Company Overview: Dacian Gold Limited (ASX: DCN) is an Australian company, mainly involved in gold mining, processing and exploration at its 100% owned Mt Morgans Gold Operation (MMGO), located 25km west of Laverton and approximately 750km north-east of Perth in Western Australia. MMGO is primarily comprised of a 2.5 Mtpa CIL treatment plant, the Jupiter open-pit mine and the Westralia underground mine. 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

Sustainable Production Profile: Dacian Gold Limited (ASX: DCN) is an Australian gold mining company with a highly prospective land package in Western Australia. 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. The company’s growth strategy is focused on optimising production to maximise cash flow while aggressively exploring its large tenement package in pursuit of organic growth opportunities. With MMGO in its portfolio, DCN has a sustainable operating profile with multiple levers to unlock value. Over the last one year, the company has undergone a significant evolution as it transformed from gold developer to producer. From 1 January 2019 onwards, the company has commenced its commercial production, allowing it to recognise revenues in 2019 and 2020.

5-Year Financial Summary (Source: Company Reports)

FY20 Results Highlights: During the year ended 30 June 2020, the company witnessed decent operational performance with robust gold production and cash flow generation. Over the year, the company produced 138,814oz at a Mt Morgans Gold Operation AISC of $1,619/oz, generating $23.0 million in operating cash flow. The production was within the company’s guidance of 138,000-144,000 ounces at an MMGO AISC of between $1,550-$1,650/oz. MMGO processing plant milled 2.96 million tonnes during the year at a head grade of 1.6 g/t Au and recovery of 92.7%. For FY20, the company reported total revenue of $270.04 million generated from the sale of 140,946 ounces of gold at an average price of $1,912 per ounce. Notably, FY20 revenue is 103% higher than the previous year’s revenue, reflecting the commencement of commercial production on 1 January 2019. For the full year, the company incurred a net loss after tax of $116.5 million, impacted by significant cash and non-cash adjustments, including $68.5 million of MMGO asset impairment, losses on derivative instruments from deferred premium put options of $6.8 million, exploration expenditure of $9.1 million, and net tax expense of $20.4 million.  During the year, the company repaid $41.4 million of debt.

FY20 Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 38.71%. Franklin Advisers, Inc. and Sun Valley Gold, LLC hold the maximum interest in the company at 7.57% and 5.04%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For FY20, the company’s gross margin and EBITDA margin stood at 0.40% and 13.9%, respectively. The company’s current ratio for FY20 stood at 1.32x, higher than 0.74x in FY19, demonstrating that the company has improved its ability to pay short-term obligations. The company’s debt to equity ratio stood at 0.48x in FY20, lower than 0.67x in FY19.

Key Metrics (Source: Refinitiv, Thomson Reuters)

High-Grade Drilling Results at MMGO: On 23 October 2020, the company announced the drilling results from its initial drilling program along strike from the Mt Marven open pit at its 100%-owned Mt Morgans Gold Operation (MMGO). The company highlighted strongly mineralised trend encountered in first-pass RC drilling along strike from the currently producing Mt Marven open pit. Significant intercepts from the initial RC program include 12m @ 1.41g/t Au from 23m in 20MVRC0014 and 4m @ 1.49g/t Au from 39m in 20MVRC0014. Looking ahead, the company is focused on establishing supplementary ore sources at MMGO to bolster annual production. The company has identified multiple targets in the location and is planning to drill those targets in FY21. The company plans to investigate the presence of any potential parallel lodes to the existing Mt Marven open pit.

September Quarter Highlights: For the quarter ending 30 September 2020 (Q1FY21), the company reported total production of 32,799 ounces at an AISC of $1,315/ounce. The company processed a total of 707,040 ore tonnes during the quarter at an average feed grade of 1.6 g/t gold containing 35,581 ounces. During the period, the company sold 34,017 ounces of gold at an average realised price of $2,142/oz. Over the quarter, the company completed various drilling activities across its key exploration targets including, Mt Marven, Phoenix Ridge, McKenzie Well, Mt McKenzie, Cameron Well. DCN completed Infill and expansionary drilling programs at the Mt Marven, Phoenix Ridge and McKenzie Well deposits with further results expected during the December quarter. As at 30 September 2020, the company had cash and unsold gold on hand of $38.5 million and total net debt of $0.6 million.

DCN recently restructured its hedge commitments, allowing a greater proportion of FY21 gold production to be sold at current higher spot prices. Following the restructure, the company’s total forward hedge position stood at 61,488 ounces at an average gold price of $2,101/oz. A summary of total hedge commitments subsequent to 30 September 2020 is depicted in below table:

Summary of Total Hedge Commitments (Source: Company Reports)

Key Risks: The company is exposed to the risks related to the fluctuations in the price of gold. Further, the company is exposed to risk and uncertainties caused by the COVID-19 pandemic and associated impacts. DCN 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.

What to expect: The September quarter production of 32,799oz at an AISC of $1,315/oz is tracking well against the FY21 guidance of 110,000-120,000oz at an AISC of $1,400-$1,550/oz. The company’s operating plan is focused on investment during FY2021 and harvesting through FY2022-2023. 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 identified various targets that are being followed up with the aim of providing a continuous future ore supply for DCN’s processing plant, including both greenfields and near mine opportunities.

Three -Year Outlook (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 Approach (Source: Refinitiv, Thomson Reuters)             

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of DCN has corrected by 5.19% in the past six months and 8.74% in the last one month. The stock is currently inclined towards its 52-weeks low price of $0.290, proffering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$0.292 and resistance of ~$0.501.  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 decent production performance in FY20 and Q1FY21, strengthened balance sheet with reduced debt, modest outlook, and current trading level, we give a “Buy” recommendation on the stock at the current market price of $0.365, down by 7.595% on 10 November 2020. 

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

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