-stripping activities for Hub deposit, GTS deposit, and Nambi deposit. With its stable operations, the company is currently well positioned to achieve its FY21 full year guidance of 110-120koz @ AISC of $1,400-1,550/oz. Development capital in FY21 is expected to be around $55 million. DCN recently announced that it will conduct a General Meeting on 9 July 2021.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

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 30.99% and is currently inclined towards its 52-weeks’ low price of $0.270, offering a decent opportunity for accumulation. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We have taken a slight premium to its peer average, considering the rise in H1FY21 profitability, reduction in debt, and improved profitability margins. We have taken peers like Resolute Mining Ltd (ASX: RGG), Regis Resources Ltd (ASX: RRL), and St Barbara Ltd (ASX: SBM), etc. Considering the recently completed equity raising, increased regional presence caused by the merger with NTM Gold Limited, ongoing focus on debt reduction, decent long-term outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $0.280, down by 1.755% as on 15 June 2021.

DCN Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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. 

Technical Indicators Defined: 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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