Ed Eshuys-led DGO offering investors gold leverage of a different kind
A two-pronged strategy of taking strategic equity positions in companies with brownfield gold discoveries in parallel with exploration in its own right is making DGO a leveraged proposition for investors. Plus, cashed-up Kairos set to start the rig turning again at its 640,000oz Pilbara project.
Here’s one for lazy investors looking for leveraged exposure to near-record Australian gold prices – DGO Gold (DGO).
Led by Ed Eshuys of Plutonic, Bronzewing and Jundee gold deposits discovery fame, and Bruce Parncutt of analyst/investment banker fame with McIntosh Securities and Merrill Lynch, DGO has a somewhat unique strategy for a junior.
The strategy combines strategic equity investments in WA brownfield gold discoveries along with exploration in its own right, with the latter having an emphasis on largely-ignored sediment-hosted gold opportunities capable of forcing a re-think on where to find big WA gold.
The call that DGO could be one for lazy investors in the junior space goes to how DGO, drawing on the decades of geological and market-smartz Eshuys and Parncutt (they are both geologists) bring to the table, went about finding its initial brownfields equity investments.
Recognising that much of the best land for gold exploration in WA was locked up inside the ASX-listed juniors, DGO screened more than 90 projects held by juniors against three criteria.
They were projects where the finding cost is assessed to below the brownfield average of $25/oz, they have a resource potential of more than three million ounces and they come with upside.
About 10 juniors made it on to a short list, with DGO able to act on two of them to date – Pilbara gold explorer De Grey Mining (DEG), where it has a 10.7% stake, and Leonora gold explorer NTM Gold (NTM), where it has a 12.1% stake.
DGO now has board representation at both and has been supportive of their capital raisings to allow them to get cracking on the upside it believes are inherent in both. Significantly, both have sizeable gold resources under their belt, with the potential for much more, on DGO’s assessment.
That gives the strategy its brownfields foundation. Industry data suggests it is a smart strategy given the cost of finding an ounce of gold in the resource category is about $25 an ounce. Juniors with a resource generally get valued at about $50 an ounce and can expect $250-$400 an ounce when they have a mine development on their hands.
So adding ounces to a known discovery with assessed upside can be a low-cost way to create value. Compelling, some might say.
There can be a disconnect between DGO’s assessment of the chosen junior’s upside and their current market values. That’s OK, DGO is simply backing its seasoned assessment against a market that flits all around the place when it comes to picking the best of the juniors.
DGO itself is trading at 96c for a market cap of about $34m. It is a very thinly traded stock with 85% of the stock held by 12 investors, including Regal Funds and a bunch of notable ex-stockbroker types around Melbourne.
It is so tight that some think of it as a private syndicate within a public company structure. The upside to that is its shares can move sharply to positive news events while being sluggish to the downside.
Aside from progress by De Grey and NTM, the other driver in DGO’s valuation is its own exploration effort. On the company’s current market cap, it can be said about two-thirds of its value rests with its own exploration portfolio.
An interesting portfolio it is too, curated by Eshuys over time from studies of open file data on what had become vacant ground, with a focus on sediment hosted criteria in a broad sense.
There are too many to give them all a mention here, suffice to say if there is a cashed-up gold producer out there looking for a walk up start to drilling a bunch of technically interesting project areas, DGO’s portfolio could be the answer.
DGO’s recent success at its Black Flag project, 20km north of Kalgoorlie, demonstrates the point. Drilling there last quarter hit 4m at 7.5g/t gold from 116m.
It is an area never drilled before, remembering it is all of 20km from Kalgoorlie. The reason why? It is covered by sand and lake cover. Another one to watch is Pernatty Lagoon on the Stuart Shelf in South Australia – a Zambian copper belt-style play if you don’t mind.
Kairos Minerals: KAI
Talking about Pilbara brownfields gold and untapped exploration upside, it is worth noting that Kairos (KAI) has pulled in $1.35m from a placement with plans to raise up to $2m from a share purchase plan to fire up things at it Pilbara gold project.
And why wouldn’t it fire things up given the gold resource valuation metrics in the DGO yarn above.
Kairos is trading at the princely price of 1c for a market cap of all of $10m yet its Mt York gold resource at its Pilbara project stands at 14.4Mt at 1.39g/t gold for 643,000oz, making it one of the biggest held by a junior.
If the $40 an ounce metric were applied to the resource estimate, Kairos’ market cap would be more like $25m, which it is not.
The apparent disconnect there is largely explained by Kairos putting the project on the backburner while it checked out the conglomerate gold potential of its Pilbara land holdings in the wake of the Novo Resources-led rush of 2017.
Fair enough too, they were fun times, and Kairos is still in the conglomerate chase should pack leader Novo eventually prove up a commercial mining proposition around the now fabled watermelon-sized nuggets that fired up imaginations back in 2017.
But with Aussie gold at near record prices, Kairos has quite rightly figured that the hard-rock Mt York gold resource is the company’s core value proposition.
The resource estimate was largely drawn by Kairos from a re-evaluation of known resources from the historical Lynas Find gold project which now makes up Mt York, about 100km south-east of Port Hedland.
Lynas Find as it was produced more than 125,000oz of gold between 1994 and 1998 at $A350 an ounce when gold prices were a whole lot meaner than the near-record $A2,170/oz now available.
The other big change since the 1990s has been the upgrading of the regional infrastructure courtesy of the Pilgangoora lithium projects of Pilbara Minerals (PLS) and Altura Mining (AJM), which are pretty much on Mt York’s doorstep.
Following the re-evaluation of the existing resource, Kairos has worked up some exciting new exploration targets – particularly at the higher-grade Iron Stirrup prospect.
Iron Stirrup is the initial focus in a drilling program due to kick of this month and the hope is that the mineralisation extends beneath and along strike from the existing open pit, which was mined in the 1990s.
Studies into a possible development are due to start in the first (calendar) quarter of 2020 which kind of suggests that Kairos is confident that Mt York has the potential to shape up into a much bigger resource.
The recent fund raising has also been earmarked for more work at the big and high-tenor gold-in-soil anomaly identified recently at the Croydon project where much of the company’s conglomerate gold efforts have been focussed.
The 8km long anomaly is related to sandstone and conglomerate units within the Hardey Formation in a part of the Pilbara where some nugget patches exist, the idea being the nuggets had to come from a source.
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One of Australia’s leading business journalists, Barry FitzGerald, highlights the issues, opportunities and challenges for small and mid-cap resources stocks, and most recently penned his column for The Australian newspaper.