CA - Dundee Precious Metals: Mines Improve Ahead Of Gold Rally

2023-11-21 22:14:26 ET

Summary

• Dundee Precious Metals Inc. stock is rated "Hold" in this analysis, with a strong positive correlation to the price of gold.
• The company's gold production is growing and gaining momentum ahead of a possible strong rally in gold prices.
• The debt-free balance sheet supports the continued improvement of key operating metrics and the promotion of mineral projects for future cash flow generation.

This Analysis Reiterates the "Hold" Rating for Dundee Precious Metals Inc.

Dundee Precious Metals Inc. ( DPMLF ) ( DPM:CA ) stock is rated Hold in this analysis, confirming the same rating as in this previous article from last year.

Dundee Precious Metals Inc. is a Toronto, Canada-based gold mining company that produces the yellow metal from mineral projects in southeastern Bulgaria and also engages in smelting and other mineral operations in Ecuador, Serbia, and Canada. The company also produces copper and silver, but gold is the main commodity as it accounts for 80% of the company's overall profitability. In the previous article, the reader can find more information about the company's portfolio of activities and their geolocation.

The previous article suggested investors continue holding Dundee Precious Metals shares as they would have benefited from a robust gold price. Despite growth catalysts of operational flexibility and a strong positive correlation with the trends in the gold price, it was still recommended not to strengthen the position. The shares did not appear to be trading at the most compelling prices, but the market would offer more attractive prices to lift the position due to the volatility of the gold market, which also affects the performance of Dundee shares. It was also seen as an opportunity for investors to take profits near a peak and thus benefit from cyclical fluctuations.

Aside from the growth opportunities that arise from price movements, owning shares of Dundee Precious Metals Inc. generally provides investors with a steady increase in the share price in both the U.S. over-the-counter market and the Canadian Toronto stock market.

Keep an Eye on the Growth Opportunities Arising from Gold Price Volatility while Holding for the Medium and Long Term

Using gold price cycles as a strategy combined with a core medium/long-term bias would have allowed the real investor to perform even better than the price growth of the two stocks on their respective exchanges over the last 12 months.

Retail investors certainly gained more than DPMLF +50.87% or DPM:CA +54.25%, taking advantage of the peaks in April and May after strong interest in gold as a safe haven against the regional banking crisis in March 2023, and if they strengthened their position at the market's lows formed in July or early fall.

Dundee Precious Metals Inc. pays a quarterly dividend of $0.04 per share and started paying in 2020 with a payout ratio of $0.02/share. However, investors do not invest in this gold producer because of the dividend paid. The dividend is very small, and the investor would have to have a very large position to receive a significant return on investment in the form of dividends received. This situation is further exacerbated by the fact that the shares of Dundee Precious Metals Inc. are characterized by very low trading volume: in the last three months, 23,806 shares were traded on the US over-the-counter market under OTCPK:DPMLF symbol, while TSX:DPM:CA on the Toronto Stock Exchange is a bit more liquid with an average trading volume of 524,614 shares over the past three months. For statistics on traded shares, scroll down this page and this page to the “Trading Data” sections.

Also, the stock has 181.41 million shares outstanding while the float is 170.83 million shares and 66.25% of the float is held by institutions.

The moral of this story is that retail investors should be careful when building a position that they do not intend to hold long-term, as low float combined with low trading volumes can result in shares not being sold quickly enough when needed without incurring cost losses.

The Strong Positive Correlation Between Dundee Precious Metals Inc. and the Price of Gold

Backed by a strong portfolio of mineral activities, the high positive correlation between the share price and gold prices is likely to deliver further benefits to retail investors in Dundee Precious Metals Inc., who reasonably expect an increase in the value of their stake.

There is a strong positive correlation between Dundee Precious Metals Inc. stock price and gold price, which has a bright future. The tailwinds from gold - which accounts for 80% of Dundee Precious Metals' sales - are expected to outweigh the negative winds that could come from copper in the near term as the looming recession weighs on copper demand.

As shown in the following two charts, the yellow areas - a graphical representation of the correlation coefficient - were in the positive part of the chart, with a few exceptions.

The reader should be aware that the positive correlation means that Dundee’s shares have risen as gold prices have generally trended upward over the past year.

The performance of the two assets over the past year has been so different from each other, probably because Dundee shares have risen more than the price of gold in recovering from previous losses.

