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:

• Constant increase in cash balance: In the recent past, the company reported constant growth in its net cash balance, which is a key positive as it supports the overall liquidity of the company. Net cash balance stood highest in the last five quarters at USD 260 million in Q2FY21. Apart from the increase in revenue, the company reported a decline in its All-in Sustaining cost (ASIC) and cash cost, which has resulted in improved profitability and cash flows. Notably, free cash flow stood at USD 67.045 million at the end of Q2FY21, as compared to USD 59.868 million in pcp.

Source: Company Report

• Industry beating margins: In Q2FY21, the company reported improved margins as compared to its peers, wherein EBITDA margin and operating margin were recorded at 57.4% and 43.6%, respectively, higher than the industry median of 40.1% and 25.8%, respectively. The company reported a net profit margin of 38.6%, significantly higher than the industry median of 15.7%.
• Encouraging long-term outlook: For the next three financial years, the group expects to add ~280,000 ounces of gold per year from its current nine mines, which indicates production stability. Copper production is expected at ~35 million pounds on an annualized basis from FY21 to FY23.

Q2FY21 Financial Highlights:

• DPM announced its quarterly results, wherein the company posted revenue of USD 174.736 million, jumped 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 a higher average realized gold price of 1,803/ounce v/s 1,649/ounce in pcp.
• Earnings before income taxes stood at USD 74.932 million, surged from USD 52.961 million in Q2FY20. The growth was supported by elevated revenue and significantly lower general & administrative expenses, partially offset by higher cost of sales and higher exploration and evaluation expenses.
• Net earnings stood at USD 88.119 million, climbed from USD 49.093 million in the previous corresponding period (pcp).

Q2FY21 Income Statement Highlights (Source: Company Report) 

Valuation Methodology (Illustrative): Price to Cash Flow based

Stock Recommendation:

For FY21, the company expects total ore processed in the range of 2.925 to 3.125 million tonnes. All-in sustaining cost per ounce of gold is expected in between USD 625 to USD 695, while the company expects its cash cost per tonne in between USD 450 to USD 520. 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, Centerra Gold Inc etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 7.88 on September 27, 2021.

One-Year Technical Price Chart (as on September 27, 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:

• Strong Liquidity: At the end of Q2FY21, the company reported impressive liquidity of USD 464 million, which includes an undrawn credit facility amounting to USD 326 million and a cash balance of USD 138 million. The above seems to be sufficient to withstand the company’s short-term and long-term capital requirements. Moreover, the company does not have any maturity before October 2023, which is a key positive.
• Impressive operational performance: In H1FY21, the company reported a surge in its average realized price to USD 1,802/ounce, as compared to USD 1,485/ounce in the previous corresponding period (pcp). Moreover, during the period, the company reported higher gold sales of 131,723 oz, as compared to 129,626 oz in pcp. Notably, revenue jumped to USD 363.1 million in H1FY21 from USD 270.8 million in pcp.
• Operational Highlights: During the second quarter of FY21, the company conducted open pit mine of 158,556 tonnes per day (tpd), exceeding the 2021 target of ~151,000 tpd from its Rainy River project. The company reported a gold recovery of 87% and is focusing on further operational and cost optimizations and the continued conversion of underground reserves from the above mine. From the company’s New Afton project, the group expects its mill averaged 13,795 tpd, which is in-line with the plan to optimize recoveries, while the gold recovery was reported at ~80%.

Q2FY21 Financial Highlights:

• NGD announced its quarterly results, wherein the company posted revenue of USD 198.2 million, jumped from USD 128.5 million in the previous corresponding period (pcp). The growth was aided by a higher sales volume of gold and copper. Notably, gold price stood at USD 1,817/ounce as compared to USD 1,514/ounce and USD 2.51/pound in pcp. During the quarter, the company reported total sales of 57,304 Gold eq. ounce, higher than the 47,873 Gold eq. ounce in pcp.
• Income from operations were recorded at USD 40.9 million, surged from USD 16.6 million in pcp. The strong growth was driven by elevated revenue coupled with lower depreciation and depletion costs. Meanwhile, a higher corporate administration expense coupled with a surge in operating expenses remained a drag,
• Net loss lowered to USD 15.8 million, from a 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)

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendations:

The company expects FY21 gold equivalent production in between 405,000 to 450,000 ounces. Copper production is expected in between 56 to 66 Mlbs. The company expects its total cash costs, per gold eq ounce in between USD 960 to USD 1,030 per ounce. AISC is expected in between USD 1,415 to USD 1,495 per ounce. We have valued the stock using EV to EBITDA 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 Dundee Precious Metals Inc, Centerra Gold Inc etc., Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 1.40 on September 27, 2021.

One-Year Technical Price Chart (as on September 27, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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