DPMLF - Dundee Precious Metals: A Top Choice Among Gold Miners

2023-03-12 05:44:48 ET

Summary

• Dundee Precious Metals has recently posted solid Q4 and all-year financial results.
• The company has revised lower its cost estimates, which makes it one of the lowest cost producers in the sector.
• It is using its strong balance sheet partly to return capital to shareholders and partly to pursue future growth opportunities.
• It has recently made a significant exploration discovery at ?oka Rakita.
• Considering also the game-changing Loma Larga project in Ecuador, there are many reasons to be excited about the future.

Introduction

While many precious metals miners continue to disappoint, Dundee Precious Metals ( DPM:CA , DPMLF ) has recently released solid Q4 and full-year financial results . More importantly, the company has provided strong guidance for the next 3-year period. With the game-changing Loma Larga project in the pipeline, and a new exceptional discovery at ?oka Rakita , there are plenty of reasons to be excited about the future. In my opinion, Dundee therefore remains one of the best choices among mid-tier producers, especially considering its unassuming valuation compared to free cash flow generation, its strong balance sheet, and future growth opportunities.

Cost outlook

Dundee is one of the lowest cost operators in the sector. When gold was at $2000 per ounce in 2020, many gold miners appeared to trade at every attractive enterprise value to free cash flow multiples. However, with gold being pressured by monetary policy headwinds and inflationary pressures, especially in energy and basic materials, most miners have seen their margins squeezed dramatically over the last three years. This is evidenced by the VanEck Vectors Gold Miners ETF ( GDX ) being down more than 35% from its peak. All-in sustaining costs (AISCs) have been creeping up, to the point that the sector's average could be around $1200 per ounce at the moment. Bucking the trend, Dundee has not only achieved its annual cost guidance, with AISCs at $885 per ounce over the full year, but it has also recently lowered its estimates going forward. Over the next three years, AISCs are expected to average around $800 per ounce, significantly below the sector's average.

Important drivers of the company's costs are local inflationary pressures, energy costs, and copper by-product credits. Dundee's main assets, Ada Tepe and Chelopech , are both located in Bulgaria, which has experienced significant inflation. However, such pressures have been counterbalanced by a stronger US dollar, which in 2022 led to cost savings of approximately $100 per ounce. In addition, the company enjoys a significant competitive advantage from government energy subsidies. The energy subsidy was around 200 Bulgarian lev (or $110) per megawatt hour in 2022 and has been renewed for 2023. Higher copper prices are also contributing to keeping total cash costs in check. The company has recently lowered its AISCs estimates, mostly as a result of better life-of-mine planning at Ada Tepe .

Valuation

Looking at the valuation, Dundee is currently sitting on $430 million in cash, has no debt, and an investment portfolio valued at around $40 million at the end of 2022, including interests in Sabina Gold and Velocity Minerals. Sabina Gold was recently acquired by B2Gold for $824 million, which means that the approximately 7% stake in the company by Dundee will give rise to a $58 million cash inflow upon conclusion of the acquisition. With a market capitalization of around $1.2 billion, Dundee therefore has an enterprise value of approximately $700 million. This is not considering the smelter operation at Tsumeb, which the company has in the past expressed interest in divesting and which could be conservatively valued at $40 million.

During a challenging year like 2022, Dundee still managed to achieve $166 million in free cash flow, from production of approximately 273,000 ounces of gold and over 30 million pounds of copper. This equates to a roughly 25% FCF yield. Looking forward, over the next three years, total gold and copper production is guided to be roughly flat, but costs are coming down. The following table reports the guidance midpoints for gold and copper production, AISCs and sustaining capital expenditures.

With gold prices remaining in the current $1800-1900 range, Dundee could produce around $200 million of FCF per year, or 85% of its total EV over the next three years.

A look at the future

With a solid balance sheet, the company is in a position to both return capital to shareholders and pursue growth opportunities.

Currently, Dundee offers a sustainable quarterly dividend, corresponding to an approximately 2.7% yield. Besides, it is committed to buying back shares, which it has actively done also in the past few weeks, when the share price was under pressure along with gold prices. In 2023, the intention is to renew the NCIB program for the purchase of up to $100 million of shares outstanding. This is equivalent to around 10% of the total market capitalization.

More importantly, Dundee has significant projects in its development pipeline. First of all, there is the Loma Larga project in Ecuador. The project has a complicated history, which I detailed in a previous article . Unfortunately, at the moment drilling activities remain paused, as the company waits for the outcome of the appeal process related to the decision on the constitutional protective action. The decision is expected to clarify whether the indigenous consultations can be carried out in parallel, or are required before resuming the citizen participation process. If they can't be carried out in parallel, the company expects a roughly 6-month delay on the timeline. In the meantime, Dundee is negotiating with the government of Ecuador an investor protection agreement, which it considers essential prior to committing further significant capital and which is targeted for completion in Q1 2023. The situation remains muddled, but Loma Larga is a potential game changer, with estimated annual production of 200 thousand ounces and an NPV5% of $520 million at $1500 per ounce gold (based on the 2021 feasibility study).

In addition, the company has made a significant discovery at ?oka Rakita. The prospect is located only 3 kilometers from its already owned Timok project in Serbia. Drilling has uncovered a large high-grade footprint open in multiple directions, including a stunning intercept of 40 metres at 63.46 g/t Au. In fact, the potential is so significant that the company is putting on hold the on-going feasibility study at Timok, in order to focus exclusively on ?oka Rakita. About 40,000 meters of infill and extensional drilling are planned for 2023, with the objective of defining a first mineral resource estimate by the end of 2023.

Conclusions

There is very little not to like about Dundee Precious Metals. During a generally challenging year, the company has achieved solid operational results. While costs have increased by more than 30% compared to 2021, they remain far below the sector's average and, crucially, they are projected to come down over the next three years. The company has a solid balance sheet, is committed to returning capital to shareholders, and trades at an EV of 4.2x 2022 FCF. The complicated Loma Larga project has strong government approval and, in my opinion, will eventually receive the environmental permit, though the timeline has already been significantly extended. Even without Loma Larga, Dundee has other possibilities for future growth, as exemplified by its recent discovery at ?oka Rakita and, more recently, at Tierras Coloradas . In conclusion, Dundee remains one of the best bets among mid-tier gold producers. I consider it a solid buy-the-deep candidate and am looking forward to opportunities to keep accumulating, especially in case the gold price comes under further pressure from monetary policy expectations.

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