The large dispersion in the performance of the two assets should not lead the retail investor to believe that the two assets are not positively correlated.

Last year's performance is simply the difference between last year's prices and current prices but does not measure what happens in between. And in between, the following trend occurred: the price of Dundee shares and gold futures fluctuated hand in hand either up or down, but with different gains or losses.

This analysis also estimated how much, on average, Dundee Precious Metals Inc.'s stock price could rise if gold, represented in this analysis by the gold futures benchmark (GCZ2023), appreciates.

Dundee Precious Metals Inc. stock weekly returns were the output, while gold futures weekly returns were the input in a linear model run over the trailing 52 weeks ending November 17, which produced the following results. Gold futures explained about 27% of the change in Dundee's share price, which, while not high, is still acceptable as an approximation of the complexity of what could affect Dundee's share price.

Based on the linear model OTCPK:DPMLF or TSX:DPM:CA tend to magnify the change in gold prices by 1.6 times: if gold prices rise by 5%, Dundee shares rise by 8%, on average. As a result, Dundee shares are well positioned to record a hefty gain should gold prices experience a bull market in the wake of an economic recession.

The returns of the last 52 weeks were considered sufficient in the model because going forward the market will most likely be influenced by the same factors as last year: increased interest rates, elevated inflation, and geopolitical issues, including the war in Ukraine and Gaza.

The Growth Potential for Gold Price: the Looming Recession

The next upside for Dundee Precious Metals Inc. shares could be the looming economic recession: A sharp slowdown in the business cycle typically creates such headwinds for portfolios that investors flock to the yellow metal's safe havens in search of protection; a higher price per ounce is beneficial to Dundee Precious Metals Inc.'s earnings, which is a strong driver of the stock price.

This article mentioned that a group of economists expect a significant slowdown in the US economy sometime in 2024. The group recently welcomed economists from Oxford Economics who called for a recession in the coming months.

In the eyes of this analysis, the economy has provided the market with additional and fresh trends over the past week that support the recession thesis:

• Consumption seems to be slowing down. A reliable measure is the decline in the US retail sales index in October 2023, which fell for the first time after six consecutive months of gains. The trend was primarily due to declines in discretionary purchasing categories such as furniture stores, sporting goods, musical instruments, and booksellers. This trend means that U.S. households are significantly limiting purchases of non-essential, non-priority items.

The health of consumption is a key indicator of how the cycle is shaping up, as consumption accounts for the majority of US gross domestic product ((GDP)). The component accounts for nearly 70% of GDP, as this chart from Y Charts shows .

• The first drop in good prices in five months led to the biggest fall in US producer prices since April 2020. This development was mainly due to lower gasoline prices and some energy price indices such as diesel and heating oil; liquefied gas; and light commercial vehicles, all of which declined. This could indicate a slowdown in economic activity.

Supported by a robust and well-performing portfolio of mining operations, shares of Dundee Precious Metals Inc. will be rightly positioned to benefit from the favorable winds of gold's recovery.

Readers may be wondering why investors do not invest directly in physical gold, but rather through shares of a gold producer. The answer is straightforward: investing in physical gold requires the availability of funds that retail investors typically do not have, but an institutional investor does. So, in order not to lose the growth opportunities of a gold price that will rise under favorable macroeconomic conditions, retail investors can achieve the goal through shares of gold stocks that follow the price movement of gold.

Dundee Precious Metals Inc. in the Third Quarter of 2023: Very Encouraging Trends in Operating Metrics Leading to Robust Cash Flow Generation.

On November 7, 2023, Dundee Precious Metals Inc. released its third quarter 2023 operating and financial results report .

The operation is currently benefiting from increased throughput and higher grades of ore processed at the mine in Bulgaria, as well as the completion of furnace maintenance at the smelter in Namibia, which is now being ramped up to allow full processing of metal production in the future.

Although the smelter may still face problems in the short term with lower production and higher cash costs than the company wishes, the mines in Bulgaria are not disappointing expectations. Gold production is growing and despite ongoing external pressure on costs due to geopolitical conflicts and difficult macroeconomic conditions, spending remains within budget.

Supported by the increased tonnage of ore processed, gold production is up-trending, with the Ada Tepe mine showing rapid increases, while the Chelopech mine is gradually recovering its production levels as the declines continue to thin out. In the Chelopech mine, the ore grade is still low, but this is offset by a higher amount of processed minerals.

