Barry FitzGerald: Dacian racing to hit its June targets and prove Mt Morgans has the goods
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Warren Buffett reckons it pays to be fearful when others are greedy and to be greedy only when others are fearful.
It is the second part of the Oracle of Omaha’s maxim that could well be applied to newbie gold producer Dacian Gold (ASX: DCN).
Its share price has been beaten up badly in the last three months, diving from $2.83 on February 27 to $1.68 on Wednesday.
The 40% fall is way out of line with the performance of the broader gold sector and reflects delays in Dacian getting to an annual run rate of 200,000 oz at its Mt Morgans gold operation near Laverton in Western Australia.
Commercial production at the operation was declared effective on January 1 and it is fair to say things have been a bit bumpy, with output in the March quarter below expectations at 35,003 oz at an all in sustaining cost (AISC) of $A1,488 oz.
The share price dive since February reflects fears that Mt Morgan hasn’t got what it takes to become the 200,000pa oz producer with AISC costs of about $A1,000 oz as promoted.
But as Buffett’s maxim suggests, those fears could well represent an opportunity for investors prepared to back home the idea that Dacian’s 200,000 oz annual target is well within reach.
On that score, the company did issue guidance on April 29 for the current June quarter to see production of 50,000 to 55,000 oz at an AISC of $A1,050-$1,150 – an annual run rate of 200,000 oz, with all of its market re-rating implications.
(As an aside, Dacian’s market cap is now $378 million which makes for an interesting comparison with the $854m St Barbara [SBM] has just agreed to pay to take over Canada’s Atlantic Gold, the annual producer of 90,000 oz of gold with plans to go to more than 200,000 oz – but not until 2023.)
That Dacian’s share price has remained under pressure suggests the market also remains fearful that the June quarter target will not be achieved.
But the tide of opinion could be turning as was suggested by Dacian’s small share price rise on Wednesday when the rest of the gold sector was under pressure from weakness in the US dollar gold price.
“While others in the space are fully priced with relatively low risk, Dacian is in our view undervalued, even considering additional risks associated with ramp-up (of Mt Morgans),’’ Hissey said in a research note.
“Dacian appears to be languishing on the back of a lacklustre March quarter in which the company was not able to deliver on the updated guidance it provided just one week before the end of the period.
“While this is undesirable, it should not detract from the longer-term opportunity of the business which we maintain can deliver 200,000 oz for in excess of 8 years at $A1,050-$A1,100/oz. In our opinion, the market is suffering a crisis of confidence given what we believe were elevated early expectations.”
He answered the question of whether Mt Morgans was a good asset gone bad. “We don’t think so.”
Hissey goes on to make the point that hitting guidance for the June quarter will be important for Dacian.
“If Dacian does not deliver 50,000 oz in the June quarter, we believe investors will be disappointed.’’
But having said that, Hissey says Dacian should not be confused with companies where the balance sheet is a key risk.
At the end of the March quarter, Dacian was holding cash and cash equivalents of $70m and it had reduced its total debt to $123.5m following the repayment of $10m during the quarter.