Company Overview: Dacian Gold Limited is a gold exploration and development company. The Company's principal activities include mineral exploration and development activities at its Mt Morgans Gold Project (MMGP) in Western Australia. MMGP is located over 20 kilometers west of Laverton, being approximately 850 kilometers northeast of Perth in Western Australia. The project area is a 520 square kilometer contiguous tenement package comprising granted mining licenses. MMGP includes various deposits, such as Westralia Deposit, Allanson Deposit, Beresford Deposit and Jupiter Deposit. The Jupiter Deposit occurs in the eastern half of the MMGP, being over 20 kilometers east-south-east of the Westralia Deposit. The Beresford mineralization is located at the south end of the Westralia ore system. The Cameron Well Prospect is located over five kilometers east of Westralia. The Callisto Prospect lies over six kilometers south of the Jupiter Deposit and over seven kilometers west of the Wallaby gold deposit.

 

DCN Details

Quarterly Production Guidance Achieved for June 2019 Quarter: Dacian Gold Limited (ASX: DCN) is an Australian Securities Exchange-listed gold miner with a market capitalisation of ~$214.43 million (as at 23 July 2019). The company is engaged in pursuing several organic pathways to increase its production and mine life. The company achieved its June 2019 quarter production guidance for the Mt Morgans Gold Operation (or MMGO), which was in the range of 36,000-38,000 ounces. The June 2019 quarter production from MMGO stood at 36,658 ounces, which marked an upside of over 1.8% from the lower range of the guidance.

The All-in-Sustaining-Cost (or AISC) for the June quarter remained at the lower end of the cost guidance and stood at A$1,519 per ounce while the cost guidance for the quarter was in the range of A$1,500-A$1,600 per ounce. In the investor presentation July 2019, with respect to Mt Morgans, the company stated that it is surrounded by the multi-million-ounce deposits. At the end of the June quarter, DCN implemented the additional hedging commitments of 24,000oz at A$2,019/oz. It was also added that total hedge commitments over the next 2 years total 147,449oz at A$1,810/oz.

The following table gives a broader idea of the key operating outputs from MMGO mine plan:

Key Operating Summary Outputs for MMGO (Source: Company Reports)

Top 10 Shareholders: The following table provides a broader idea of the top 10 shareholders in Dacian Gold Limited:

 
Top 10 Shareholders (Source: Thomson Reuters)

Reducing Exposure to Debt Component: It looks like that Dacian Gold Ltd is reducing its exposure to debt component, and this might help in stabilising the company’s balance sheet moving forward. A reduction in the debt is generally considered as positive as it reduces the future commitments for the company. In 1H FY19, Debt/Equity ratio stood at 0.86x, which reflects a fall of 21.3% on a YoY basis. Also, during the same period, the company’s long-term debt as a percentage to total capital stood at 31.4%, which implies a fall of 4.7% on the YoY basis. The company’s current ratio stood at 0.98x at the end of 1H FY19.


Key Metrics (Source: Thomson Reuters)

Robust Growth in DCN’s Top Line: Dacian Gold Ltd witnessed a robust CAGR growth of 30.82% in its top-line between FY14- FY18 which reflects that the company is possessing decent revenue-generation capabilities. It can be said that the company’s balance sheet position has been improved between FY14 – FY18 as its total current asset base has been increased from $11 million in FY14 to $79.7 million in FY18.

The company’s cash and short-term investments have increased from $10.9 million in FY14 to $62.9 million FY18 and, therefore, it can be said that the company might make necessary deployments towards operational capabilities. These deployments might help the company in achieving long-term strategic objectives. The company’s total debt has been reduced to $150.4 million at the end of December 2018 from $166.1 million at the end of June 2018. The reduction of debt might help the company in further improving its overall financial position, which could position it well to tap the growth opportunities.

New High-Grade Gold Discovery: DCN intersected multiple high-grade mineralization position at the north of the Westralia Mine. The significant results from the intersection area as:
The drill intersected 1.7m @ 127.0 g/t of gold from 297.3m
The drill intersected 31.0m @ 6.3 g/t of gold from 208.0m
The drill intersected 14.3m @ 12.7 g/t of gold from 284.8m
The drill intersected 3.2m @ 12.5 g/t of gold from 365.1m
The drill intersected 1.4m @ 9.0 g/t of gold from 218.5m
The drill intersected 1.7m @ 7.5 g/t of gold from 248.9m
The drill intersected 1.6m @ 6.2 g/t of gold from 308.6m
The drill intersected 3.4m @ 5.0 g/t of gold from 205.0m

DCN and S&P Commodity Producers Gold TR Index: On comparing the total returns delivered by the stock of the company with the total returns delivered by the S&P Commodity Producers Gold Total Return Index and Australian Gold Spot from the 1^st of July 2019 till 23 July 2019, DCN outperformed both. While DCN delivered a total return of 105.66% from 1^st July 2019 to 23^rd July 2019, the global index and the Australian Gold Spot delivered a return of just 9.07% and 0.65% respectively.