Instead, miners at the Ada Tepe mine encountered zones of higher-grade minerals, according to the mine plan, and despite processing a lower throughput of ore, Ada Tepe achieved record levels of gold production in the third quarter of 2023 and the first nine months of 2023.

Essentially, both the Ada Tepe mine and the Chelopech mine are in line with the company's expectations, including in terms of copper production. The latter production is developing positively and is on track to achieve competitive volumes this year compared to last year's levels.

Excluding an impairment charge taken for the Tsumeb smelter in Namibia in the third quarter of 2022 and lower operating costs due to the maintenance shutdown of the smelter furnace in the third quarter of 2023, thanks to the increase in ounces sold, costs for the company have generally trended positively, both in terms of cost of sales and All-In Sustaining Cost per ounce of gold sold (AISC/oz).

There are factors that could continue to impact future costs though, namely labor costs at mine sites, weaker copper prices affecting byproduct credits, and expensive procurement of production inputs.

As far as labor costs are concerned, it cannot be ruled out that there will be a reduction in labor costs in mining as well. This trend will ultimately align with analysts' expectations , who generally foresee companies making significant cost cuts as early as 2024 to protect their margins.

Labor costs should not be excluded from cost reduction initiatives as they represent the largest portion of the total cost of operating activities.

Weaker copper prices as the economy slows down and weighs on demand for copper may continue to impact byproduct credits. Retail investors should also consider the crisis in China's property sector, as this cornerstone of the Chinese economy, which is also a large consumer of copper in the world, is currently facing debt repayment problems with its main property development operators.

However, headwinds will face resistance from metal production, which, supported by positive trends in ore throughput tonnage at the Chelopech mine and metal ore grade at the Ada-Tepe mine, appears to have taken a turn in growth.

Raw material sourcing is likely to benefit from cooling inflationary pressures, but the retail investor needs to be aware of the risk of a rise in energy prices due to the conflict in Ukraine and in particular the Gaza Strip.

The company's smelting costs will remain at the high end of the forecast range this year but are on track to become less burdensome as volumes recover from the furnace maintenance shutdown in the third quarter of 2023. This should lead to cost optimizations that enable more efficient use of capital expenditure.

Looking forward, Dundee Precious Metals Inc. expects full-year 2023 gold production to fluctuate between 270,000 and 315,000 ounces, copper production between 30 million and 35 million pounds, and AISC between $700 and $860 per ounce of gold sold.

The Financial Condition

As a result of improved operations combined with higher gold prices (up 12.2% to an average of $1,921/oz), Dundee Precious Metals Inc. generated Non-GAAP EPS of $0.15 (vs. net loss of $0.30/share in Q3-2022) on revenue of $135 million in Q3-2023 , an increase of 5% compared to the previous year.

Copper prices rose an average of 5.4% year-over-year to $3.72 per pound in the third quarter of 2023, accounting for approximately 15% of total sales.

On a nine-month basis, total revenue was $458.4 million, or 10% higher year-on-year, reflecting higher volumes coupled with higher gold prices (up an average of 6.7% year over year to $1,933/oz), while copper prices were less robust (down on average of 5.9% year over year to $3.85/lb).

Non-GAAP or adjusted net income for the first nine months of 2023 was $0.72 per share compared to $0.50 per share in the corresponding periods in 2022, mainly reflecting higher gold volumes sold and higher gold prices achieved.

Gold ounces and prices, which are on track to further improve as outlined in this analysis, should ideally contribute positively to the formation of adjusted net income, a key driver of stock price, as well as to the formation of free cash flow going forward.

Third-quarter 2023 free cash flow remained roughly flat year-over-year at $44.6 million. Free cash flow of $180.1 million in the first nine months of 2023 reflected 35.2% year-over-year growth, thanks to higher Adjusted EBITDA and lower sustained capital expenditures.

Adjusted EBITDA was $52.5 million in the third quarter of 2023 (down 7% year-over-year) and $207.5 million in the first nine months of 2023 (an increase of 6.7% year-over-year).

The Adjusted EBITDA margin was 38.9% in Q3-2023 vs. 43.8% in Q3-2022, and it was 45.3% in first 9M of 2023 vs. 46.7% in first 9M of 2022.

Robust free cash flow should continue going forward as gold sales volumes and gold prices perform in a robust way while the company keeps operating costs under control, barring unexpected negative external factors, which are always possible due to a very high volatility global scenario.

