One Small-Cap Metal & Mining Stock to Bet on- DPM

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 Updates:

• Robust 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 40.2% and 19.9%, respectively. Moreover, the company reported its net margin of 29.7% in FY21, higher than the industry median of 12.8%.

• 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 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.

• Higher cash balance indicates higher 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 334.3 million in Q4FY21, which is the highest in the last four quarters. Notably, cash flow from operating activities stood higher USD 253.1 million in FY21, as compared to USD 196.9 million in FY20.

Source: Company Report

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)

• In FY21, the company posted its revenue of USD 641.4 million versus USD 609.5 million in FY20. This increase was primarily driven by higher gold sales of 279,051 ounces, versus 270,834 ounces in FY20. Additionally, a higher average realized gold price of USD 1,790/ounce versus USD 1,709/ounce in FY20 also contributed to the growth.
• The group reported its total cost & expense stood at USD 412.0 million in FY21, versus USD 391.6 million in FY20. This surge was due to an increase in cost of sales amounting USD 359.9 million v/s USD 330.8 million in FY20. However, this was partially offset by lower general & administrative expenses coupled with a slide in exploration & evaluation expenses.
• Despite a rise in cost and expenses, the company managed to report a higher net profit of USD 209.8 million in FY21, versus 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 FY20.

   Valuation Methodology (Illustrative): Price to CF based methodology

Analysis by Kalkine Group

Stock Recommendation:

The company provided its three-year production guidance, wherein gold production is expected to average ~270,000 ounces/year based on current mine plans. Dividend distribution in FY21 stood significantly higher at USD 22.1 million, as compared to USD 10.8 million in FY20, supported by stable cash flows. We have valued the stock using the Price to CF -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 7.69 on March 22, 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 March 22, 2022). Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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