Dundee Precious Metals Inc

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

Investment Rationales

• Robust Second Quarter numbers:The company's revenue grew 58% to USD 157 million in the second quarter of 2020 from USD 99.1 million in the year-ago period. Adjusted net earnings increased 191% to USD 45.8 million from USD 15.7 million in the same period of the previous year. The performance during the quarter has been robust with record gold production. 

• Strong Balance Sheet with Growing Net Cash Position: The company is in a healthy financial position, with a growing cash balance, no debt on books and a liquid investment portfolio.

Source: Company

Operational and Financial Highlights - 2QFY20

Source: Company

• Record gold production– The company Produced 81,365 ounces of gold in concentrate, as Ada Tepe delivered its highest quarterly production to date, and Chelopech continued its track record of consistent performance. Copper production was 9.4 million pounds.
• Reliable smelter performance – The company managed to achieve the output of 58,516 tonnes at Tsumeb despite a 30-day reduction in throughput in April related to the management of staffing levels because of COVID-19.
• Record quarterly free cash flow generation – Generated USD 75.5 million in cash flow from operating activities and a record USD 58.4 million of free cash flow.
• Growing earnings– Reported record net earnings attributable to common shareholders of USD 48.8 million, reflecting strong gold production and excellent cost performance from Chelopech and Ada Tepe combined with higher gold prices.
• Strong cost performance at all operations – Reported an all-in sustaining cost per ounce of gold at USD 729 and a cash cost per tonne of complex concentrate smelted of USD 345. Cash cost guidance for Ada Tepe has been reduced to USD 44 to USD 50 per tonne reflects strong operating performance.

Source Company

Risk Associated To investment

The company’s financial performance is mostly dependent on the price of gold, which directly affects the company’s profitability, margins and cash flows. The price of gold is subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, all of which are beyond the company’s control.

Share price performance

Source: Refinitiv, Thomson Reuters

Valuation Methodology (Illustrative): EV to EBITDA

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

H1FY20 was a transformational year for the company as it came out with the robust performance, strong cash position, zero debt. All these factors give a glimpse of strong foundations led by the company.

We are bullish on the gold prices and believe that despite a little pullback, gold, as an asset class would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions.

Therefore, based on the above rationale and valuation done, we have given a “HOLD” rating at the closing price of CAD 10.13 on October 13, 2020. We have considered Eldorado Gold Inc, Alamos Gold Inc, Wesdome Gold Mines Ltd etc. as the peer group for the comparison.

New Gold Inc

New Gold Inc (TSX: NGD) is an intermediate gold mining company with 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. Besides, New Gold owns 100% of the Rainy River and Blackwater projects in Canada, along with a minority stake in the gold stream on the El Morro project in Chile.

Investment Rationales

• Higher Gold Prices are likely to enhance margin and profitability: Gold and gold stocks have been on a great run since hopes for a V-shaped recovery was doused by an increasing case of the virus. Though there was a slight correction in the recent past, still gold prices are up 26% on an annual basis. The higher gold prices would have a positive impact on the profitability and margins of the company.

• Divestment will boost more funds: On June 9, 2020, the company announced that it entered into an agreement with Artemis Gold Inc. ("Artemis") to sell the company's 100% interest in the Blackwater project to Artemis in exchange for CAD 190 million in cash (CAD 140 million in cash upon closing of the transaction and CAD 50 million in cash payable twelve months following the close of the transaction.

Financial Highlights – 2QFY20

Source: Company

• Revenues posted by the company for the quarter were USD 129 million and USD 271 million for the six-month period, a decrease compared to the prior-year period due to the decline in gold and copper sales volumes and a drop in copper prices, partially offset by an increase in gold prices.
• Operating expenses for the quarter and six-month period were lower than the prior-year period due to lower production. Additionally, for the three months ended June 30, 2020, operating expenses were positively impacted by the receipt of the Canada Emergency Wage Subsidy.
• Net loss for the quarter was USD 46 million and USD 74 million for the six-month period, an increase in loss over the prior year quarter primarily due to lower other gains and losses. Other gains and losses for the quarter and six-month period includes a USD 38 million impairment loss on the reclassification of Blackwater as held for sale.

 Revised Operational Outlook

Source: Company

The company’s revised operational outlook for 2020 incorporates the lower than expected grades at New Afton over the balance of the year and the overall impact of COVID-19 at their operations as they continue to prioritize the safety of employees and local and Indigenous communities. Unit costs and capital are expected to remain near planned levels.

Following a two-week voluntary suspension at the Rainy River Mine due to COVID-19, the mine resumed operations at reduced levels and is expected to achieve full capacity early in the third quarter.

Risk Associated To investment

The company’s financial performance is mostly dependent on the price of gold, which directly affects the company’s profitability, Margins and cash flows. The price of gold is subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, Demand and supply, all of which are beyond the company’s control. 

Share price performance              

Source: Reuters

Valuation Methodology (Illustrative) – EV to Sales

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

We are bullish on the gold prices and believe that despite a little pullback, gold, as an asset class would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. Further ETFs are showing no sign of decline in gold buying, which is likely to increase the gold prices higher. We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions.

Therefore, based on the above rationale and valuation done, we have given a “Hold” rating at the closing price of CAD 2.77 on October 13, 2020. We have considered Eldorado Gold Inc, Dundee Precious Metals Inc, Golden Star Resources Ltd etc. as the peer group for the comparison.

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.