The Balance Sheet

In the third quarter of 2023, the balance sheet was robust as follows: Cash and short-term investments were $562.7 million - an increase of 30% from the end of 2022, driven in large part by strong operating results. In addition, the $150 million credit facility provides the ability to draw down more funds and the balance sheet is unencumbered by debt, increasing the company's resilience in a high financing cost environment.

If you scroll down to the "Risk" section of this page , you'll find an Altman Z-Score of 6.46 - indicating a zero percent chance that Dundee Precious Metals Inc. will face bankruptcy issues in the next few years.

During the nine months ended September 30, 2023, the company committed a total of $57.5 million to repurchase 8,431,871 shares of its common stock, resulting in an average purchase price per share of $6.82 (or CA$9.18).

The balance sheet is supporting mineral activity and feasibility study optimization for the Loma Larga gold project in Ecuador.

As for the Ecuador project, the company is waiting to resume drilling as some environmental aspects still need to be clarified. The Loma Larga Gold Project, located approximately 30 km southwest of the city of Cuena, is expected to have the potential to generate high economic returns in the future through the 12-year operation of an underground deposit producing an estimated 170,000 ounces of gold per year. Until then, its development is likely to use fewer financial resources in 2024 than in 2023.

The company is also involved in exploration activities in Serbia: these are targeting a maiden mineral resource estimate by the end of the year at ?oka Rakita and the commencement of an exploration program at Timok sometime between late 2023 and early 2024.

Since August 2023, the company has also been engaged in drilling activities in Tierras Coloradas, Ecuador, as part of a 10,000-meter drill program focused on two well-mineralized high-grade vein systems that provide further exploration potential in multiple directions.

In Bulgaria, Dundee Precious Metals Inc. is advancing the brownfield exploration program at Chelopech and is conducting exploration activities at Ada Tepe.

The Stock Valuation

As of this writing, shares of OTCPK:DPMLF traded at $6.97 apiece for a market cap of $1.26 billion, and a 52-week range of $4.44 to $8.08.

Shares are trading above the 200-day simple moving average of $6.77 and above the 50-day simple moving average of $6.43. Shares are also above the middle point of $6.26 in the 52-week range.

The 14-day Relative Strength Indicator of 57.31 indicates that shares are neither oversold nor overbought and that there is scope to reach lower levels under pressure of the Fed “higher for longer” stance on interest rates which doesn’t favor the gold price, the main driver of Dundee Precious Metals Inc.

Higher interest rates increase the opportunity cost of holding gold rather than bonds. Currently, interest rate traders see very little chance that the Fed will raise rates further from the current 5.25% to 5.50% to 5.50% to 5.75%. However, this analysis sees the possibility of another increase in early 2024. As US families will be less frugal during the December shopping season, consumption conditions will strengthen. Further tightening may then be required to boost the deflationary process, and the hike will undoubtedly impact gold prices and also lead to lower valuations of Dundee Precious Metals Inc shares.

Given this possibility, this analysis suggests sticking with the "Hold" rating for now, as there may be an opportunity to take advantage of attractive entry points before the forecast bullish sentiment around gold materializes.

The same considerations can be made for shares trading on the Toronto Stock Exchange under the symbol TSX:DPM:CA.

As of this writing, shares of TSX:DPM:CA traded at CA$9.70 apiece for a market cap of CA$1.73 billion, and a 52-week range of CA$5.98 to CA$10.78.

Shares are trading above the 200-day simple moving average of CA$9.15 and above the 50-day simple moving average of CA$8.81.

Shares are also above the middle point of CA$8.38 in the 52-week range.

The 14-day RSI of 59.51 suggests shares are neither oversold nor overbought, but with room for lower levels if the Fed tightens its “long-term higher” stance in early 2024.

Conclusion

Dundee Precious Metals Inc. is mining gold and some copper from operations at two mines in Bulgaria. Since its income is more tied to the price of gold than copper, its share price will continue to benefit from its strong and positive correlation with the yellow metal as long as it is bullish.

In addition to the forecast bull market in gold prices, Dundee Precious Metals Inc. is poised to benefit from other upside catalysts such as positive trends in tonnage throughput and gold grades, while cooling inflation should result in reduced pressure on operating costs.

If the Fed raises interest rates again, shares of Dundee Precious Metals Inc. could reach more attractive levels.

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