Risks remain, but Dacian’s recovery plan highlights abundance of leverage after sell-off

Barry FitzGerald

Independent Journalist

Dacian Gold, sold down heavily last month after missing guidance, unveiled new production and financial forecasts this week. Analysts were impressed, noting there are still risks, but the rewards could be substantial. Plus, PolarX is about to drill some deep holes into a highly-rated porphyry target courtesy of North American major Lundin.

Newbie gold producer Dacian (DCN) served up some shock back in early June when it told the market that it should forget about its Mt Morgans operation being a 200,000 oz a year producer for 10 years at a cost of $A1,000 an oz.

Its June 5 stock price crashed from $1.58 to 51c, catching everyone in the market – and this space – on the hop.

To the credit of executive chairman and CEO Rohan Williams, Dacian has wasted no time getting back to the market with a five and an eight-year mine plan and a stated intention of not raising equity funds to see it through.

For those with memories of the 1968 classic kids film Chitty Chitty Bang Bang, it’s a case of up from the ashes, up from the ashes, grow the roses of success. There are some if and buts though with the new mine plan.

The five-year plan is for 170,000oz a year at an all-in-cost of $A1,340-$A1,440 an oz. So given the current gold price in local dollar terms and the ability for some judicious hedging, forward margins of $A500 an oz or so says straight up that the June 5 sell down was overdone.

That’s particularly so when no one doubts what Dacian said is the “significant potential” to extend the 170,000oz annual rate out beyond five years.

But as mentioned earlier, there are risks, most notably the ability of the treatment plant to continue to exceed nameplate capacity by a big margin and the conversion of resources into reserves as expected.

That’s why currently at least, Dacian’s share price recovery to 59c has not undone much of the June damage.

Regaining the faith of investors by delivering on its mine plan is going to take time, at least two to three full quarters.

What is more certain is that the combination of Dacian’s leverage to the upside in delivering on its new mine plan and the current Aussie spot gold price of $A2,040 an oz is now about as extreme as can be found among the producers.

That is reflected in the price targets placed on the stock by analysts following the release of the new mine plan on Wednesday.

Canaccord Genuity’s price target is $1.55 a share.

“We see the comprehensive life-of-mine update as a conservative approach which demonstrates transparent margins up to about $A500/oz for a plus-5 year mine life,” Canaccord said.

“Leveraged gold producers on the ASX (Silver Lake, Westgold, Red 5 and Ramelius) have enjoyed an impressive 2019, with most up plus-100% year to date.

“As Dacian re-emerges from a 75% sell-off, we see good scope for a considerable re-rate as production targets are hit through FY2020 and the company continues to de-leverage.”

RBC has a $1 price target. “Simplistically, if we look more closely at the midpoint of FY2020 guidance for costs and production, along with spot gold prices, we identify a notional $90m of cashflow after all operating costs and capex, with a further requirement for $33m in debt repayments,” RBC said.

“This indicates a strong cash flow-positive position on paper, but we expect some in the market to remain cautious given disappointments to date.

Macquarie is more cautious still. Its target price is 70c. “We remain cautious on Dacian’s outlook with the mill having to perform above nameplate to hit the revised outlook,” it said.

In the meantime, it remains to be seen what becomes of the strategic review Dacian has going after it received unsolicited third-party interest before the June shock.

Williams said that there had been a strong response, adding the review was not necessarily intended to put the company into play. Maybe so. But a fall to 51c and then a new mine plan with upside kind of does that anyway.

PolarX Limited (ASX: PXX):

It’s been said before, but it is worth mentioning again: drilling into a textbook porphyry copper-gold target is the closest thing there is in the mining game to drilling a textbook wildcat oil target with some scale about it.

Snag something early on that confirms the big-time potential of the porphyry target – or the black stuff in an oil well – and it can be a case of being off to the races as the serious value of the prize is delivered in subsequent drilling.

That’s the position that PolarX (PXX) finds itself in as it prepares to drill the first series of holes into its Saturn copper-gold porphyry target within its Alaska Range project, starting this month.

It’s the porphyry target that was text book enough to attract the attention of Canada’s $5.6 billion Lundin Mining, which recently took up a $4.3 million share placement in PolarX, giving it a 12.85% stake after taking into account PolarX’s subsequent $3.5 million entitlement offer.

The Lundin funding is specifically for the initial drilling program at Saturn of 8-10 holes totalling about 5,000m, and to be completed this field season.

The hope of PolarX and Lundin is that the drilling at least returns lots of “smoke suggesting Saturn does indeed live up to its text book reputation.

If there is sufficient smoke, Lundin can earn a 51% interest in the project area (there is another target called Mars) by staged exploration of $US24 million and staged payments to PolarX of $US20 million.

It goes without saying that for a company trading at 8.5c for a market cap of $34 million, the months ahead make for exciting times for PolarX.

The Saturn anomaly was identified 3km to the east of the high-grade Zackly skarn deposit (PolarX has kept 100%), a style of mineralisation often associated with large mineralised porphyry systems.

PolarX reckons Saturn is the potential mineralising fluid source for Zackly.

“The geometry of the Saturn magnetic body, its geological setting, and the bulls-eye magnetic high/low pattern seen in the magnetic inversion model are consistent with an interpretation of a hydrothermal system related to a porphyry intrusive body, including an interpreted halo of magnetite destruction and propylytic alteration surrounding the body,” PolarX said this week.

As always, it is the drill bit that will be the ultimate test of the thesis.

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Barry FitzGerald
Independent Journalist

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.

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