Dundee Precious Metals Inc. (TSX: DPM) is an international gold mining company which is engaged in the acquisition, exploration, development, mining, and processing of precious metals. The corporation primarily operates through its three mines, namely Chelopech and Ada Tepe in Bulgaria and Tsumeb in Namibia.

Key Investment Rationales:

• FY21 Production stood in-line with guidance: The company reported its gold production of 310 K ounce in FY21, which is higher than 298.3K ounce in FY20 and remained in between the company’s guidance of 271 to 317k ounces.The growth was supported by a strong operating performance at Chelopech and Ada Tepe, partially offset by maintenance downtime due to water leaks in the off-gas system in Tsumeb, Namibia. 

Source: Company Presentation

• Strong performance from Chelopech mine: The company reported strong Gold production from its Chelopech mine, located in Bulgaria. Notably, Gold production stood at 49.1 Koz and 177 Koz, respectively, in both Q4FY21 and FY21, respectively, which is significantly higher than 9.2 Koz and 34.7 koz, respectively, outperforming its 2021 guidance. As per the management, the momentum is likely to continue in the coming days, supported by increased mineral reserves and extended mine life to 2029. Currently, the corporation is continuing testing conceptual targets on the Brevene exploration license and near-mine prospects from the Chelopech mine, which is likely to contribute to the upcoming operations.

Production highlights from Chelopech mine (Source: Company Presentation)

• Flourising prospects from the Loma Larga project: During the fourth quarter of FY21, the company completed its acquisition of INV Metals Inc., and added the Loma Largamine under its portfolio. This mine offers a high-quality gold development project with robust economics located in Ecuador. Initial mine life is expected of roughly 12 years, with average annual production is expected ~200k oz/year, which is likely to add meaningful prospects to the company’s operations. Notably, the group is planning to commence 15,800-metre programs in Q1FY22 along with the review of technical and permitting schedules with the government of Ecuador.

• Growth in cash and cash equivalent to support liquidity: Despite the ongoing macro turbulence, the company reported a constant growth in its cash and short-term investments, which indicates improved liquidity levels. Notably, cash and short-term investments were reported at USD 334 million in Q4FY21, which is the highest in the last four quarters. Notably, free cash flow stood higher at USD 65.8 million and USD 252.3 million in Q4FY21 and FY21, respectively, as compared to USD 39.2 million and USD 211.4 million, respectively, in Q4FY20 and FY20, respectively.                        

Source: Company Report

• Higher profitability margins: The company reported improved profitability margins as compared to the industry median, which indicates better operational efficiencies. Notably, in FY21, the company reported its EBITDA margin and operating margin of 52.5% and 37.1%, respectively, as compared to the industry median of 40.8% and 19.9%, respectively. Moreover, the company reported its net margin of 29.7% in FY21, higher than the industry median of 12.1%.

• Bullish outlook of Gold: International Gold price has remained elevated since September 2021 and is trading close to 52-weeks high due to rising bond yield and weak macros outlook. Moreover, being a defensive asset class, gold is gaining traction due to the overvalued equity market coupled with persisting tensions between Ukraine and Russia. Recently, we have seen a growing interest in the Gold ETF segment, which implies that investors are pouring their investments in the same. Continuation of the above trend would support the company’s sales volume in the coming days.

Risks associated with the business:

Volatility in international commodity prices would likely hinder the realization and would subsequently dampen the overall performance of the group. Moreover, rising input costs might put pressure on the company’s margin, which remains a key concern for the company. 

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Elevated Revenue: For FY21, the company posted its revenue of USD 641.4 million, which is higher than USD 609.5 million in FY20. This growth was primarily driven by higher gold sales of 279,051 ounces, as compared to 270,834 ounces. Moreover, the average realized gold price stood at USD 1,790/ounce in FY21, higher than USD 1,709/ounce in FY20 also contributed to the growth.

• Increase in cost and expenses: The company reported an increase in input costs, and hence total cost & expense stood at USD 412.0 million in FY21, higher than USD 391.6 million in FY20. This was primarily due to higher local currency operating expenses in Bulgaria reflecting higher prices for electricity and direct materials combined with higher labour costs and higher royalties at Ada Tepe mine. However, this was partially offset by lower general & administrative expenses coupled with a slide in exploration & evaluation expenses.

• Higher net earnings: Despite a rise in the input costs, the company managed to report a higher net profit of USD 209.8 million in FY21, as compared to USD 194.8 million in FY20, supported by earnings from discontinued operations amounting to USD 19.0 million v/s a loss of USD 4.4 million in pcp.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 48.01% stake, BlackRock Investment Management (UK) Ltd. and Van Eck Associates Corporation are the major shareholders in the company with an outstanding position of 10.11% and 9.47%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

   Valuation Methodology (illustrative): EV to Sales based metrics

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:

On a two-years perspective, the management remains bullish on its gold production, and expects to deliver gold production within the range of 240 to 280 k ounces in FY22, and in between 265 to 310 k ounces in FY23, respectively. This looks impressive and is expected to generate stable income and cash flows for the company in the coming two years. We have valued the stock using the EV to Sales-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Torex Gold Resources Inc, Fortuna Silver Mines Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of DPM at CAD 7.88 on March 09, 2022.

One-Year Technical Price Chart (as on March 09, 2022). Analysis by Kalkine Group

*Recommendation is valid on March 10, 2022, price as well. 

 Technical Analysis Summary

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