Company Overview: Dacian Gold Limited (ASX: DCN) is an Australian gold mining company, focused on optimising its overall production to maximise cash flow while aggressively exploring its large tenement package in pursuit of organic growth opportunities. The company has a highly prospective land package in Western Australia, including the Mt Morgans operation, a very highly endowed gold field with numerous multi-million-ounce gold deposits. The company’s overall goal is to be the next Australian mid-tier gold producer and it intends to expand its production profile and increase scale while adding incremental mine life.

DCN Details

Improving Top-line and Bottom-line: 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. The company’s operating strategy is focused on generating low risk, sustainable positive cash flow and unlocking future through existing resources and exploration. The year 2019 was the company’s first full year as a gold producer with total gold production of 138,911 ounces. After reporting no revenue for four years (2015 to 2018), the company finally came up with a decent revenue of $132.82 mn in FY19. Over the years, the company has also witnessed significant improvement in its bottom-line, rising from a net loss of $8.05 million in FY15 to a net profit of $3.02 million in FY19.

Five-Year Performance (Source: Company Reports)

The company recently finished its financial year 2020 or FY20, wherein it achieved total gold production of 138,814 ounces at an MMGO AISC of $1,619/oz, in-line with the company’s FY20 guidance. It is worth noting that the company’s production has not experienced any material impact by the ongoing COVID-19 pandemic, due to the rightful implementation of COVID-19 management plan. Looking ahead, the company is focused on making an investment during FY2021 and harvesting through FY2022-2023. Further, the company is targeting its exploration program to extend mine life and bolster production underway across the Mt Morgans land package. For FY21, the company expects its total production to be in the range of 110,000-120,000 ounces at an AISC of between $1,400-$1,550/oz.

FY19 Performance Highlights: For the year ended 30 June 2019 or FY19, the company reported total production of 138,911 ounces of gold. The company earned a net profit after tax of $3.02 million, as compared to the net loss of $5.4 million recorded in FY18, mainly driven by the revenue from gold sales.

Over the year, the company aggressively explored and made significant exploration progress at its Phoenix Ridge project, located only 500m north of the Westralia open pit. At Phoenix Ridge, the company discovered a new high-grade and near-surface deposit which returned encouraging exploration intercepts. During the year, MMGO Ore Reserves increased by 16% to 1.4Moz and Measured and Indicated Resources increased by 11% to 2.5Moz.

FY19 Key Financial Data (Source: Company Reports)

H1FY20 Performance Highlights: For the half-year ended 31 December 2019 or H1FY20, the company reported total production of 75,237 ounces of gold at an AISC of $1,562 per ounce. The underground mine production at Westralia totalled 417kt at 2.7 g/t for 36,526 ounces of contained gold and the mine production at the Jupiter open pit for the half-year totalled 724kt at 1.3 g/t for 30,608 ounces of contained gold.

During the period, the company sold 73,147 ounces at an average gold price of A$1,938, generating a sales revenue of $141.8 million. For the half-year period, the company reported a net loss after tax of $78.5 million, significantly higher than the net loss of $7 million in pcp, mainly due to $68.5 million of MMGO asset impairment and a net tax expense of $18.1 million.

Production Summary (Source: Company Reports)

H2FY20 Performance Highlights: For the March and June 2020 quarter, the company reported production of 31,695 ounces and 31,883 ounces respectively, taking the total full-year production to 138,814 ounces within the guidance of 138,000-144,000 ounces. Over the period, the company’s mining activities at Jupiter were focused on ore delivery from the Heffernans open pit and commencement of pre-stripping of the Doublejay Stage 1 pit as planned. At the end of the June quarter, the company had total cash and gold of $57.3 million and net debt of $6.8 million.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 34.41%. Franklin Advisers, Inc. and Perennial Value Management Ltd. hold the maximum interest in the company at 7.57% and 4.97%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick Look at Key Margins: Over the last one year, the company has witnessed significant improvement in its profitability margins. For H1FY20, the company’s gross margin and EBITDA margin stood at 15.3% and 26%, respectively. For the same period, the asset turnover multiple stood at 0.43x, higher than the industry median of 0.25x. The company has a current ratio of 0.54x, lower than the industry median of 1.83x.

Key Metrics (Source: Refinitiv, Thomson Reuters) 

Recapitalisation via Equity Raising: In order to deliver on its three-year outlook, the company recently recapitalised itself via equity raising. On 8^th April 2020, the company announced that it is conducting the Offer to raise up to approximately $98 million, comprising an institutional placement of up to 99.4 million new fully paid ordinary shares in Dacian and a 1 for 1 accelerated pro-rata non-renounceable entitlement offer of up to 228.4 million New Shares. The company has completed the bookbuild of the Placement and the Institutional Entitlement Offer to raise approximately $70 million. In addition, it has also 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.

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, commodity price risk, etc. Further, the company is also exposed to the risks and uncertainties related to the impacts of Covid-19 pandemic.

Outlook: Looking ahead, the company is focused on making investment during FY2021 and harvesting through FY2022-2023. During the June quarter, the company approved a $15 million exploration budget which aims to rapidly evaluate a number of advanced exploration targets across the MMGO. 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.

The company recently reaffirmed its total production outlook for FY2021-2023 of an average of 110,000 ounces at an updated AISC of $1,425/oz with total development capital for the period to be around $73 million. This outlook prioritises high-margin, open-pit production while significantly reducing Dacian’s operating risk. 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 intends to improve its financial flexibility with continued reduction in legacy hedge commitments and refinancing of the existing debt facility.

3-Years Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the last three months, the stock of DCN has corrected by 30.11% and is trading close to its 52-weeks low price, offering a decent opportunity for accumulation.  On the technical analysis front, the stock has a support level of ~$0.32 and a resistance of ~0.40. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). Considering the company’s recent capital raising, its three-year production outlook, and current trading levels, we give a “Buy” recommendation to the stock at the current market price of $0.340, up by 4.615% on 15 September 2020. 

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

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