Interest In Dacian Gold Ramps Up

This story features DACIAN GOLD LIMITED, and other companies. For more info SHARE ANALYSIS: DCN

-Robust resource base
-Stock considered cheap
-Merger potential
 

By Eva Brocklehurst

Dacian Gold ((DCN)) has attracted some attention, having acquired and reinvigorated the Mt Morgans gold project in Western Australia. The company intends to commence production by 2018.

Canaccord Genuity considers the project a quality asset in a highly competitive Australian gold segment. Project resources have already increased to over 3.0m ounces which, the broker suggests, provides the required size to support a stand-alone operation. Moreover, Dacian Gold’s management team has a proven track record.

Mt Morgans contains the Westralia underground and Heffernans open pit deposits. Canaccord Genuity’s base case development scenario assumes a 2mtpa production rate. As the company de-risks the project through scoping and feasibility studies over the next 15 months assumptions will be refined.This may add further upside to valuation.

In the meantime the broker assumes a $20m equity raising in the December quarter, with 50:50 debt:equity funding for the $150m in capital required for the project. This should provide working capital to complete the pre-feasibility and definitive feasibility studies, with a funding decision by the end of 2016. The broker has a speculative Buy rating and 95c target in place.

Canaccord Genuity’s production scenario envisages ore sourced from two underground mines at Westralia. Given the strike is over 3km, initial mining is expected to concentrate on the Millionaires shoot and the footwall 1km to the north. Grades at these lodes are materially higher than the resource average and have potential to sustain production for up to four years.

The potential mine life is eight years, well ahead of many comparable producing assets, the broker observes. Coupled with the production profile and lower-than-average capital intensity, the company is likely to be on the radar of mid-cap gold producers looking to bolster their production.

Morgans, too, suspects this is the case. The company offers merger potential in a market that is starved of new production projects in precious metals. The broker takes the view that Dacian has potential to re-rate, as scoping and pre-feasibility studies are completed. The recent discovery of parallel ore zones at Westralia and potential for high-grade discoveries in the proximity of the Jupiter deposit are near-term catalysts for upside, Morgans maintains.

The broker initiates coverage with an Add rating and 85c target. Morgans believes, when compared with other gold producers, Dacian Gold is cheap. The broker compares Dacian to its producing peers such as Saracen Mineral ((SAR)), Kingsgate Consolidated ((KCN)) and Doray Minerals ((DRM)). The risked valuation offers 54% upside from the current share price and, Morgans suspects, once the studies progress the discount on valuation will unwind.

Dacian Gold listed on ASX in 2012. The project is in one of Australia’s most prolific gold areas and Mt Morgans was in operation until 1998. Dacian Gold updated the Westralia underground resource base last month. It now stands at 9.24mt at 5.1g/t gold for 1.5m ozs.

The increased resource at Westralia has essentially demonstrated continuity with the North open pit. This was a hypothesis put forward by the company which has now been successfully tested. In Bell Potter’s opinion, this success reinforces the view that management’s skill set is well suited to this asset.

The upgrade adds more strength to the development case. The broker suspects the market is just starting to consider the company as a differentiated development story, reflected in its 12-month outperformance of 38% versus the ASX gold index. This gap has opened up over the last six weeks and near-term catalysts should build on this. Bell Potter reiterates a speculative Buy recommendation and 70c target.
 

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