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 Rationale:

• Growth in Mineral Reserves: The company is focusing of extending its consolidated mine life though in-mine and brownfield exploration startegies and has increased its mine life extension to 2030. This is expected to provide sufficient mineral extraction opportunity on a medium-term perspective. The group has an optimized life of mine (LOM) plan and updated Mineral Resource from the Chelopech mine, wherein it expects to add more than 286,000 ounces of gold production and 47 million pounds of copper production between 2022 and 2030. This looks encouraging and is likely to support the upcoming operations.

• Impressive Prospects from the Loma Larga project: During the fourth quarter of FY21, the company reported 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 at around 12 years, with an average annual production is expected ~200k oz/year, which is likely to add meaningful prospects for DPM. Moreover, the company is planning to commence 15,800-metre programs in Q1FY22 along with the review of technical and permitting schedules with the government of Ecuador.

Source: Company Presentation

• Expected improvement in Smelter Performance: The company expects to improve its smelter performance in the coming years, which is likely to support the company’s mining extraction process. An efficient smelter performance is expected to reduce the Cash cost per tonne of complex concentrate smelted. This is likely to lower the input costs of the company and would support the upcoming margins as well.

Source: Company Presentation

• Positive Long-term outlook of Gold: After giving a stupendous return in the recent past, international gold price lowered from its 52-weeks high. We expect a possible upward momentum in the commodity price due to rising bond yield and weak macro-outlook. Moreover, being a defensive asset class, gold is gaining traction among investors due to the overheated equity market coupled with persisting tension 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.
  

• Increase in dividend distribution: The company reported a higher dividend payment of USD 5.7 million in Q1FY22, which is higher than USD 5.4 million in pcp. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. Additionally, the stock of DPM is carrying a dividend yield of ~2.685% on an annualized basis, which looks decent considering the present interest rate scenario. On May 04, 2022, the company declared a quarterly dividend of USD 0.04 per share with a payment date of July 15, 2022.
  

• Robust profitability margins: The company reported improved profitability margins as compared to the industry median, which indicates better operational efficiencies. Notably, in Q1FY22, the company reported its EBITDA margin and pretax margin of 44.3% and 22%, respectively, as compared to the industry median of 39.9% and 20.6%, respectively. Moreover, the company reported its net margin of 17.4% in Q1FY22, higher than the industry median of 13.4%.

Risks associated with the business:

Volatility in international commodity prices would likely hinder the realization price 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.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• Higher Income: In Q1FY22, the company posted its revenue of USD 153.8 million versus USD 138.0 million in the previous corresponding period (pcp). The growth was primarily due to higher volumes of complex concentrate smelted at Tsumeb coupled with higher realized gold and copper prices.
• Slide in Earnings before income taxes: The group reported a surge in its input costs and registered a rise in cost of sales, higher general & administrative expenses. However, this was partially offset by a lower exploration and evaluation expenses. The company reported its total cost and expenses of USD 119.9 million in Q1FY22, as compared to USD 102.7 million in pcp. Earnings before income taxes stood at USD 33.8 million v/s USD 35.2 million in pcp.

• Growth in Net Earnings: Despite a rise in cost and expenses, the company managed to report a higher net profit of USD 26.8 million in Q1FY22, versus USD 19.8 million in Q1FY21, supported by lower income tax expenses.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 44.45% stake, BlackRock Investment Management (UK) Ltd. and Van Eck Associates Corporation are the major shareholders in the company with an outstanding position of 10.12% and 9.48%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.  

  Valuation Methodology (Illustrative): EV to Sales based

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:

The company provided its three-year production guidance, wherein gold production is expected to average ~250,000 ounces/year based on current mine plans. The company expects its majority of gold production from the Chelopech mine. 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 Alamos Gold Inc, B2Gold Corp etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of DPM at the last closing price CAD 7.59 on May 11, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 11, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

*Recommendation is valid on May 12, 2022, price as well. 

  Technical Analysis Summary

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.