Dundee Precious Metals Inc.

Dundee Precious Metals Inc. (TSX: DPM) is an international gold mining company and is engaged in the acquisition, exploration, development, mining, and processing of precious metals. The group operates through three reportable operating segments Chelopech and Ada Tepe in Bulgaria and Tsumeb in Namibia.

Key Highlights:

• Growth in Cash flows: The company reported a surge in its cash from operations of USD 123.288 million in H1FY21, jumped from USD 84.590 million in pcp. The increase was driven by higher net earnings. Moreover, free cash flow jumped to USD 118 million in H1FY21, from USD 110 million in pcp.
• New Acquisition to provide a value-unlocking opportunity: On June 26, 2021, the company acquired INV Metals Inc. DPM would focus on developing the Loma Larga project, which is expected to add ~2.6 million gold equivalent ounces of high-grade mineral reserves for the first twelve years of mine life. Notably, the above mine has the potential to produce an annual average of ~200,000 Au oz. in the first five years.
• Upcoming Drilling program: Within the Timok Gold Project located in Serbia, the company would conduct drilling of approximately 14,000 m and is focusing on the following:

1. Shallow oxide resource delineation at Chocolate and Chocolate South, as well as target delineation
2. Target delineation at Coka Rakita and other sulphide targets.

• Production outlook for next three years: For the next three years, the company expects to add 280,000 ounces of gold per year from its current nine mines. Notably, for FY21, DPM expects its production within 271,000 and 317,000 ounces. Copper production is expected at ~35 million pounds per year during FY21 to FY23.

Q2FY21 Financial Highlights:

• DPM announced its quarterly results, wherein the company posted revenue of USD 174.736 million, increased from USD 154.028 million in the previous corresponding period (pcp). The growth was primarily due to higher income from the gold segment (USD 126.973 million v/s USD 116.816 million in pcp) supported by an increase in average realized gold price of 1,803/ounce v/s 1,649/ounce in pcp.
• Earnings before income taxes were reported at USD 74.932 million, surged from USD 52.961 million in Q2FY20. The surge was due to an increase in cost of sales, elevated exploration and evaluation expenses, partially supported by lower general and administrative expenses and a slide in finance cost.
• Net earnings stood at USD 88.119 million, jumped from USD 49.093 million in the previous corresponding period (pcp).

Q2 FY21 Income Statement Highlights (Source: Company Report)

Risks: Lower commodity prices might hinder the company’s margins and the cash flows. Moreover, lower than expected drilling results from its new acquisition might hinder the company’s upcoming performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company reported improved margins in Q2FY21 as compared to the industry, which indicts higher operational efficiency. EBITDA margin and operating margin stood at 57.4% and 43.6%, respectively in Q2FY21, higher than the industry median of 40.1% and 25.1%, respectively. Moreover, the net margin stood at 39.6% in Q2FY21 as compared to the industry median of 15.7%. We have valued the stock using P/CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Fortuna Silver Mines Inc, SSR Mining Inc etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 7.44 on August 26, 2021.

One-Year Technical Price Chart (as on August 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

New Gold Inc

New Gold Inc (TSX: NGD) is an intermediate gold mining company and has operations across the globe. The company has a portfolio of four producing assets, the New Afton Mine in Canada, the Mesquite Mine in the United States, and the Cerro San Pedro Mine in Mexico.

Key Highlights:

• Second quarter operational highlights: In Q1FY21, the company reported 158,556 throughputs (tpd) at open pit mine, higher than its target of 151,000 throughput. The mill processed stood at an averaged 25,349 tpd and is expected to operate at 27,000 tonnes/day during the second half of FY21. During the first half, the company focused its operations on stripping to bring pit walls to final pit limit. Average gold grade stood at 0.82 g/tonne in H1FY21. Notably, gold recovery rate was accounted at ~89% in H1FY21.
• Ample Liquidity: As on June 30, 2021, the company has a solid liquidity position of USD 464 million, which includes cash and cash equivalent of USD 138 million and undrawn credit facility amounting USD 326 million. We believe the above is sufficient to support its short-term and long-term capital needs.
• Surge in Cash flows: The company reported solid growth in its cash flows and reported cash from operations of USD 163.7 million in H1FY21, as compared to USD 104.1 million in pcp. The above growth was primarily due to net earnings of USD 1 million, as compared to a net loss of USD 73.9 million in pcp. Notably free cash flow stood at USD 15.5 million in H1FY21, as compared to an outflow of USD 19.8 million in pcp.

Q2FY21 Financial Highlights:

• NGD announced its quarterly results, wherein the company posted revenue of USD 198.2 million, higher than USD 128.5 million in the previous corresponding period (pcp). The growth was aided by higher sales volume of gold and copper. Notably, gold and copper price stood at USD 1,817/ounce and USD 4.43/pound, respectively as compared to USD 1,520/ounce and USD 2.51/pound in pcp.
• Income from operations stood to USD 40.9 million, jumped from USD 16.6 million in pcp. The improvement was aided by higher revenue coupled with lower depreciation and depletion costs. Meanwhile, a higher corporate administration expense and increase in operating expenses remained as a drag,
• The company reported a net loss of USD 15.8 million, as compared to the net loss of USD 45.6 million in Q2FY20. The quarter witnessed other losses of USD 42.8 million, primarily attributable to the unrealized loss on revaluation of non-current derivative financial liabilities and loss on revaluation of investments.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in underlying commodity price may result in lower realization price, which would dampen the company’s margin and cash flows. Moreover, increase in cash costs and ASIC costs would dampen the company’s future profitability.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendations:

For FY21, the company expects its production in between 440,000 to 490,000 ounces and consolidated all-in sustaining costs are expected to be at the higher end of the range of USD 1,230/ gold eq. ounce to USD 1,330/ gold eq. ounce. Majority of the gold production is expected from Rainy River, which is in between 275,000 to 295,000 ounces. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of single digit (in percentage terms). For the said purposes, we have considered peers like Centerra Gold Inc, Iamgold Corp etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 1.48 on August 26, 2021.

One-Year Technical Price Chart (as on August 26, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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