DCN, SPCPGT, XAUAUD Total Returns QTD (Source: Thomson Reuters)

Gold Price Scenario: Gold prices are currently on a rally supported by the demand push from the central banks and over the market expectation of a rate cut by Federal Reserve in the United States. The demand from central banks is witnessing a quarterly growth.


Quarterly Central Banks Gold Addition (Source: World Gold Council)

The gold reserve from the central banks are anticipated to increase slightly overtime and would not witness a decline, and while the central banks are pushing up the gold reserve amid estimated long-term impact of the re-escalated U.S-China trade tiff, the dovish stance of the Fed is providing an additional impetus for growth.  The market is expecting at least 50bps cut in the interest rate, and the Fed in its recent addresses to media has shown an inclination towards a rate cut, which might further propel the gold prices ahead. The United States Federal Reserve has a proven record of behaving in line with the market expectation, and the probability of a rate cut at the upcoming Fed meet on 31^st July is moving nearly to 1.


Implied Probably and Historical FED Actions (Source: World Gold Council)

Gold Demand Trend: Gold demand has witnessed a decent yearly growth in 2018, and the global gold-backed ETFs which witnessed a fall in 2018, increased drastically in the first and the second quarter of the year 2019. As per the data, the global gold-backed ETFs witnessed an addition of 127 tonnes to stand at 2,548.0 tonnes (US$5.5 billion) in June 2019, up 4.8% from the previous month. On a regional basis, North America and Europe have witnessed a heavy gold inflow through ETFs, and total ETFs tonnage in North America at the end of June 2019 stood at 1,262.7 tonnes, up by 5.0% from the previous month. The total tonnage in European ETFs stood at 1,183.8 tonnes in June 2019, up 4.7% from the previous month.


Global Gold Demand Trends (Source: World Gold Council)


Global ETFs Inflows (Source: World Gold Council)

FY20 Guidance & Updated Life of Mine: DCN recently updated the current life of mine (LOM) plan for its Mt Morgans Gold Operation, which in turn, underpinned a sustainable average annual production of 170,000 ounces over the first five years with an All-in-Cost (or AIC) of A$1,340-A$1,440 per ounce. The company stated that over 8-year LOM period a total of 1.08 million ounces have been forecasted to be produced. Additionally, it was added that All-in-Cost for this production is A$1,280-A$1,380/oz.

At the gold price of A$1,800 per ounce and further discounting it with a 5% rate, the pre-tax cash flows for MMGO exceed A$420 million based on eight-year LOM. The production guidance of the company for FY2020 is in the range of 150,000-170,000 ounces with an MMGO All-in-Cost (AIC) of A$1,400-A$1,500 per ounces and consolidated AIC of A$1,450-A$1,550 per ounce.

The company added that after the effort to rebuild the operating momentum at Westralia underground during the quarter ended June 2019, it anticipates continued focus towards accelerating planned development rates at Westralia during 1H FY20. It was also stated that the effort would be positioning the company favourably from the beginning of 2H FY20.

 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings based Valuation

Price to Earnings based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months

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

Stock Recommendation: The company’s stock price has witnessed a rise of 42.20% in the span of the previous one month, which might attract the attention of the market players. As per ASX, the company’s stock price is trading below the average of 52-week high and low price of $1.69, indicating a decent opportunity for accumulation. As can be seen from Debt/Equity ratio and percentage of long-term debt to total capital at the end of 1H FY 2019, the company has reduced its exposure to the debt component, and this might help it in gaining traction among the market players. Also, it could help it in stabilizing its balance sheet position. Based on the foregoing, we have valued the stock using Relative Valuation method, PE multiple and have arrived at the target price of the stock, exhibiting a lower double-digit growth (in %). Hence, considering the aforesaid facts and current trading levels, we give a “Buy” recommendation on the stock at the current market price of A$1.090 per share (up 14.737% on 23 July 2019).
 
 
DCN Daily Technical Chart (Source: Thomson Reuters)

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